Why More Artists Are Forming Limited Liability Corporations

More artists are incorporating their practices, and Observer dug into what prompts creatives to become corporations.

Press preview Of Christo
The artist Christo sets up all his projects as limited liability corporations. Photo by Tim P. Whitby/Tim P. Whitby/Getty Images for Serpentine Galleries

For all the talk about how the art world is an industry and how artists should think of themselves as being in business, it can be surprising when creatives exhibit actual corporate behavior. The ultimate example of this might be when artists—perhaps the paragons of sole proprietorship—establish their practices as limited liability companies, or LLCs, which a growing number have done as a means of obtaining bank loans, securing insurance for themselves and/or artworks and protecting their personal assets from liability and copyright infringement claims. Realistically speaking, artists like to dream big—about the big sale, the big break or the big museum retrospective—but achieving more success can mean shouldering more risk and a lot that can go wrong. Perhaps someone slips and gets hurt while visiting the artist’s studio or a sculpture tips over at an art fair and damages another artwork. Or maybe you’re Jeff Koons and you’ve plagiarized another postcard, photograph or advertisement. We live in a litigious society, and a single adverse judicial ruling can cost an artist everything they own.

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With an eye on protecting themselves from one mishap or another, more and more artists have set up business entities. In 2014, Brooklyn sculptor Sharon Louden became Sharon Louden LLC, which means that if you sue Sharon Louden, the artist, you can only go after the assets held by the corporation in which Louden is the sole shareholder. Her belongings—her home and its contents, retirement account, bank account and whatever else she has—are off limits.

Sharon “had a large museum project and realized that we should protect our personal assets by using an LLC,” Vinson Valega, her husband and project manager, told Observer. “We had always known that we should be doing our large projects under the protection of an LLC, but for some reason only got around to it in October of 2014.” Today, all of Louden’s contracts are written under the LLC.

It’s an idea that a growing number of lawyers recommend to clients in the arts. “First and foremost, artists look to form corporate entities to shield their personal assets from legal judgments and creditors,” said lawyer Robert Powers, a partner in the Virginia-based firm McClanahan Powers, which represents several visual and performing artists.

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Some of Powers’ clients have been sued for breach of contract—the claim being they didn’t do something they promised to do—and for nonpayment and copyright infringement. “The legal entity limits their exposure” to whatever the corporation owns and controls.

There are several types of corporate entities, including partnerships and S Corporations, which tend to have more than one shareholder, but most artists operating as one-man shops set up limited liability companies, according to Powers, where the LLC is the employer and the artist is technically the employee. When a sale or commission is made, the money is paid directly to the corporate entity, which then pays the artist, either in a lump sum or in increments (as a salary), and the artist pays taxes on that money as ordinary income. But not all the money transfers directly through to the artist. The corporate entity retains some cash to purchase art supplies, health insurance, workmen’s compensation to protect employees who may get injured during transit or installation, commercial premises and liability insurance—and, assuming the artist is successful enough, to hire employees or consultants.

Incorporating protects against more than liability

If it’s written into the corporation’s operating agreement, the corporate entity might even own the artist’s artwork and archives. When Colorado sculptor James G. Moore and his wife divorced in 2015, the fact that his S Corp owned his entire body of work was a boon. His wife was not a partner or officer in the corporation, and the split of their marital estate did not result in his losing half of his artwork or otherwise adversely affecting his career, according to Moore’s father and business manager, don moore.

Having a corporate entity own most or all of an artist’s output can also be beneficial for estate planning, according to Boston, Massachusetts lawyer Steven Ayr, as the objects and intellectual property rights to them “will not go through the standard probate process, saving the estate those costs.” The operating agreement would identify what fate the artist intends for the corporate assets after he or she is dead—e.g., these objects will go to this person or that institution; the copyright will be controlled by this person or that organization.

Setting up a corporate entity isn’t something that artists necessarily even consider unless prompted. Ralph Helmick, a sculptor in Newton, Massachusetts, created more than a dozen public artworks without ever giving a thought to incorporating. He was never sued, but when he started doing larger projects, and the client contracts contained clauses that referred to liability and indemnity, he was concerned. “I ran those contracts by a lawyer who explained to me what could happen to me if someone got hurt on one of my sculptures,” he told Observer. He refers to Helmick Sculpture LLC as a “firewall between my business and my personal assets,” adding that incorporating has taken one large worry away.

It was another artist who recommended that muralist Tom Taylor of Orlando, Florida set up a corporation, Mural Art LLC, in 1999 “to cover my you-know-what in the extremely unlikely event that I’m sued for a mishap.”

The protection that a corporate identity offers an artist becomes quickly apparent when one looks at the indemnity clauses in public art commission contracts, which can be paragraphs or event pages long. The focus is principally on who is responsible if a passerby is injured by the artwork, whether by circumstance or because they’re, say, climbing on the piece. The first draft of these contracts often assigns all liability to the commissioned artists, requiring them to bear legal and court costs in full. The language may also be broad and one-sided.

The standard contract for Percent for Art commissions in Maine, administered by the Maine Arts Commission, for instance, states: “[t]he artist shall, at his own cost and expense, defend and indemnify, all hold harmless the contracting agency, their officers, agents and employees, from and against all claims, damages, losses and expenses, including attorneys’ fees, arising out of, or resulting from, the performance of this agreement, provided that such claim, damage, loss of expense (1) is attributable to bodily injury, sickness, disease or death, or to injury to, or destruction of, tangible property, including the loss of use therefrom, and (2) is caused in whole or in part by any negligence, act, or omission of the artist, anyone directly or indirectly employed by him, or anyone for whose act he may be liable, except to the extent that it is caused in part by the contracting agency, their officers, agents or employees.”

That very long sentence places the entire burden on the artists. A shorter statement in the basic commission contract of the North Carolina Arts Council—“the artist must hold the agency harmless for any action or claims arising from the artist’s negligence or omission”—has much the same effect. Both place the onus of defending against all claims, including the most frivolous (‘blocks my view’) and fatuous (‘I needed stitches after I tried to skateboard off it’), on the artist.

Incorporating the art instead of the artist

“When I negotiate a commissioning agreement for an artist, I require indemnity from the city or agency and that there is no liability for the artist if someone walking by somehow gets hurt,” Chicago lawyer Scott Hodes told Observer. However, public art agencies won’t always accept modifications to their agreements. Another possibility, he recommended, is incorporating the specific art project, a practice he established with his client Christo—whose projects are all set up as limited liability corporations—and went on to leverage when working with other artists who create works in the public sphere. If legal action is taken, the corporation (of which the artist is a salaried employee) can be sued for its assets, which can be no more than the value of the commission.

There are drawbacks to incorporating—specifically formalities and costs. Artists have to fill out an initial application with the office of the secretary of state corporation division identifying the name of the corporation, its address, the name and address of officers and business managers, and then pay a filing fee. Each year, they have to file an annual renewal, which asks if the corporation’s name and address have changed, and pay another fee. These fees differ widely by state. In Colorado, the initial fee is $50 and the annual renewal is $10, while Massachusetts requires $500 initially and $500 annually. That’s in addition to legal fees. In 2008, when James Moore set up J.G. Moore LLC, a company with no other employees that periodically hires independent contractors “for things like bronze chasing or occasional help with larger pieces and installations,” he paid a local attorney $880 to ensure that the company complied with the law.

Artists don’t have to loop in a lawyer or accountant to incorporate, but according to Steven Ayr, “and perhaps this is a bit self-interested, artists may want someone to help them set up their LLC financially, how they will be paid, how expenses of the LLC will be handled, how things will be handled if a partner or investor leaves the company and needs to be bought out, who owns what if the artist gets divorced, what the law requires in terms of establishing bylaws and holding annual meetings.”

As easy as it is to incorporate—the forms are available online—Ayr noted that artists can find that the protections a corporate entity offers may be lost—referred to in legal parlance as “piercing the corporate veil”—if the legal requirements of an LLC are not adhered to exactly. For instance, the courts would look askance at an incorporated artist who lacks an operating agreement that states who the shareholders are and how much of the company they own. Artists must also treat the corporation as an entity distinctly separate from the artist’s personal business, so no buying groceries with funds from the corporate account. And if all the money paid to the corporation goes directly to the artist, leaving the LLC with no money in the bank to pay for insurance or creditor claims, courts will bypass the LLC and bring a judgment against the artist.

Incorporating creates investment opportunities

There is one more benefit to consider. Sculptor Zachary Coffin in Atlanta, Georgia used the creation of his LLC to develop a prospectus and solicit investors for costly projects, offering them potential returns when his project was completed and purchased. Thusly he financed the creation of a monumental 65-ton assemblage of granite and steel—an outdoor sculpture called The Temple of Gravity exhibited at Burning Man in 2003. He received an initial grant of $20,000 to build the piece, but that still left him $60,000 short of the actual costs of fabrication.

“In real estate, it’s quite common for developers to form an LLC when they look to put up a building,” David Decker, the lawyer who helped Coffin form his LLC, told Observer. “The beauty of an LLC is that it can take out insurance to insulate investors from claims, and it is only intended to have a limited life span. The investors come in, pool their money, the project is completed and sold, and then the money is distributed back to the investors, and the LLC is dissolved.”

Investor-seeking LLCs are not unknown in the arts. Most theater productions that reach Broadway are either LLCs or a related entity: limited partnerships. They are also common in the film and music industries, where financial backing is essential for projects to proceed. Fine artists whose work requires large amounts of capital often incorporate their projects for the same reasons. Gravity Group, LLC is just one of many such entities.

The ten investors who helped fund The Temple of Gravity, all from Georgia, bought in at $1,000 per share with a minimum purchase of five shares. These collectors of Coffin’s work, fans and friends of the artist and, in one case, the aunt and uncle of the corporation’s business manager, Keith Helfrich, can, according to Coffin, expect a 200 percent return on their investment when the work is sold. “One of the investors had lost a lot of money in the stock market,” he said. “But he knew my work and thought it a better bet than a mutual fund.” As an incentive, all of the shareholders received the management team’s prospectus affixed to a 50-pound slab of sculpted granite, suitable for pedestal or coffee table display.

Why More Artists Are Forming Limited Liability Corporations