Chapter 27 Exercises: Business Formation for Creators

Exercise 27.1 — Business Structure Decision Analysis

Objective: Apply the decision tree from Section 27.2 to real and hypothetical creator scenarios, building fluency in entity selection.

Instructions: For each of the following creator profiles, determine the most appropriate business structure (sole proprietorship, single-member LLC, multi-member LLC, or S-Corp consideration) and explain your reasoning. Reference the specific decision criteria from the chapter.

Profile A: Jasmine Jasmine is 17 years old and posts art tutorials on YouTube. She earns about $180/month from YouTube AdSense and occasionally sells digital art files for $25 each through a Gumroad link. Her parents handle her taxes as part of their household return.

Profile B: Carlos Carlos is 26 and runs a personal finance blog with an email list of 12,000 subscribers. He earns $8,500/month from a combination of affiliate commissions, a $297 course, and one or two brand deals per month. He works alone, from home. He has $22,000 in savings.

Profile C: The Syntax Sisters Two sisters, Amara (24) and Chisom (22), run a coding education channel together on YouTube. They earn $4,200/month combined (split 50/50) from AdSense, Patreon, and one recurring sponsorship. They have never had a formal agreement about the business.

Profile D: Tyler Tyler is 29 and runs a successful fitness content operation. His net self-employment income is $115,000/year after deductions. He has a single-member LLC currently. His accountant mentioned he should "consider his tax structure."

For each profile, write: 1. Recommended structure and why 2. Most urgent action to take 3. The specific risk that the current informal or under-structured situation creates

Exercise 27.2 — LLC Formation Research

Objective: Research the actual LLC formation requirements in your home state (or a state you choose).

Instructions: 1. Go to your state's Secretary of State website (search "[state name] Secretary of State LLC formation"). 2. Find and document the following information: - Filing fee for Articles of Organization - Processing time (standard and expedited) - Annual report requirements and fees - Any special requirements for your state (e.g., publication requirement in New York, franchise tax in California, etc.) - Whether online filing is available 3. Create a simple budget for LLC formation in your state: - One-time formation costs (filing fee + expedited processing if desired) - First-year recurring costs (registered agent + annual report fee) - Ongoing annual costs 4. Compare your state to one other state (Delaware or Wyoming) as an alternative formation state. Calculate the total cost of forming in that state vs. your home state over 3 years, including any taxes or fees you would still owe your home state.

Deliverable: A one-page LLC formation research report for your state.

Exercise 27.3 — EIN Application Walkthrough

Objective: Walk through the EIN application process and understand what information is required.

Instructions: 1. Go to irs.gov/ein (the IRS EIN application page). 2. Review the application interface without completing it (unless you actually want an EIN now). 3. Document the following from the application: - What entity types are available for selection? - What information is required for an LLC application? - What is the responsible party requirement? - What is the processing time and delivery method for the EIN? 4. Write a brief (200-word) explanation of why you should give brands and payment processors your EIN (for your LLC) rather than your Social Security Number when they request tax information.

Reflection: Why do you think the IRS offers EINs for free through their website? What are the potential harms of using a third-party service that charges fees to obtain an EIN?

Exercise 27.4 — Business Deduction Audit

Objective: Calculate your current or potential business expense deductions to understand the tax savings available.

Instructions: 1. For the most recent full year, pull together your records (bank statements, receipts, or estimates) for potential business expenses across the following categories: - Equipment (cameras, microphones, computers, accessories) - Software and subscriptions - Internet service (estimate business-use percentage, typically 50–80% for creators) - Home office (measure the square footage of any dedicated workspace) - Phone (estimate business-use percentage) - Professional development (courses, books, conference registrations) - Contract labor (editors, designers, virtual assistants) - Marketing and advertising - Professional services (accountant, attorney) - Other

  1. Total your documented or estimated business expenses.

  2. Calculate your estimated tax savings using this formula: - SE tax savings: Total expenses × 14.13% (the employee-equivalent SE tax rate) - Income tax savings: Total expenses × your estimated marginal income tax rate (use 22% if uncertain) - Total estimated savings: SE tax savings + Income tax savings

  3. Calculate what the home office simplified deduction would be for your dedicated workspace (sq ft × $5, up to $1,500/year).

Deliverable: A business deduction summary table with categories, amounts, and total estimated tax savings.

Reflection: What was the total amount of tax savings you could potentially have claimed last year with proper documentation? Does this change your prioritization of record-keeping?

Exercise 27.5 — Contract Review and Red-Flag Identification

Objective: Develop ability to identify missing, vague, or problematic language in creator contracts.

Instructions: Below is a simplified brand deal email exchange. Read it and identify: (1) What contract elements are present? (2) What critical elements are missing? (3) What specific risks does each missing element create?

Email from brand representative:

"Hi! We love your content and would love to partner with you for our spring launch. We're thinking $1,500 for one YouTube video. Let us know if you're interested and we'll send over some talking points!"

Creator response:

"Sounds great! I'm in. Looking forward to it."

Using the brand deal contract checklist from Section 27.5, identify: 1. Which elements of a complete brand deal agreement are present in this exchange? 2. Which elements are missing? 3. For each missing element, describe a realistic dispute scenario that could arise because it was not specified. 4. Write a short follow-up email the creator could send to establish the missing terms before production begins.

Deliverable: A contract gap analysis and a draft follow-up email that closes the most critical gaps.

Exercise 27.6 — Operating Agreement Provisions for the Meridian Collective

Objective: Practice drafting operating agreement provisions for a multi-member creative collaboration.

Background: The Meridian Collective (Destiny, Theo, Priya, and Alejandro) is forming a four-member LLC for their gaming/esports content operation. They have agreed on the following basics: - Priya and Alejandro each hold 30% ownership (they contributed the initial equipment and channel infrastructure) - Destiny and Theo each hold 20% ownership (they joined later) - Revenue is being generated from YouTube, Twitch, Discord memberships, and sponsorships

Instructions: Draft operating agreement language for each of the following provisions:

  1. Revenue Distribution: How and when is revenue distributed? Who must approve distributions? How are operating reserves handled?

  2. Decision Authority: What level of approval is needed for routine operations vs. significant business decisions?

  3. Member Exit: What is the process and formula for a member who wants to leave? What notice is required?

  4. Account Control: Who controls the LLC's digital assets (YouTube account, Twitch account, Discord server, email addresses)?

  5. Dispute Resolution: What process must members follow before taking any legal action against the LLC or other members?

You do not need legal precision for this exercise — plain English is fine. The goal is to think through the scenarios and document your intended approach clearly enough that all four members would agree they understood the terms.

Deliverable: Draft provisions for the five topics above (1–2 paragraphs each).

Exercise 27.7 — Three-Year Business Infrastructure Plan

Objective: Create a phased implementation plan for your creator business's legal and financial infrastructure.

Instructions: Based on your current situation, create a three-year plan for implementing the business infrastructure discussed in this chapter and in Chapters 25–26. Use the following framework:

Phase 1 (Months 1–3): Foundation - What legal structure will you establish (or are you already in)? - Will you form an LLC? Which state? What is the cost and timeline? - What business bank account will you open? - What accounting system will you implement? - What existing verbal agreements need to be formalized in writing first?

Phase 2 (Months 4–12): Operations - How will you handle quarterly estimated taxes? What safe harbor amount do you need to pay based on last year's tax liability? - What contract templates do you need for your most common business relationships (brand deals, collaboration agreements, contractor agreements)? - What retirement account will you open and what contribution target do you set? - What records will you maintain and how?

Phase 3 (Year 2–3): Optimization - At what income level will you evaluate the S-Corp election? - What attorney relationships do you want to establish before you need them urgently? - What business insurance do you need to evaluate? - How will you review your business structure annually as your situation evolves?

Deliverable: A written three-year business infrastructure plan with specific, realistic actions and timelines.