Written by Pat Brown, MBA
As NIL (Name, Image, and Likeness) opportunities continue to expand for student-athletes, many are finding themselves with substantial income from endorsement deals, brand partnerships, and sponsorships. With this new revenue stream comes the need to establish a solid business structure to handle the financial, legal, and tax aspects of these earnings.
Setting up a business structure, such as a Limited Liability Company (LLC) or Sole Proprietorship, can help your child manage their NIL income more effectively and protect their personal assets. Here’s a step-by-step guide on how to set up your child’s NIL business structure:
1. Understand the Basics of Business Structures
The first step in setting up a business for NIL purposes is to understand the different types of business structures and what they mean for your child’s tax liabilities, legal protections, and financial management. Here are a few options to consider:
Sole Proprietorship
A sole proprietorship is the simplest business structure, where the athlete (or parent) is the sole owner and operator. This structure doesn’t require formal registration with the state, and taxes are filed on the individual’s personal tax return.
- Pros: Easy to set up, minimal paperwork, and low start-up costs.
- Cons: No liability protection. The athlete is personally responsible for any debts or legal issues related to the business.
Limited Liability Company (LLC)
An LLC offers more legal protection than a sole proprietorship. It separates the athlete’s personal assets from the business, meaning they aren’t personally liable for business-related debts or legal actions.
- Pros: Liability protection, more credibility, tax flexibility, and easy to form.
- Cons: Requires filing with the state and paying filing fees. You’ll also need to maintain more administrative requirements, like separate bank accounts and tax filings.
Corporation (C-Corp or S-Corp)
A corporation is a more complex structure and is typically used by businesses looking to raise capital or offer shares to investors. However, most student-athletes will likely find an LLC or Sole Proprietorship more fitting for their NIL ventures.
- Pros: Strong liability protection, can raise capital by issuing shares.
- Cons: Higher costs to set up and maintain, additional taxes, and more complex compliance requirements.
2. Consult with Legal and Tax Professionals
Before making any decisions, it’s essential to consult with a legal and tax professional who specializes in athlete or business law. They can help determine which business structure best fits your child’s needs and goals.
- Tax Implications: The choice of structure will impact how your child’s NIL income is taxed. An LLC, for instance, may allow more tax flexibility, while a sole proprietorship may be simpler for reporting income on personal tax returns.
- Legal Protections: An LLC provides protection against personal liability, which can be crucial if your child is signing multiple endorsement deals, entering contracts, or managing significant sums of money.
- State and Local Requirements: Each state has different requirements for business structures. A lawyer or tax advisor can help navigate these regulations and ensure your child complies with local laws.
3. Register the Business
Once you’ve chosen a business structure, the next step is to officially register your child’s business with the appropriate state agency. For most states, this involves filing paperwork with the Secretary of State’s office.
Steps to Register an LLC:
- Choose a business name: The business name must be unique and not already in use by another company. Be sure the name aligns with your child’s personal brand.
- File Articles of Organization: This document includes essential information about the business, such as its name, address, owner, and structure. It’s typically filed with the Secretary of State.
- Obtain an Employer Identification Number (EIN): An EIN is necessary for tax purposes and to open a business bank account. It can be obtained for free through the IRS website.
- Create an Operating Agreement: Though not required in all states, an LLC operating agreement outlines the ownership structure, responsibilities, and how profits will be distributed.
If you opt for a sole proprietorship, the registration process is simpler, and you’ll only need to obtain an EIN if your child plans to hire employees or operate as a business for tax purposes.
4. Open a Business Bank Account
It’s essential to separate your child’s NIL earnings from their personal finances, which is why opening a dedicated business bank account is crucial.
- Why it matters: Keeping business funds separate from personal funds ensures accurate tax reporting, protects personal assets, and makes the business more credible to potential sponsors or partners.
- Required documents: To open a business account, your child will need their EIN, business formation documents (LLC or sole proprietorship paperwork), and a valid ID.
- Considerations: Look for a business account that offers low fees and benefits, such as merchant services or credit options, that can help manage NIL income.
5. Set Up Accounting and Bookkeeping
Proper accounting and bookkeeping are essential for managing your child’s NIL income, especially when it comes time to file taxes. You’ll want to track all income and expenses related to their NIL deals to ensure accurate reporting.
- Use Accounting Software: Tools like QuickBooks or FreshBooks can help track income, expenses, and invoices. These tools are user-friendly and help ensure compliance with tax laws.
- Hire an Accountant: For those new to business and tax filings, hiring a professional accountant can help ensure that all finances are properly handled, and any deductions or credits are applied.
6. Understand the Tax Responsibilities
One of the most critical aspects of setting up your child’s NIL business is understanding the tax responsibilities. NIL income is taxable, and the athlete is responsible for paying taxes on it. The type of business structure chosen will impact the tax filing process:
- Sole Proprietorship: Income is reported on your child’s personal tax return (Form 1040). It’s considered self-employment income, so self-employment taxes may apply.
- LLC: An LLC can choose to be taxed as a sole proprietorship, partnership, or corporation, providing more flexibility. An LLC taxed as a pass-through entity will pass income to your child’s personal tax return, while an LLC taxed as an S-Corp may allow for some tax savings by paying yourself a reasonable salary and taking additional profits as dividends.
- Corporation: If your child operates as a corporation, they will pay corporate taxes, and you may also need to deal with additional tax forms (e.g., 1120 for C-Corps or 1120S for S-Corps).
7. Consider Future Growth and Expansion
While your child’s NIL business may start small, it’s essential to think about scalability. As NIL deals grow, so too will the need for professional management.
- Hiring Employees: If your child’s NIL business grows large enough, they may need to hire employees to assist with marketing, content creation, or business operations.
- Partnerships and Ventures: As your child’s brand expands, they may enter into joint ventures or new sponsorships. Having a business structure in place will help manage these partnerships.
Final Thoughts
Setting up your child’s NIL business structure is an essential step in managing the income from their athletic endorsements while protecting their personal assets and ensuring compliance with tax laws. Whether you choose a Sole Proprietorship, LLC, or other structure, consulting with professionals, establishing strong financial systems, and planning for future growth will help ensure that their NIL business thrives both during and after their athletic career.
By taking the time to set up a solid business foundation, your child will have the tools they need to manage their earnings, protect their brand, and prepare for long-term financial success.
- Pat Brown, MBA
