Last summer, one of the workshops I attended at the RWA National Conference was So Your Books Have Taken Off…Now What? presented by Marie Force. While it might seem silly to go to a workshop about managing publishing success before I’d even published, Marie’s tips covered every aspect of our publishing journey.
Marie Force has sold over 3 million books, so she has a team of employees helping her manage her success. However, much of her advice was focused on getting authors to think of themselves as entrepreneurs or business people, no matter what stage we’re at in the publishing process.
For example, she recommended establishing a business bank account (even before we publish our first book) and using a business-expense-only credit card. Those are both good points that will help us stay organized down the road. One no-brainer tip she shared was getting a professional email address so we’re not sending queries from HotForLoki27@cheesyemail.com. *smile*
Another interesting point she made was the various “milestones” for when we should take the business aspect of our writing more seriously. According to Marie:
- Once we reach $10K a year, we should get a CPA tax professional who can help us with accounting and ensure we properly handle all expenses and deductions. Staying out of jail for messing up taxes is always a good goal.
- Once we reach a sustainable $100K a year, we should look into the benefits of incorporating. In the U.S., an S-Corp is better for FICA taxes, but an LLC is potentially helpful as well. (She’s currently an S-Corp but might switch to LLC due to her employee situation.)
Despite the fact that I write by the seat of my pants, in my normal life, I’m very much a planner. So I filed Marie’s tips away in my head and knew that when it was time for me to publish, I’d keep her business advice in mind.
Because of all this thinking and preparation, when I finally clicked publish on my stories last month, I had a plan. And that plan included starting a publishing company to handle the business aspects of my writing.
Today, I’m excited to have Kathryn Goldman here to share with us the legal aspects of starting our own company. Whether we indie publish or traditionally publish, we may want to start a company at some point in our writing career. (For example, Marie Force started an ebook formatting company, but this could also be a cover design, editing, blog tour/marketing, or any other company.)
Even if we publish traditionally, we still might want establish our pen name as a business. If we self-publish, we might want to start a publishing imprint or another type of company. And if we’re successful like Marie, we may want to turn our writing itself into a company.
(Note: Some of this post might apply to international authors, but the specifics are focused on U.S. company structures and tax rules. Please consult local experts for more information on rules in other countries.)
Some of this information would have been helpful to me months ago, but luckily, I don’t think I screwed it up too much. *smile* Please welcome Kathryn Goldman!
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How to Start a Publishing Company
(or Any Company)
When I learned that Jami had started her own publishing company, Blue Phoenix Press, and had published her first two books, I was thrilled for her. I love it when folks, especially creative folks, get that entrepreneurial spirit and then do something about it – make it happen. It’s fun to get wrapped up in a new project, to work with focus toward launch, and to see something become real before your eyes.
Starting a new enterprise can be frightening, as well as exhilarating. Not only is the feeling of “What if I fail?” all pervasive, there is also the ever present thought of “What if I’m not doing it right?” Entrepreneurs question themselves every step of the way about whether they’re “doing it right.” Writers and artists whose expertise is in the act of creation but perhaps not in the creation of a business are particularly prone to second guessing themselves on business issues.
As an intellectual property attorney, I have been counseling clients including creative professionals in their startup businesses for many years. Jami has graciously allowed me this space on her blog to explore how creative professionals can think about business start-up issues.
Choosing the Best Type of Business Structure
Once a creative professional decides the time is right to start a business, in this example a publishing company, the first question asked (after “Am I nuts?”) is usually, “What type of business should I form?” We are going to take a look at the different options available to help answer that question.
When it comes to answering the question, “What if I’m doing it wrong?” it’s important to know that there isn’t any one right way of starting a business. In fact, there is a whole spectrum of choices. The business structure that works for you could fall anywhere along a continuum from a simple and easy to implement solution all the way up the continuum to a more sophisticated and complex solution or anywhere in between.
Deciding what is best for you begins and ends with your specific needs and goals. My aim is to provide you with guidelines to help you decide when to choose one type of entity over another as you build your publishing empire.
***Here it comes: the disclaimer – because I’m a lawyer, I have to say there are always individual considerations and this is not legal or tax advice for your specific situation. ***
The Business Entity Continuum
This list describing the various business organization choices should give you a basic understanding of business formation to help you be thoughtful about your decision.
Sole Proprietorship
The easiest option for starting a publishing company (or any company) is to operate it as a sole proprietorship. This is a common form of business organization. In many states, you can invent a business name and use it without going through any legal formalities. If I wanted to start a publishing company called SpyderByte Publishing in Maryland, for example, all I need to do is print a business card. I can buy the domain (if it is available), set up a web site and I’m in business.
I can setup my KDP account using the name of my new publishing company. When I receive a check from Amazon and want to deposit it in the bank, I need to have a bank account called “SpyderByte Publishing.”
Before I can do that, however, the bank may require me to have what is known as a DBA registration. DBA stands for “doing business as.” DBA registrations can be obtained from your state’s corporate registration or charter office. The purpose of a state DBA registration is to create a public record of the operating entity behind SpyderByte Publishing. In this case, that entity would be me.
Once you start earning income from your publishing company, the IRS requires you to report it. Income from a sole proprietorship is reported on your individual 1040 using a Schedule C. Schedule C reflects business expenses in addition to income so you would only be taxed on your net earnings. Using my example, a Schedule C would be created for SpyderByte Publishing and attached to my tax return. You can file as many Schedule Cs as you need – one for each sole proprietorship, if you operate more than one.
From a liability perspective, as a sole proprietor you are personally liable for all the contracts you enter and any of your intentional or negligent actions done in the name of your company. You have no protection from lawsuits by third parties. But that may not matter to you. If your genre is steampunk romance, your risk of being sued for invading someone’s privacy or defamation is probably pretty low.
If you work in non-fiction or write memoirs (if you use celebrities and other real people in your fiction), you may have reason to be more concerned about potential liability. In that case you might be better served by creating a limited liability company (an LLC) or an S-Corp.
Using Pen Names as a Sole Proprietor
You can set yourself up as a sole proprietorship for administrative ease, choose a nifty name for your publishing company and publish under a pen name. Again, your state may not require you to register for a DBA (although the bank might). In fact, you can use pen names with relative ease in any of the business entity choices discussed in this post.
Helen Sedwick, another attorney, has written a useful post on whether you should be using a pen name with some pointers on how to do it.
Sole Proprietor with an EIN
The next step up the ladder of business entity complexity is one in which you choose to be a sole proprietor that has its own EIN. (Sorry about all the initials, but really this is just a half step.) An EIN is an employer’s identification number. It is assigned by the IRS after completing a short online application. You need an EIN when you begin to hire employees. Until that time, you can manage your sole proprietorship reporting to the IRS with your own Social Security number.
Some banks may require you to have an EIN to set up an account in the name of your sole proprietorship. To me, that’s not a good enough reason for an EIN and instead, I’d look for a different bank. It’s not unreasonable for a bank to require some kind of government documentation before they allow you to begin depositing checks that are not in your name. I prefer the state DBA registration option over an IRS employer identification number because I like to keep my relationship with the IRS as simple as possible for as long as possible.
The two arguments in favor of getting an EIN at this stage are: (1) an additional layer of protection for your social security number; and (2) clarifying your independent contractor status if you are working as a freelancer.
Single Member LLC
If you do go the route of getting an EIN, the next step in business organization complexity is to setup an LLC. An LLC is a limited liability company. It is a business entity recognized in most states (maybe all by now, I haven’t checked recently).
An LLC offers the benefit of limited personal liability and doubles down on that benefit with relative ease of set-up and operation. You can choose any name that suits you and which is available in your state’s corporate registration or charter office where you would file Articles of Organization and pay a filing fee.
Purple Vegetable Farms LLC is a perfectly acceptable name for an LLC, for example. If you write about growing purple vegetables and it turns out that one of the vegetables you recommend happens to be poisonous when it is mixed with orange pekoe tea (or whatever), then because you’ve chosen an LLC as your business entity you will have some measure of protection from lawsuits by anyone who might have gotten sick by eating purple vegetables and drinking orange pekoe tea.
A single member LLC means that you’re in business alone, you are the only member of the company. An LLC is what is known as a pass-through entity. That means that the profits and losses pass straight through to your tax return. Any income that passes through to you is taxed at your personal income tax rate, plus you pay self-employment taxes on that income up to a certain level.
Multiple Member LLC
A multiple member LLC means you are in business with other individuals or business entities, like other LLCs. If you are in business with someone else you should always have a written agreement between you as to what you expect of them and what you are obliged to do.
The written agreement for a multi-member LLC is called an Operating Agreement. An Operating Agreement sets out the deal between the members of the company – who makes the decisions, how the decisions are made, whether you can sell your stake in the company, and many other issues. Think of an Operating Agreement as a pre-nup – sign one while everybody still likes each other.
At this point on the continuum of business structure complexity you start to incur attorney’s fees. You will also incur accountants fees at tax time because a K-1 must be prepared for each member of the company to report the pass through profits or losses on her own tax return.
With a multi-member LLC, you have business partners, limited liability, pass-through income and possibly employees. Once you start paying professional fees, you know you have achieved a certain level of sophistication. How sophisticated you want to be is up to you. *smile* (I learned online smiling from Jami.)
S-Corp
An S-Corp, or an S-Corporation, is a corporation that is created first by filing Articles of Incorporation with your state. Instead of being a member of an LLC, you are a shareholder of a corporation. An S-election is then made with the IRS. Like LLCs, S-Corps are pass-through tax entities so there is no double taxation.
An S-Corp is similar to an LLC in terms of the liability protection benefits it offers you. Your personal assets will have some measure of protection from third party lawsuits.
There can be tax benefits in choosing an S-Corp structure over the LLC. With an S-Corp, you pay yourself as an employee, so you must set a reasonable salary for yourself. If the corporation generates income above that salary, you can pay yourself the difference as a shareholder distribution which is not subject to self-employment tax and is taxed at the generally lower capital gains rate.
S-Corps are more complex than LLCs. The math of the income benefit needs to be discussed with an accountant. Gaining this income benefit may be worthwhile if you have already established a payroll system. So, there are some savings to be had with an S-Corp, but they need to be weighed against filing fees, payroll costs, and the accountants and attorneys fees it will take to realize those savings.
If you are going into business with other shareholders, the document that controls the decision making in the corporation is called a Shareholders (or Stockholders) Agreement.
Moving Up and Down Along the Continuum
If you are just starting out, keep it as simple as possible. Move up the continuum as your business needs call for it.
You can start as a sole proprietorship, then if you find that you need protection from personal liability, you can transition to an LLC. If your business grows to the point where increased income calls for a more aggressive tax structure, you can transition into an S-Corp. Or you can change to multi-member LLC if you want to add another member, etc.
Transitioning into a different business structure is not as easy as choosing the most workable structure from the beginning, but with understanding and planning it can be done. Understanding the structure that you choose, how it works and how it fits with your overall goals will reassure you that “You’re doing it right.”
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Kathryn Goldman is a lawyer who protects creative professionals, writers, artists, and businesses from having their work and art ripped off. She regularly lectures to writers and artists on copyright, trademark and business basics. Soon, she expects to launch an online class that teaches writers how to copyright and enforce the rights in their work.
Since she’s a lawyer, she has to mention that she’s not your lawyer (so this article isn’t technically legal advice), but you’re still invited to download her free Digital Artists Rip-Off Protection Report.
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Thank you, Kathryn! From cover design and workshop presenting to “author assistant” services and managing blog tours, many writers will set up companies during their career, and it’s good for us to be aware of our options so we can make the best choices for our situation.
Remember how I’ve mentioned that we should have a business plan? Thinking about our goals in advance will help us choose the best path for us. *smile*
Do you have (or do you plan to have) a writing-related business? What type of business (publishing imprint, author services, etc.) is part of your plan? Have you thought about how to set it up? Have you taken any of Marie or Kathryn’s first steps yet (bank account, credit card, EIN, DBA registration)? Do you have any questions for Kathryn?
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