When setting up your indie company, some questions will probably be easy to answer, such as how should you set it up?
Probably the best rule of thumb is: a simplest that you need and as the laws in your area requires.
When you’re just starting out, when it’s just you and the computer and your first book, a sole-proprietorship is probably all you’ll need. As you generate income and turn a profit, you may want the advantages and protection of a more organized structure. If you take on a partner, you may need to look into a partnership or at least codify between you two what your relationship is, who contributes what to the business, and what you get in return. And if you’re thinking about hiring employees, then an limited liability corporation or incorporation is the way to go.
But, and this is most important, your decision should be based on your situation. Here are three situations where the obvious choice might not be the right one:
* Libel law: When you’re just starting out, it is usually best to organize as a sole-proprietorship, which is akin to hanging a shingle by your door reading “writer.”
But what if your first book is a tell-all memoir about your time working on a presidential campaign? You saw all kinds of shenanigans on the campaign trail, by the candidate, his aides, and members of the press, and your book will open the bag on all the dirty stuff you saw and participated in.
Prepare to get sued. Even if you disguise the names, chances are someone’s not going to like appearing in your book.
I found this out when Penguin accepted my manuscript for “Writers Gone Wild.” One afternoon, I sat down with a nice lawyer, and over the phone he walked me through the book, asking about the source of my stories. Fortunately, most of the writers had been dead, so they passed automatically. As for the living writers, he was concerned about the Erica Jong story, in which she provided pleasure of a sexual nature to a publisher in return for what she thought was going to be a rare first edition. He was relieved when I pointed out that I got the story straight from the source.
This is where organizing your indie company as an LLC or corporation can protect your personal assets. If the jury finds for libel, the assets of the company would be seized, not your personal home or car. Your legal expenses, however, are between you and your lawyer.
* International partnerships: Say you’re a writer setting up a webcomic and you’re working with an artist, and you two agree to share the profits. Ordinarily, this would call for a limited partnership or an LLC.
However, the artist is in Canada and the writer is in the United States. Congratulations! You get twice the paperwork to fill out and twice the tax forms, not to mention dealing with currency issues.
This happened to two people I know. They solved the problem by having the writer form the company, with the artist working as an employee, and the profits split according to a prearranged formula. This also places the running of the business in one person’s hands, which frees up the other person to focus on the work.
* Sales tax: Peschel Press exists as a sole-proprietorship, with no official presence. However, it does have a tax ID number with the State of Pennsylvania.
Several times a year, we set up a booth at trade shows such as Art on Chocolate and the Winter Arts and Crafts Show. We sell books to the public, so we must collect the state sales tax and file a return twice a year. Setting up an account with the state was easy through their e-Tides portal, and so long as I keep track of sales and when to file, the process doesn’t take very long.
Note that I am acting as a retailer at these shows. When I sell books to bookstores, or place them on consignment, I’m acting as a wholesaler. The bookstore is responsible for collecting and paying the sales tax.
This is why I stress educating yourself before setting up your indie company and not rely entirely on this book before proceeding. Laws change, there are plenty of nuances, and you may have peculiar circumstances that will affect your decision.
Your Indie Company: Pros and Cons
You can organize your business in four ways, from easiest to most complex: sole-proprietorship, limited liability company, corporation, and S corporation. There are also nonprofits, cooperatives, and limited partnerships, but they are more appropriate for other types of businesses and will not be covered here.
We’ll summarize the four options below. For more information, visit the U.S. Small Business Administration. It has advice on starting a business, writing a business plan, choosing a business structure, and registering your business name. A lot of it doesn’t apply to you, but I can’t see spending an hour or so at the site can do you harm.
What it is: The simplest form of a business for a writer.
Amount of paperwork: Small, but pay attention to the laws at the local and state levels. Does your locality restrict working out of your home? Are writers allowed in a residential zone (most likely, since you shouldn’t have customers parking outside and tractor-trailers hauling books)? Do you need to file your business name with the state, commonly called “doing business as”?
Advantages: 1. Cheap to run and simple to dissolve. 2. Few paperwork hassles. 3. Your business income is not taxed separately, but pass through to your standard tax form. 4. You are Dilbert’s pointy-haired boss, in complete control of making your business succeed.
Disadvantages: 1. You can’t sell stock to raise money, and banks are reluctant to make loans. 2. If you lose a lawsuit, you’re personally liable for any judgments. 3. You are Dilbert’s pointy-haired boss; if your business tanks, it’s your fault.
Limited Liability Corporation
What it is: An official status that gives you the asset protection of an incorporated business. It can consist of one owner, two or more owners, or a combination of individuals, corporations, or other LLCs.
Cost: Varies. Some of the paperwork can be bought from legal sites, and filing fees vary from state to state (it’s currently $125 in Pennsylvania).
Amount of paperwork: Substantial. You register your business name with the state, file articles of incorporation or a docketing statement that describes how your LLC is set up and who’s involved and possibly an operating agreement setting out the rules for how the LLC is run. Hiring employees requires more paperwork: employment taxes, workers’ compensation insurance, and informational returns with the IRS. You may also consider opening a bank account and getting a credit card in your business’ name. Separating your business from personal expenses will make it much easier to keep track of come tax time.
Rules for LLCs, and corporations as well, vary from state to state. Check your state’s website for further information.
Advantages: 1. Your personal assets are shielded if the business goes belly-up. But it’s a “limited” liability; you’re not protected if you or your employees break the law. 2. There’s more record-keeping than a sole-proprietorship, but less than a corporation. 3. The members decide how the profits are shared.
Disadvantages: 1. In many states, the LLC must be dissolved if a member leaves it, unless there are provisions allowing it. 2. Members must pay the federal self-employment tax that finances Medicare and Social Security.
What it is: A business, with shareholders, employees, and headaches. We’ll get into this briefly, but unless you’re planning on building a company, you shouldn’t worry about this.
Cost: Substantial. Legal Zoom, a business which sells templates for legal procedures, suggests $100-$250 for filing the articles of incorporation, $800-$1,000 franchise tax (except if you set up in Nevada, which is free), $50-$200 government filing fees, plus attorneys fees that start at $500.
Amount of paperwork: Substantial: register business name, trademark it, acquire licenses and permits (if needed), and file articles of incorporation. You’ll need people to fill the board and issue stock certificates. You’ll also need a lawyer versed in the process to guide you.
Advantages: 1. Limited liability as in LLCs. 2. Easier to raise capital. 3. Tax advantages. 4. Easier to hire qualified help, especially if you offer stock in the company.
Disadvantages: 1. Depending on local, state, and federal laws, you’ll need to keep track of filing forms and keeping accurate records. 2. It costs more money to keep a corporation going, such as paying annual fees to the state. 3. Double taxation: Money flowing to the corporation gets taxed, and taxed again when it pays employees.
What it is: An LLC or a C corporation that is given a unique status through an IRS tax election (Subchapter 5) that turns it into a S Corporation.
Cost: Same as the LLC or C corporation.
Amount of paperwork: Same as the LLC or C corporation, plus filing the tax election form with the IRS.
Advantages: 1. An S corporation is not taxed; only the wages plus any distribution of profits, which is taxed at a lower rate. However, this varies from state to state. 2. Depending on the state, shareholders can leave without forcing the business to close.
Disadvantages: 1. Paperwork and recordkeeping similar to that of corporations. 2. The IRS keeps track of the ratio between salaries and distributions and audits corporations with low salaries.