If you mention you are going to self-publish, your brother-in-law, neighbor, or some other busy-body is going to say you must incorporate or form a limited liability company (LLC) in order to protect your assets.
Smile politely and ignore them. They are wrong, at least 95% of the time.
Forming a corporation or LLC is an unnecessary expense and complication for most writers. For liability protection, insurance is a better option. And unless you are making a lot of money, there are few tax benefits to operating as an entity.
But I am getting ahead of myself. Let me explain...
Incorporation May Not Work
Your brother-in-law is correct about one thing. Businesses operate as corporations or LLCs (an entity) in order to protect the personal assets of the owners from business liabilities. If you were manufacturing bicycles in a factory full of employees, then operating as an entity would shield your personal assets from creditor claims if the company went out of business and personal injury claims if someone says the bicycles were defective.
But writers work alone. Most of us don’t have a staff. There is no “business” separate from the writer’s own actions. Even if a writer had a corporation or LLC, someone would sue both the corporation and the writer for defamation, privacy or infringement claims.
The Technicalities Will Get You
Many people have heard the expression “piercing the corporate veil.” In summary, unless you keep enough assets (money) in the entity’s accounts to cover its potential liabilities, AND you keep the entity’s finances separate from your personal finances, AND you keep up with certain formalities and state filings, your entity may be disregarded by a court and not provide any liability protection.
Most of us won’t keep all this straight. We won’t leave a lot of money sitting in our business accounts. We’ll forget about state filings and corporate minutes. We’ll hate the additional tax forms and paperwork. In other words, we will undermine the protection the entity could have provided.
Most Writers Don’t Need the Protection
Most writers are not writing high-risk material. Fiction writers are rarely sued for defamation, unless they have been lax about masking identities. Memoir and other nonfiction writers take more risks, but they can and should learn how to minimize them. As a starting point, take a look my post How to Use Real People in Your Writing Without Ending Up in Court.
However, if you are going after Big Oil, Big Food, Big Med, City Hall, Wall Street, or any deep pocket, then you are taking greater risks. Even then, consult with an attorney before you spend money on forming an entity.
How to Get More Protection for Your Money
Forming and maintaining an entity costs money. In California, it’s $800 a year. If your risk or anxiety level is high, that money is better spent buying liability insurance.
If you have insurance, then the insurance company hires the attorneys and manages the claims, saving you time, money, and stress. A business liability policy ($500 to $800 a year) covers unintentional infringement and defamation, but be sure to ask your insurance agent about the coverage since policies vary.
For more protection, take a look at Media Liability Insurance. These policies provide more protection at a higher cost ($1,500 and up). If you are a member of the Author’s Guild or other professional organization, you may be eligible for a discount.
Maybe you have already formed a corporation or LLC. No problem. You have not made a mistake. If the cost of maintaining the entity in your state is low, then you might as well keep it in existence. It serves as one more indication that you are operating your writing as a business for tax purposes. But if the annual fees in your state are more than you want to spend, consider dissolving the entity.
If a Business Is Not a Corporation or LLC, Then What Is It?
A sole proprietorship. Despite its name, a sole proprietorship may be owned by you alone or by you and your spouse. You can even get a separate EIN for a sole proprietorship, as I explain in this post, Sell Your Book, Not Your Identity.
The vast majority of small businesses operate as sole proprietorships. They are simpler to operate and subject to fewer arbitrary rules than corporations and LLCs.
Who Should Incorporate
Of course, there are exceptions to every rule. Consider the 4 Ps.
Privacy. If you want to hide your identity, you can use a pen name, but that’s not a perfect solution. At some point, CreateSpace and other providers will ask for your real name. The more people know your real name, the more likely the information will leak.
For an added layer of privacy, form a corporation or LLC and publish and register your work in the entity’s name. Even then, you must designate a living person (other than you) to sign corporate documents. That person should be your attorney, accountant, or someone you trust. All this costs money, probably $500 to $1000 a year depending on where you live. For some people, this is money well spent.
Partnership. If you run various businesses with different partners and investors, then it may make sense to set up an entity to distinguish one business from another.
Profits. If you expect to make significant net income from your writing, let’s say $50,000 or more a year (some accountants say $100,000 or more), then it may make sense to form an entity to save on self-employment taxes. You are living the writer’s dream, but it’s time to hire someone to help you with business set-up and tax planning. This is what I call a “problem of success,” a problem I hope every writer enjoys.
(Disclaimer: Helen Sedwick is an attorney licensed to practice in California only. This information is general in nature and should not be used as a substitute for the advice of an attorney authorized to practice in your jurisdiction.)
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