Often writers don’t just write, but they also speak, teach and offer other professional services. Depending on what you do as a writer, will guide you in the structuring of your business. Let’s look at each business structure and how it relates to a writing career.
Sole Proprietorship is the very basic type of business. You are the only owner, therefore the only person responsible for the finances and success of the business. A Sole Proprietor will use their social security number as their tax ID.
Legal ramifications of a Sole Proprietorship are should someone decide to come after you in a lawsuit, you and anything you own (property, house, etc.) are open to potential loss should the suit be settled not your favor.
Limited Liability Company provides some protection and features of a corporation. It can be owned by one or more persons (members). Income is still rolled up to the members of the LLC based up percentage of ownership.
The advantages of an LLC are limited personal liability for business decisions or actions taken by the LLC. Meaning, if the LLC incurs debt or is sued, the member’s personal assets are usually exempt and protected. Keeping in mind that the liability is limited, which means members are not necessarily protected from wrongful acts or violation of laws. In addition, there is less recordkeeping for an LLC than that of a corporation. Members of the LLC are considered self-employed so tax rates of the individuals apply.
If you have employees or a partnership, you’ll want to consider an LLC.
S Corporation is similar to a C Corporation, but you are taxed only on the personal level. While members of an LLC are subject to employment tax on the entire net income of the business, only the wages of the S Corp shareholder(s) are subject to employment tax.
Example: An S Corp has a net income on $10,000. But the shareholder was only paid $5,000. The taxes are on the $5,000. While an LLC would be taxed on the $10,000.
Some expenses that the shareholder / employee incur can be written off as business expenses such as health insurance. On the flip side if an employee owns 2% or more of the corporation, that health insurance is considered taxable income. An LLC cannot deduct the cost of health insurance.
S Corps are their own entity, requiring their own tax ID number. The disadvantage to an S Corp is the requirement to hold regularly scheduled shareholder meetings and keeping notes or those meetings. A shareholder must receive reasonable compensation. For instance, a shareholder cannot be paid a low wage all year long and then at the end of the year take a large distribution. The IRS will consider the distribution as wages and force the payment of taxes.
An S Corp would be advisable for a larger self-published / publishing company with employees and even other shareholders (partners) where family members are part of the company.
Filing for Sole Proprietorship with your state is often the least expensive. You’ll want to file an assumed business name, telling others you’re doing business as (DBA) to protect your business / name. By registering a DBA with your state, you stake claim to that name. If you write under a pseudonym, then you’ll want to register to protect it.
If you have created your own publishing company, you may consider filing for an LLC. In addition, consider applying for an employer identification number (EIN) even if you don’t have employees. This way, when you are asked to provide a tax payer ID, you can provide an EIN rather than your social security number.
Funneling income through your LLC for things such as speaking and teaching fees, will also keep your social security number safe and 1099’s are not required to be filed for LLC’s.
In many states the cost of filing for a DBA versus an LLC are the same.
The important thing to remember is as a writer, making income—you are in business. Taking steps to protect yourself need to be considered.
> Protect your name
> Protect your social security number
> Protect any assumed business names
> Keep good accounting records (Income and Expenses)
Now get back to work writing that best seller!