EIN, DBA, LLC, ISBN, 1099? Considering the alphabet soup of business terms, no wonder indie authors are intimidated by the business aspects of self-publishing.
Here’s a secret: Setting up your business is one of the easier parts of self-publishing. The process is a series of steps, many of which are as simple as filling out the right forms at the right time. Over the course of several guest posts, I will walk you through those steps.
Before I get started, however, let’s look at why it makes sense to treat your writing as a business.
Treat Your Writing as a Business
Our tax code encourages people to start new businesses. In fact, the IRS expects businesses to lose money at first, so the law provides tax breaks to help offset early losses. The key is to operate as a business and NOT as a hobby.
If your writing is considered a business by the IRS, then you may deduct writing-related expenses from non-writing income. In contrast, if the IRS considers your activities to be a hobby, then you may deduct writing expenses from writing income only. This can cost you real dollars.
Suppose you spend $5,000 hiring editors, designers, and a publicist to launch your book. At the end of the year, you make $1,500 in sales. You may deduct $1,500 of your expenses from the income whether your writing is considered a business or a hobby. But you may deduct the remaining $3,500 of expenses from your “day-job” income only if you are operating your writing as a business, and, if audited, can demonstrate that to the IRS.
You may have heard the old rule that the IRS considers a business to be a hobby unless the business shows a profit during three out of five years. In practice, the hobby rule is not that strict, but the taxpayer must demonstrate a serious intent to operate at a profit. One of the ways to demonstrate your intent is to separate your business activities from your personal life.
Four Steps to Setting Up a Writing Business
Setting up a business is a four-step process.
- First, come up with and claim your business name. This is optional. You may operate under your own name if you prefer.
- Whether or not you adopt a company, you will need to obtain various business numbers and certificates (EIN, Seller’s Permits, etc.).
- Then, you open separate bank accounts and link those accounts to CreateSpace, IngramSpark and other vendors and retailers necessary to run your writing business.
- Finally, you set up a few record-keeping procedures that will make your life easier.
Today, I will start with what you don’t have to do to start a writing business: incorporate.
You Don’t Need to Incorporate to Have a Writing Business
If you mention you are going to self-publish a book, then your neighbor or some other busy-body will say you must incorporate or form a limited liability company (LLC) to protect your assets.
Smile politely and ignore them. They are wrong at least 95% of the time.
For the majority of writers, forming a corporation or LLC is an unnecessary expense and won’t do much good. A writer’s greatest legal risks are defamation, privacy, and infringement claims, all of which result from the writer’s personal actions, not the acts of the entity. Even if a writer forms an entity, someone would sue both the writer and the corporation or LLC.
Instead, your business will be a sole proprietorship. You create a sole proprietorship simply by going into business. A sole proprietorship is not taxed separately. You will report its revenue and expenses on a Schedule C, which is attached to your 1040 and the equivalent state form.
The Four Reasons to Incorporate Your Writing Business
Are you one of the 5% who should incorporate?
To determine if you are, consider the 4 Ps.
Privacy. If you want to hide your identity, you may 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 who know your real name, the more likely the information will leak. For an added layer of privacy, you can 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.
Profits. If you expect to make significant 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.
Partnership. If you run various businesses with different partners and investors, then you may want to set up an entity to distinguish one business from another.
Protection. If you are writing a high-risk book, then you may want the additional layer of protection of operating as an entity. A high-risk book is one that takes on Wall Street, City Hall, Big Business, Big Data, Big Medicine, Big Agriculture, Mr. or Ms. Big, or any other target with the money to hire a pack of lawyers to make your life miserable.
There are many sites, services and books to help you set up a corporation or LLC. However, you will be better off working with an attorney or CPA. It’s far cheaper to set up the entity correctly in the first place than to clean up a mess later on.
Over the next several posts I will walk you through the process of setting up your business. If you want to jump ahead, or would like more details, then I recommend you purchase Publishing Business in a Box, a kit I wrote for AuthorToolkits.com. Not only does it break down business set-up into easy-to-follow steps, the kit also includes various sample contracts such as a freelancer agreement, interviewee release, and non-disclosure agreement.
In my next post, I’ll explain why and how to adopt a company name.
About the Author
Helen Sedwick is an author and California attorney with thirty years of experience representing businesses and entrepreneurs. Publisher’s Weekly lists her Self-Publisher’s Legal Handbook as one of the top five resource books for independent authors. Her blog coaches writers on everything from saving on taxes to avoiding scams. For more information about Helen, check out her website at helensedwick.com.
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.
Photo courtesy of gajus/123RF.com.