Cliché or not, we all know the two inevitable things in this world: death and taxes. Funny enough, both of them take you by inches, nibbles, and bits at a time. Well, beating death is somebody else’s job. I’m here to give you some very general financial planning advice for the self-published author.
Two Disclaimers: This blog post is written based entirely on United States tax law. That’s where we’re located, as are the majority of our clientele, so it only makes sense for me to focus there initially. If you’re an international tax guru, though, please contact me. I’d love to do a follow-up for authors who don’t live in the USA, but I’m going to need some research assistance.
Additionally, we are not tax preparation professionals or experts in tax and business law. We stand by this advice as generally useful, but your situation may vary. Consult a pro before making any final business decisions!
What’s Out and What’s In(corporated)?
One of the first things new small businesses often ask themselves is if they should incorporate. At the new, small-business level, the main reason to incorporate is to protect personal assets from liens, debts, and company bankruptcy. Your three typical options will all do this for you. They are Limited Liability Corporations (LLCs), S-Corporations, and C-Corporations.
A-B-C, Easy as 1-2-3
So what’s the difference between an LLC, an S, or a C?
S & C-Corporations require a level of bureaucracy. These types of corporations require regular shareholder meetings, detailed minutes of those meetings, and generally more meetings across the board (even though those meetings are just with myself). Since all of that sounds more like an early level of Hell than it does like something I want to do to be successful, that alone is enough for me to give them a pass.
Additionally, S-Corps also have ownership rules, such as requiring citizenship and a limited number of owners. LLCs have no punitive ownership rules. So based just on simplicity, LLCs are starting to look pretty good.
But what about the taxes? I’d probably put up with some of that unfun stuff of C and S-Corps if it saved me money, right?
Well, the C in C-Corps doesn’t stand for cash when it comes to taxes. C-Corps face the dreaded “double taxation” problem. What I mean is, all net income is taxed at the 34% corporate tax rate and then all distributions and/or payroll are taxed at the owners’/employees’ income tax rates. That’s a lot of taxes!
By contrast, LLCs & S-Corps are “pass thru” entities. What this means is profit and loss are not taxed at the corporate level. Instead, owners are taxed at their own tax rates based upon the ownership percentage.
S and C-Corps have complicated rules. C-Corps have a more significant tax burden. LLCs dodge both of those issues. I think it’s safe to say that an LLC is almost certainly the best option for starting a small, probably single-person, publishing business.
One extremely important thing to keep in mind for the self-published author is that without choosing one of the three above company options, the author will be a self-employed/sole proprietorship. A sole proprietor’s personal assets are not protected and can be seized/forfeited to cover any debts of a failed company. If the self-published author plans on taking on debt to fund the business or acquire assets, then she should definitely choose one of the Big Three above.
Does Size Matter?
Yes! And I’m not just saying that so we can all snicker together like 8th graders.
Growth isn’t likely to be a major decision point for a very long time unless the owner reaches a point she stops consuming all of the profit as income and can afford to start taking a salary. Meaning that a small company – let’s say operating at less than $250,000 net income (after all expenses) – will likely operate as an LLC for a very long time.
Once the profit begins to exceed that of what the IRS defines as a “middle class income” (roughly that magical $250,000 mentioned above), then a C-Corp could become the better option. It’s much more attractive to look at $1 million net income and paying yourself a salary of $100K with attributable taxes compared to $1 million in personal income tax.
There’s some common wisdom floating around the interweb that one should incorporate outside of their home state in order to reap the benefits of more business-friendly states. This is a thing, but it adds many layers of complexity that the average small business owner probably doesn’t want.
Larger corporations incorporate in other states when they can get tax breaks and the like for having corporate offices in one place and manufacturing/retail someplace else. As you can imagine, these aren’t likely to be concerns of the average small business owner, especially authors (even before weighing the costs of all the added complexity).
That said, you may live in a state that is just heinously unfair to your situation. If so, the added difficulty may be worth the financial incentive.
The Cost of Doing Business
Here’s some news: Setting up corporations costs money. The good news is, in most states, the fees for filing paperwork and getting business licenses are typically only a few hundred bucks. Are you ready for what could be the bad news?
Depending on a variety of factors and preferences, you probably need to budget at least a thousand dollars to set up your new incorporation. The reason is this stuff is hard. There are a lot of i’s to be dotted and t’s to be crossed, sometimes literally. You need this work done correctly, professionally, and on the first try. You should pay somebody to do it, and, sadly, good lawyers and accountants ain’t cheap.
I mean, if I suggested getting a professional for your covers, what did you think I was going to say about taxes?
So now you’re all set up as a business with a novel that has been professionally edited, designed, and published. Are you wondering how you’re going to tell people about it? Come back next week for some basic suggestions on marketing your new book.