By Mike Kowis, Esq.
I recently gave a talk to a local writer’s group about the process of self-publishing a book, which includes setting up an author business. Afterwards, the group leader thanked me for sharing the “business side” of being an author. While I appreciated her kind gesture, it struck me as odd because I think of an author as more than just a person who writes a book. To me, an author is also a person who performs many roles including small business owner, public speaker, web designer, social media guru, bookkeeper, marketing expert, etc. That leads me to the point of this post. Authors are business owners, and as such they should consider creating a business entity for their book creation and marketing activities.
*** CAVEAT: This post is intended for general discussion purposes only and is not tax or legal advice. If you have questions about your particular situation, please seek tax or legal advice from a qualified CPA or attorney.
An Author Business Versus a Hobby
An author business has two main advantages.
First, the business name you choose helps establish your brand and sets you apart from other authors. Creating a well-known brand name should be at least one part of your marketing plan, especially if you intend to write more than one book.
Second, operating book activities as a business usually allows you or your business entity to deduct book-related expenses on your federal income tax return, even if those expenses exceed royalties and other income. If an author doesn’t operate her book activities as a business, such activities might be treated as a hobby for income tax purposes. That’s bad news for most people because the ability to deduct hobby expenses is severely limited and cannot exceed hobby income.
To be clear, creating an author business is not necessary for everyone. For example, if your primary goal is to create a memoire to be shared only with close friends and family and you have no plans for future books, then you probably don’t need an author business.
How to Pick the Right Entity
The good news is that authors have several choices when selecting the type of business entity for their author business. Unfortunately, no one particular entity is right for all authors. As you evaluate each business entity, you should consider what I like to call the “LENT” factors, including:
- LIABILITY of the owner (whether the owner has limited or unlimited liability for debts and legal claims against the business);
- EASE of creation (whether the business is cheap and easy to form);
- NEED for capital (whether the business requires significant funding to start/operate); and
- TAX considerations (whether the business is subject to single or double income tax).
Common Business Entities
In the United States, there are many forms of single-owner business entities. Below are the four most common types and their LENT characteristics:
Sole Proprietorship (“SP”):
L – owner has unlimited liability, meaning the owner can be held personally liable for debts and legal claims against the SP
E – very cheap and easy to create
N – available capital is limited to the assets and credit of the SP owner
T – single income tax (at the owner level)
Limited Liability Company* (“LLC”):
L – owner has limited liability, meaning the financial risk associated with debts and legal claims against the LLC is limited to what the owner invested in the LLC
E – a little more complicated and expensive to create/operate than a SP
N – available capital is limited to the assets and credit of the LLC and its owner
T – has the OPTION of being subject to single income tax (at the owner level)
*NOTE: you can create a single-owner LLC in some states, but other states require two or more owners.
C Corporation (“C Corp”):
L – owner has limited liability, meaning the financial risk associated with debts and legal claims against the C Corp is limited to what the owner invested in the C Corp
E – more complicated and expensive to create than a SP or LLC
N – available capital is limited to the assets and credit of the C Corp and its owner
T – double income tax (taxed once at the C Corp level and again at the owner level)
S Corporation (“S Corp”):
L – owner has limited liability, meaning the financial risk associated with debts and legal claims against the S Corp is limited to what the owner invested in the S Corp
E – more complicated and expensive to create than a SP or LLC
N – available capital is limited to the assets and credit of the S Corp and its owner
T – single income tax (at the owner level)
The SP and LLC are probably the most popular choices for authors. On the plus side, both entities are subject to a single income tax (assuming the LLC chooses that option). Some authors prefer the SP because it is the cheapest and easiest to create and operate. However, this entity leaves the owner vulnerable to personal liability for any unpaid debts and legal claims against the SP. Other authors prefer the LLC because its owner enjoys limited liability. However, the LLC comes with a little more complexity and expense to create and operate as compared to a SP. Which type is right for you will probably depend on how much money and effort you are willing to spend to create/operate the business (the SP is cheaper/easier) and how risk averse you are (the LLC offers limited liability for its owner).
While the C Corp and S Corp have their own advantages, I don’t recommend them for most author businesses for several reasons. First, both entities have much more complex income tax rules as compared to that of a SP or LLC (assuming the LLC chooses single income tax option). Second, the C Corp is subject to double income tax and requires additional effort and cost to operate. Third, the additional effort and cost required to create and operate an S Corp together with additional ownership restrictions make this entity less popular than the SP or LLC.
How to Form a Business Entity
The first step to creating any business entity is picking its name. This simple task may be a little trickier than you might think. For starters, the author should select a name that represents her “brand” (what makes her stand out from all other authors/publishers). Second, the author should pick a unique name that doesn’t infringe on the tradename of any other business. To that end, you should conduct a search to ensure that your preferred name is not already used by another business. I recommend searching for your preferred name via your favorite search engine and the U.S. Patent and Trademark Office (www.uspto.gov). You can also contact the Secretary of State’s office in the state where your future business will be created to inquire about the availability of the preferred name. Third, many states require certain words or abbreviations be included in the name depending on the type of business entity. For example, some states may require a C Corp to include “Incorporated” or “Inc.” in its name. For more information on the name requirements, you can check the instructions for the business creation forms offered by the Secretary of State office, or ask your attorney.
The next steps to creating a business entity will depend on the type of entity and the state where it will be created. While each state has its own process and forms for creating a new business entity, the basic steps are fairly common. The following are typical steps required to create each of the single-owner entities described above:
Sole Proprietorship*:
Step 1: Obtain a Federal Employer Identification Number or “FEIN” from the IRS website (www.irs.gov)
Step 2: Take the file-stamped Assumed Name Certificate that you received from the county clerk’s office or Secretary of State office and the FEIN to a bank and open a checking account, debit card, and/or credit card in the name of the business
Step 3: File an Assumed Name Certificate (a.k.a. “Doing Business As” or “DBA” form) in your local county clerk’s office or the Secretary of State office for the state where you reside and pay the applicable fee
*NOTE: some states also require the applicant to give public notice by announcing the new business in newspapers for a minimum period of time
Limited Liability Company:
Step 1: Obtain a FEIN from the IRS website
Step 2: Take the Corporate Charter (or whatever it is called in your state) that you received from the Secretary of State and the FEIN to a bank and open a checking account, debit card, and/or credit card in the name of the business
Step 3: File the Articles of Organization (or whatever it is called in your state) with the Secretary of State and pay the applicable fee
C Corporation*:
Step 1: Obtain a FEIN from the IRS website*
Step 2: Take the Corporate Charter (or whatever it is called in your state) that you received from the Secretary of State and the FEIN to a bank and open a checking account, debit card, and/or credit card in the name of the business
Step 3: File the Articles of Incorporation (or whatever it is called in your state) with the Secretary of State and pay the applicable fee
*NOTE: a C Corp must follow all corporate formalities (draft by-laws, pick corporate officers, hold board of directors meetings and shareholder meetings, etc.)
S Corporation*:
Step 1: Obtain a FEIN from the IRS website
Step 2: File IRS Form 2553 to be treated as an S Corporation for federal income tax purposes
Step 3: Take the Corporate Charter (or whatever it is called in your state) that you received from the Secretary of State and the FEIN to a bank and open a checking account, debit card, and/or credit card in the name of the business
Step 4: File the Articles of Incorporation (or whatever it is called in your state) with the Secretary of State and pay the applicable fee
*NOTE: an S Corp must follow all corporate formalities (draft by-laws, pick corporate officers, hold board of directors meetings and shareholder meetings, etc.)
Traps for the Wary
One common benefit of owning a LLC, C Corp, or S Corp is limited liability protection for the owner. However, this benefit is not always guaranteed. Occasionally, someone sues one of these entities and the court will remove that benefit from the owner in a process known as “piercing the corporate veil.” In other words, the court can rule that the owner must incur personal liability for the debts and legal claims against the business just as if the business was a SP. Luckily, piercing the corporate veil is rare. Typically, it occurs as a result of one or more of the following situations:
- a third party is misled into dealing with the business rather than the owner
- the business is not intended to make a profit or is too thinly capitalized (underfunded)
- the business fails to meet corporate formalities
- the assets of the business and the assets of the owner are co-mingled (e.g., the income of the business is frequently deposited into the owner’s personal bank account and vice versa).
By avoiding the above situations, the owner of a LLC, C Corp, or S Corp can reduce the risk of losing its limited liability protection.
In Summary
For most authors, it makes sense to create an author business to establish your brand and maximize your income tax benefits. When choosing the form of entity, authors should consider the LENT factors and/or consult with their CPA or attorney for specific tax or legal advice. Once you choose the business entity, you must follow the procedure for creating that entity in the state where you want to create it. If you create an entity that provides limited liability protection for the owner, be sure to avoid co-mingling and other behaviors that can sometimes lead to loss of limited liability protection.
Copyright © 2021 Mike Kowis, Esq.
For more helpful author tips, please visit www.mikekowis.com.
