Disclaimer: I am not a lawyer or CPA. So I’m not in a position to give individualized and specific legal or tax advice. This article is meant to give general guidance on considerations. However, it would make sense to consult a lawyer and CPA before acting on this general guidance, because benefits and drawbacks will change from state to state.
With that out of the way, this is one of those questions I receive every so often from writers. In most cases, the writers are not earning a significant income from their writing yet, but I get it. I’m a writer too, and I feel like writers are especially gifted at dreaming up possibilities—both good and bad.
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Reasons I’ve heard writers give for incorporating or forming an LLC usually have to do with protection. Some people have heard that incorporating as an S Corp or creating an LLC will protect them from lawsuits and provide tax benefits.
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One reason writers give for considering incorporating or creating an LLC is to put a wall between their freelance business and personal assets. On its surface, it sounds like a good reason. However, the most common liability for writers is different than other businesses that have employees, investments in production, and other business costs.
The most common liabilities for writers are tied to possible lawsuits for defamation, privacy, or infringement. In all those cases, plaintiffs would likely file suits against both the company and the writer. This is why most publishing contracts have language to cover them against the actions of their writers.
The good news is that you’re not completely helpless if this is a concern for you. Writers can look into Business Liability and/or Media Liability insurance policies. If you go this route, be sure that your policy covers defamation, privacy, and infringement claims.
Link to the rest at Writers Digest
PG will provide a bullet point response:
- Get tax advice from a CPA or qualified tax accountant, not another writer. Some writers won’t gain any tax benefit from a corporation or LLC (Limited Liability Companies – they are definitely not the same when it comes to taxes) while other writers will.
- Is the writer married? Does the spouse have an income?
- Does either the writer or the spouse own assets not related to writing?
- Does the author live in a community property state?
- Are inheritance or estate taxes going to be involved if the author dies while married? Unmarried?
- Get legal advice from a lawyer, not another writer.
- Laws relating to defamation, privacy, or infringement claims vary, sometimes substantially, from state to state.
- There are very good reasons that many corporations, including most very large corporations, incorporate in Delaware rather than the state in which most of the corporation’s assets exist. (About two-thirds of Fortune 500 companies are Delaware corporations.)
- There are very good reasons why many LLCs (and an increasing number of closely-held corporations) are formed in Nevada even though the parties creating them and the assets of these entities are outside of Nevada.
- Laws relating to the types of third-party claims from which an LLC or corporation may shield a shareholder of a corporation or owner of an LLC interest vary from state to state.
- More than one lawsuit has been avoided or won because of legal speed bumps lying between the claimant and an award of damages.
- As an example, if a plaintiff lives in Illinois and the defendant/author contends a Nevada LLC owns the copyright to the book involved and the LLC files a proceeding in Nevada against the plaintiff claiming improper actions on the part of the Illinois plaintiff and that Nevada, not Illinois, is the only proper place to pursue the litigation of the claims of the LLC, at a minimum, it is almost certain the plaintiff will need to hire a Nevada attorney to respond.
- There are many, many other potential speed bumps between a complaint and cash in the plaintiff’s pocket that a determined author and competent counsel can place create. This is one reason why many litigation attorneys require a substantial up-front payment from an individual plaintiff and will not take a case on a contingency fee basis unless there is an insurance company or some other deep pocket who will pay if the judgment goes against them. You can assume that 99.999% of the attorneys who advertise on television fall into that category.
Finally, PG notes that he is a member of The State Bar of California and claims no legal or professional expertise with respect to the tax laws of any government entity nor the laws of Illinois, Delaware or Nevada. If you wish to understand tax laws, you need to hire a competent accountant or tax attorney and if you wish to understand the laws, including the corporation and LLC laws and the laws and court rules relating to litigation in a state, you need to hire a competent attorney who is admitted to practice law in that state.
UPDATE: PG didn’t mention the suggestion in the OP that an author consider acquiring Business Liability and/or Media Liability insurance. PG will note that such policies are very complex documents that include provisions that limit the policy’s coverage in various ways and will almost certainly include provisions for a large deductible that the author must pay.
PG is not opposed to appropriate insurance (and has the lawyer’s version of such insurance himself), it may not be easy for most authors to understand the protection that the policy provides and what potential losses the policy will cover and what it will not cover. Additionally, such insurance will be in force for a set period of time and renewal will require payment of another premium, even if the author does not plan to write any additional books. Maintaining the existence of a corporation or LLC may well be less expensive than premiums on such insurance. Note that nothing precludes an author from doing both – corporation/LLC plus liability insurance.
PG will also note that liability coverage connected to insurance on real estate or automobiles you may own will not cover claims made against an author relating to the author’s literary works.
Presuming that a writer has determined to form a business entity to hold and manage her writing business, there’s at lease one more step to take immediately.
Bring copies of all of the papers relating to the business — the articles, the bylaws and/or operating agreement, the certificate of good standing (if the state of organization issues them) — to the writer’s estate-planning attorney. And all of the assignments of copyright. Then ensure that the estate plan is consistent with the business entity being the actual owner of the copyrights… and that, unlike 99.58% of all estate-planning lawyers, the peculiarities of 17 U.S.C. § 203 (and, for some, § 304(c)) have been accounted for in the estate plan so that there’s a clear chain of authority.
Or you’ll be Andre Norton, who didn’t (or at least didn’t provide these documents to competent for these circumstances estate-planning counsel who was paying attention). And worse, not doing as outlined above invites state probate courts to make decisions on federal law outside their jurisdiction; had there been, say, an active film option at issue during the Norton estate’s litigation, the civil-procedure-geek joy would have been boundless! That’s just one that has generated actual litigation instead of… mere chaos.
My point is that just forming the business entity isn’t enough, if after careful consideration and competent (well-informed) advice from counsel that’s the decision. There need to be both continuing operations and an established succession plan that is not contradicted by other planning.
PS Fire any estate-planning attorney who tries to put “minimize tax burden” first in dealing with intellectual property as a major asset of the estate. With the change to excludability of the first $11.8 million from US estate taxes, the few writers so affected need something much more complex than a knee-jerk “taxes are the greatest eeeeeeeeeevil because they jeopardize family homesteads” estate plan. (I don’t have contempt for the estate-planning bar; when it comes to IP, the estate-planning bar is largely beneath contempt. And but for privilege and other confidences, I’d list dozens of examples, and those are just the ones that have crossed my desk over the years.)
All excellent points that I didn’t mention in the OP, CE.
It might be beneficial for an author to consult _both_ a business attorney _and_ an estate planning attorney before deciding on what, if anything, the author may want to do with existing and future books, contracts relating to those books, etc.
Make certain each attorney knows that you have/will also contact(ed) the other and that you have no problem with the two attorneys consulting directly with one another if they think it might be beneficial to your interests.