Don’t make these common indie publishing mistakes when you decide to start a full-time publishing business.
Your books are selling, your marketing is building a fan base and now you’re contemplating what’s next. Maybe create a publishing company to manage your writing business?
The answer is yes.
When searching for advice about incorporation most of the posts are created by tax and legal advisors or websites that profit from filing.
In this article, you will learn the two most common mistakes and how to avoid them by creating a business structure that will serve you for decades. Incorporating impacts your legal liabilities, your tax situation and your ability to get credit. Let’s begin with the option of not doing anything.
Mistake #1: Operating as a sole proprietor – AKA doing nothing
One option is to do nothing. If you don’t set up a company you are operating as a sole proprietor. Your business is an unregistered entity and the name of the business is not protected unless you have registered in your county to Doing Business As (DBA).
Legal & Liabilities
You have no corporate veil to protect you. In simplest terms, you are the business and any liabilities such as owing vendors money can be remedied by claims against your personal assets. Having the basic protections and separations of assets is important to protect your personal property.
Without a corporate charter or a formal DBA filing, there is no record of your business name. Most counties except sole proprietors to register for doing business as in the county. Given the costs and time associated with the process, you may as well put in the extra effort and incorporate with the state you reside, to set up a company and get the added benefits.
The IRS does not require you to set up a business, just to claim the income from that business on your personal tax return. In fact, anything over $400 requires reporting and self-employment tax. Self-employment tax is the Medicare and social security taxes including the employer share that you see on your paycheck stub.
One way to reduce your tax liability is to deduct appropriate expenses including expenses that are essentially perks to you. Want to go to that writer’s conference in Cabo? You can expense the trip including all your meals and sundries to the business. Previously, this used to come out of after-tax dollars and is now a pretax expense. While you can do this on your personal return, the expectation is that a business should have a substantial amount of expenses associated with operations including, travel, meals, car leases and computers. Most of what you are paying for related to your business can be classified as a tax-deductible expense.
Mistake #2 When Setting Up an LLC
There are several types of corporate structures and while an LLC is one of the most common, in my opinion, it is the wrong one for Indie Publishing Companies in the United States if not set up correctly. I will discuss why in a moment but let me first explain what is good about an LLC and what is bad to help you understand my reasoning.
First, what’s good about an LLC
An LLC is designed to be a pass-through entity meaning that profits pass to the owners and taxes are paid at the owner’s personal tax rate.
LLC’s allow for extreme flexibility, After getting your articles of incorporation you create an Operating Agreement that allows for all of the rules that the business will operate under. This is helpful if there are multiple owners/partners and the need to specify different payouts and authority.
Maintaining them is usually easier than a corporation in that states typically have more record keeping requirements for corporations than an LLC.
What’s bad about an LLC
You are required to pay self-employment tax on the profits of the business.
As a member of the LLC, you can not be paid a salary with a corresponding W-2. Any pay is taken as a draw against your capital account.
So what should you do when setting up your self-publishing empire?
What Should You Do?
No matter what advice you receive: from a lawyer or certified public accountant, it comes with the caveat that every circumstance is different and no responsibility is taken for the outcomes if you follow the advice given. Of course the same goes with this article. I can tell you what I think and what I have done and why I think it makes sense.
Either set up a subchapter S corporation or an LLC but elect with the IRS to have the LLC treated as an S corp.
This is a little more complex than starting just an LLC but well within the skill set of anyone who is running an indie publishing shop. The benefits are below:
You can pay yourself a salary and issue a W-2
The power of the W-2
If you are self-employed you know the pain of not having a W-2. Anytime you go to buy a car or refinance your house and tell the credit manager that you are self-employed the options for financing are either diminished or expensive. However, if you are able to provide a W-2 you can easily go through standard loan qualification. With an S corporation, you will be a shareholder, an officer, and an EMPLOYEE. This is impossible with an LLC. This may not seem like a big deal now but it will be if you attempt to buy something big and need credit.
Reduce Tax Burden
Here is another benefit that is perfectly legal but only available to Subchapter S Corporations.
Since you can now be a salaried employee your Medicare, FICA, and state employment taxes apply to the salary you make. You will need to adjust your salary in proportion to the overall revenue of the business. The IRS is aware of the trick where an owner takes a low salary to keep employment taxes down. A good rule of thumb is 50% of the operating profits.
The profits of the corporation would typically require you to pay corporate income tax but since you are subchapter S, profits pass through to you and you pay at your personal income level. That means you save the 3-15% self-employment tax that you would pay if you had an LLC!
What Corporate entity should you choose? You need to look at evaluate this based on the initial and ongoing costs for maintaining the charter and what give you the lower record keeping burden. If this all seems too much then you can always go to an accountant or lawyer to set this up but it is something that can be done on your own with a little patience.
Below I outline is a multistep process that you can do on-line yourself to set up the structure that I suggest. The only fees you will pay are to the Secretary of State for the registration of the corporate charter. Fees will vary but they are all in the range of $200-500. To find the State office you can get a FREE listing in my book “Should I Incorporate?” You can download a pdf copy by clicking the button below or you can get a free copy on all of the major eBook platforms.
The Steps for incorporating
#1 Incorporate. Set up a company that is incorporated rather than a limited liability company.
This can be done online you will need to have a valid credit card and need to provide a permanent address and the personal details for the officers of the corporation. Since you will most likely fill all of these roles you just need your details.
#2 File with the IRS and get the new corporation an EIN Number
An EIN number is your business social security number. You will need it to set up accounts, file taxes and to set up a bank account. EINs are obtained online for free.
#3 Designate the Corporation a subchapter S rather than a C Corp
The election and approval of subchapter S are handled by the IRS and is required to be completed before the end of your first tax year. The form is here
This designation gives your corporation the benefits of an LLC in that it does not pay a corporate income tax, instead, the income passes through to the shareholder(s). There are rules and regs associated with this but for most solely owned small businesses you will never have to worry about going above the number of shareholders or other disqualifiers. Please review them on the form before you apply.
#4 Go to your local bank and set up a bank account
With a bank account, EIN and articles of incorporation you now have all the necessary pieces for operating your publishing business.
#5 Change your KDP and other author account information to match your EIN and business bank account
With a bank account, EIN and articles of incorporation you now have all the necessary pieces for operating your publishing business. The first things to do is switch your KDP and other accounts that provide sources of income to the business to use the business EIN and the funds going to your business bank account.
If you are interested in more details on how to start and operate a business then get a copy of the Business Owner’s Compendium.
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