The Estate Planning for Writers article raised a few questions about creating a corporation or limited liability company to govern your literary work. As a quick reminder, there are four ways to transfer assets at the time of death:
- Intestate (no will).
- A will (probate).
- A trust (such as a living trust).
- A contract (like an IRA, life insurance policy, retirement plan, or assignment to a corporate entity).
The type of assets transferred includes personal property, real property, and intellectual property, like copyrights and trademarks in your literary work. We covered the first three means of transfer in detail in the Estate Planning article. This week, I will explore the corporate option further. A few readers wanted to know when or if they should form a business entity for their publishing work and how to transfer intellectual property rights in their literary work to a corporation.
For tax purposes, writers usually operate as sole–proprietorships. Most writers who change from a sole-proprietorship to a Subchapter S corporation (S-Corp) or limited liability company (LLC) hope to save taxes, provide better protection against liability, and import greater legitimacy in the marketplace with the IRS. If you are questioning whether to form an S-Corp or LLC for your literary works, here is what you need to know. One caveat, make sure you take any recent tax law changes into account before making your decision. It is always best to consult a professional tax expert or tax lawyer for your particular tax situation.
A sole-proprietorship is the default entity until an LLC or S-Corp is formed. You and your writing business are the same. Sole-proprietorships are the simplest structure of the three entities. It involves no paperwork, corporate filings, board of directors, or special fees. All the profits and losses from your writing business are reported on your personal tax return and not on a separate business tax return. Net income after expenses will be subject to self-employment tax, currently set at 15.3% in 2021.
The downside to a sole-proprietorship (besides the self-employment tax) is that you are personally responsible for any liability (e.g., copyright infringement, contract disputes, defamation), which puts your personal assets at risk. There is no protection against personal liability incurred through your writing business activities. However, this may not be as bad as it seems (see the liability section below).
Limited Liability Company
Setting up an LLC requires minimal paperwork and usually low filing fees (state requirements and fees vary, so do your research). Filing is relatively easy and can be done yourself. If you are not inclined to tackle the paperwork and don’t mind the added cost, hire a CPA or lawyer. In most cases, a writer would create a “single member” LLC, with the writer as sole owner. The LLC is considered a “pass-through” entity, which means the LLC passes the income and losses from the business to the LLC owner (the writer), who claims the profits and losses on her personal tax return (exactly like a sole-proprietorship). An LLC does not pay federal income tax and may or may not pay state tax, depending on the state. For example, most states follow the IRS and tax LLC profits by taxing the LLC owners on their personal returns. Other states, like California, require an LLC to pay 1.5% on income or a minimum of $800 per year regardless of whether the LLC does any business or operates at a loss (called a “franchise tax”). Because of these state tax differences, check with a professional.
While an LLC does not provide any tax benefit over a sole-proprietorship (and may even cost a writer more depending on state filing fees and taxes), it does provide a legal buffer to protect personal assets (more on liability below). True to its name, liability is limited.
Subchapter S Corporation
An S-Corp is the more complicated entity of the three. It requires more effort to set up and maintain. The tax returns are more complicated. But it does provide a few tax advantages over the other entities. Like the LLC, the S-Corp is a flow-through entity. Profit is transferred to the personal income tax returns of the corporate shareholders in the form of salary and dividends. This means an S-Corp does not pay federal taxes or state tax (depending on the state). Again, using California as an example, S-Corps are subject to the $800 minimum franchise tax and 1.5% tax on net income. Other states are different, so check with a professional.
The main tax advantage of an S-Corp is minimizing the self-employment tax paid by sole-proprietorships and single-member LLCs. S-Corps are not taxed like sole-proprietorships. S-Corps can allocate their profits between compensation and company profits. Only the salary you pay yourself from the S-Corp, as opposed to all the profit, is subject to Social Security and Medicare taxation, which is quite a savings. The remainder of the S-Corp company profit is passed through to you and subject only to regular federal and state taxes.
Besides the tax advantages, the other benefit is an S-Corp protects personal assets from liability (like an LLC). Be careful to maintain and adhere to the S-Corp legal requirements like annual state filings, fees, and holding board of director meetings. If not, a plaintiff suing the S-Corp could “pierce the corporate veil” and sue the owner personally.
While it might sound appealing to protect personal assets with the protection offered by an LLC or S-Corp, in reality, the business of writing is not extremely risky. It is not like we sell smartphones that explode or vehicles with faulty ignition switches. This is not to say writers are not sued. Recently, Emma Cline, author of the 2016 novel “The Girls,” found herself embroiled in litigation with her former boyfriend, Chaz Reetz-Laiolo, also a writer. They filed lawsuits against each other alleging plagiarism, copyright theft, and invasion of privacy, among other things (see Sex, Plagiarism and Spyware. This Is Not Your Average Copyright Complaint).
Whether you are traditionally published or self-published, it takes a village to shepherd a book to market. There are contracts with publishers, agents, designers, and copyeditors. There are copyrights to navigate (graphics, images, song lyrics), defamation and right of privacy claims to avoid (like Emma Cline’s lawsuit), and employees to maintain should you be lucky to have full-time research and personal assistants. All of these are potential litigation hotspots for writers. For more info on avoiding legal claims in your writing, see my earlier articles on defamation, life story rights, and plagiarism.
Incorporating might help protect a writer’s personal assets from breach of contract, creditor debt, or employee disputes, but issues of defamation, privacy, and copyright infringement result from the writer’s actions. So you can bet a lawsuit involving those types of claims will include as defendants the corporation, writer, and publisher (as in Emma Cline’s case). Likewise, standard publishing contracts have indemnity clauses, meaning the author is on the hook to indemnify the publisher due to claims arising from his work, such as defamation, invasion of privacy, and copyright infringement.
Another option as an alternative to incorporating is to purchase insurance. For example, suppose a writer doesn’t make enough income to benefit from the tax advantages of incorporation. In that case, the writer could use the money spent to set up and maintain a business entity to instead pay for business liability insurance or an umbrella policy that covers infringement and defamation. A writer could purchase a two million dollar umbrella policy which would allow one million for litigation fees and one million for damages. Depending on the coverage, these types of policies typically run from $200 to $1000 per year.
So what is best for you? The answer boils down to how much money you make from writing, what you are writing, and whether you are risk-averse. If you are a writer who makes a living from her prose, then incorporation might make sense. For the majority of authors, writing only supplements their current income, so a sole-proprietorship works fine. Sole-proprietors can avoid the added costs and inconveniences of maintaining a business entity. Plus, sole-proprietors can take a home office deduction too. Once you make a consistent profit from your writing, then reconsider your business entity status.
Transfer of Assets to a Corporate Entity
If you decide to form an S-Corp or LLC for your writing endeavors and you want to transfer your intellectual property in your literary work to the corporation, then all you need is an assignment of the intellectual property to the corporation. Use your estate planning devices like a trust or will to specify what happens to your corporation when you die: who controls the corporation, who has responsibility for literary works that are within the corporation, how do you want those literary works (both published and unpublished) to be handled, and who receives the revenue. Remember, copyrights last for the author’s life plus 70 years. Consult a professional since transferring assets to a corporation is a somewhat complicated structure.
Assignment of intellectual property (as opposed to a license) is a complete transfer of all the rights in the intellectual property. For writers, we tend to hold copyrights and trademarks in our literary work. There are plenty of copyright assignment templates online. Here are the links to a few (CopyLaw, FindForms). Or you can use the assignment included in my previous post on the transfer of copyright ownership. You can also do the same with your trademarks that relate to your literary work should you have them. Again, have a professional review your assignments for proper preparation and execution. I can’t underscore this enough.
Register your copyright assignment with the copyright office. This provides various benefits, like establishing a public record of your rights and constructive notice to others of the rights transferred. However, there is a fee for recordation. You can find out more about copyright recordation here. You should also register a trademark assignment with the Patent and Trademark Office. You can find more about trademark recordation and fees here.
If you have questions, consult a professional tax expert and lawyer to ensure incorporation and transferring your intellectual property is the best route for you and your writing career.
Legal Disclaimer: This information is provided for educational purposes only. Consult a qualified lawyer or tax expert in your jurisdiction for all legal and tax opinions for your specific situation.