Monday, July 25, 2016

Should You Start a Writing Business (Part 2)

Quick Rachel note before we get started! For those of you asking about the audio edition of NO GOOD DRAGON GOES UNPUNISHED...


That's right, the folks at Audible have come through, and the audio edition of my third Heartstrikers novel will be out on September 13, 2016!

But that's not all! Not only will you have less than a month to wait between the ebook release on August 5 and the audio edition, but the audiobook is available for preorder right now!!


That's right, in a move usually reserved for big publishers, Audible has put my book up for preorder. You can reserve your copy now at Amazon or directly from Audible.com, whichever suits your fancy!

Also, I've talked with Vikas on the phone (as I always do), and you guys, he is going to be AMAZING in this book. He's even videoing some of his recording for those of you who are interested in seeing how audio books are made. I'll be posting those links as soon as they're up, so be sure to keep an eye here on the blog, Twitter, or Facebook to catch that when it comes up.

Remember, there's only a few days left before the ebook of NO GOOD DRAGON GOES UNPUNISHED comes out in ebook on August 5! If you haven't already, you can preorder your copy now or reserve it to read on Kindle Unlimited. Bob would want you to be prepared!

And with that bit of happy news out of the way, I'll pass the keyboard to Travis and his amazing, jam packed second half of Should You Start a Writing Business?

Take it away, Trav!

( > ^_^ ) >

Hi Folks,

Last week I talked broadly about the benefits of starting a business. This week, I'm going to get into specifics about the types of businesses and what they can do for you, the author. Specifically. There's a lot to talk about here, so let's get to-

Should You Start a Writing Business (Part 2)

But first, the disclaimers!

Disclaimer #1 - Because we live in America, this is intensely USA oriented information. I'm sorry if you're looking for business advice in another country.

Disclaimer #2 - I am not your legal counsel nor your qualified accountant. We do not have a client relationship. I'm telling you what I've found and heard so that you can go look into more and proper details. Don't tell the IRS "but Travis said so!" because they won't care. If you want to do anything I've talked about here, go sort it out with an actual accountant or lawyer or both.

The 6 Main Business Problems that Authors Face (that having a company can help solve...)


1. Managing your own withholding. Authors get paid in untaxed revenue, which means that you have to estimate and save your own withholding. You can pay either quarterly or annually but both involve hoarding large sums of money in your personal accounts and require the discipline to not spend it. (I talked about this a lot last week)

2. Increased tax exposure. Having to bear the full burden of the self-employment tax adds another 7.3% on earnings for authors to pay. By default, all author earnings just pile in with all other personal income as well, pushing up tax bracket exposure.

3. Personal liability. By default, authors sued for something related to their books or publishing side have their personal assets on the line. There's no protection or division between business and personal. Same goes for business related debts.

4. Lack of business structure. You're in business by yourself implicitly, but other than kickstarters and trad publishing contracts, there's no other good options for authors seeking investors or business partners. (Note I said good, there are always ways to get investors)

5. Lack of legitimacy. This is for self-pubbers really. It's hard to get legitimacy or recognition as an indie. The sea of unprofessional people in the indie community means that you have to strive and strive hard to earn the "reputable business person" status. Honestly, it's a career long struggle for most, even the successful ones.

6. Messy accounting. Do you use your personal checking and savings accounts to handle all your writing income and expenses? Don't feel bad! Most folks do it that way. We did it that way for years. It works, but it creates work for you. Either you are tracking all writing expenses and incomes manually OR you are sorting it all out at tax time. Both options are bad IMO. It also makes it pretty hard to track and properly claim all your business-related tax deductions. Missed opportunities may abound.


Time, options, costs, taxes... So those are the business problems, as I see them, that authors face and which forming a company might solve. There are plenty of other issues such as writing a good book, and marketing, but we're about the biz today.

and how do you solve them? The depends on,

The Type of Businesses You Can Form (at least in the USA)

Not all business types are equal! Not even close. That said, there's a lot of exciting possibilities here that I want to share with you today. First off, let's talk about the easy ones that offer the most bang for your buck. This is low-hanging fruit territory.




BTW - there are more types out there than I cover here. I'm focusing on the 'main' ones as things like trusts, joint ventures, and non-profits aren't really on point for most authors. Anyway,


Sole Proprietorship and Partnerships
The sole prop. If you have Schedule C/Form 1040 income, then you are implicitly a sole prop already. That doesn't do much for you though.

Forming am official sole prop company (or a partnership) is really easy. You'll have to look up your state's laws, but getting going can be as simple as a one-page form and a one-time fee. Most, I think, are formed using your name btw. If you don't want to be [Your Name] Co. then you need to register something called "Doing Business As" or DBA. This is also easy and let's you name your company whatever... within reason and regulation of course.

A partnership is similarly easy. It's basically the same as a sole prop except that there's more than one business owner. You're not solo. Also general partnerships share profits and liabilities between owners. There's not a lot of fanciness allowed.

Both types are great in that they let you quickly and cheaply formalize your company. Once you've done that, you can setup business accounts, accounting, branding (logos, cards, etc), and so on. 

So these lightweight business types can help you solve most of the problems I mentioned in the beginning of the post. If you don't want to mess with more complicated and costly business hurdles, but you do want to get most of the benefits of having a company, then these are good options. 


What a sole prop or partnership can't do
  1. Liability protection = none. Sole proprietors and partners are all fully personally liable for everything pertaining to the business. So sorry, these don't protect you. That's part of why they are easy to setup and operate though.
  2. Limited business models. You can run your sole prop however you (legally) want to. Partnerships are also pretty willy nilly as to what partners can do. If you want more legally binding and complex structures of business administration (like rules governing who owns what and who can manage what) then you'll find the general partnership lacking. As for investors, well you don't really have any new tools other than being a business. That's something, but it's not, say, stocks.
  3. Limited tax relief.  By having business accounts, fixing the messy accounting problem, you'll be much more able to deduct all your business expenses and make sure you are fully leveraging that powerful option. If you aren't a formal company, I'd bet money you aren't doing this right now. I don't blame you! It's hard to do when the business and the personal are mixed. So hard that it's almost not worth the time to do. 
For more on sole proprietorship, partnerships, or limited partnerships, please take a look at, 

LLCs, S-Corps, and C-Corps

These are much fancier setups but they all offer more powerful features. To start with, all of these business types can achieve all the benefits that a sole prop or partnership can and more.

Feature #1 - Liability Protection
The big item in this arena. The Limited Liability Company, S-Corp, and C-Corp all provide separation of business and personal assets. Owners of these types of businesses are not personally liable for the company's losses. So if the company has debt, it's the company's not yours (unless you co-signed personally!). If the company is sued and loses, the losses are contained at the company level. Bonus, if the liability pertains to a given owner, the damage is contained to that owner usually.

This protection comes at a cost though. Setup is more complicated and you'll likely need professional help to do it. Maintenance is higher as well. You have to really endeavor to keep your personal our of your business. If you comingle funds, or fail to properly keep that boundary enforced, then a judge might pierce the veil of protection and you can become personally liable anyway.

In practice, Rachel and I haven't found this too onerous for our LLC. In addition to separate accounts, I also keep all the company records in their own filing cabinet, use company office supplies only for company mailing, and so on. Rachel's writing room is a home office and it is strictly so. No other activities happen there but business. We have to hold the occasional company meeting as well, which is fun I think.



Honestly, it's all stuff we should have been doing all along anyway. Like I said last week, acting like a business is often good for you. A necessary step of maturation for all of us IMO.


Feature #2 - Better Business Structures



Let's take the LLC for an example here. The rules of governing and running an LLC are formally set down at its creation in something called an operating agreement. This legally establishes things like how to add owners, how to sell ownership, who can manage what, and how to change the operating agreement in the future.

Operating agreements are powerful, but more so they are priceless. People are drama haha. If you have more than one owner participating in a company, there's gonna be drama at some point. The formal operating agreement helps keep drama from ruining the company. Well, if you set it up right so that the bases are protected. Nothing is truly drama proof ^_^;;

Flexible ownership setups are part of this. Unlike a general partnership, these more sophisticated types of companies can have owners who manage daily operations and owners who don't. They can also have uneven ownership. Someone might own 10%, another person own 40%, and so on. This is handy for bringing in those investor/mentor type people who can own a small part, advise the authors, and not actually run anything themselves.

S-Corps and C-Corps have actual stocks and they have shareholders. This is pretty cool since you can sell the stocks. It's one of the easiest ways to bring on investors into a company. S-Corps only have 1 type of stock though, while C-Corps can make up many kinds.

My take here is that these structures are great for people who want to go into business with others. Multi-author team ups are powerful but this isn't limited to multiple authors necessarily. Rachel's the only author in Aaron/Bach, LLC. The other owner (me) is a business person, not an author. 

This isn't for employees. All companies can have employees. These operating agreements and multiple ownership setups aren't for an employee relationship. If you have say, a paid assistant, and want to keep it that way, then these aren't going to do anything special as you'd be the sole owner of the company still. 


Feature #3 - Better Tax Options
LLCs check out on this one I'm afraid. If you are an LLC owner, then business profits are right onto your Schedule C/Form 1040 like always. 

S-Corps and C-Corps though, they are different, or they can be. These are where it gets really exciting IMO.

this might be our favorite biz related gif ever
For example, owners who don't work for the business get paid via distribution and that money is treated as capital gains. There's no SE tax and capital gains uses different, often more favorable, rates than personal income.

More importantly, these companies can pay salaries to owners who work for the business. This is awesomely powerful tax wise. Salaries pay the normal self-employment taxes, but all other profit distributions comes in as capital gains. That's a considerable savings, easily thousands to tens of thousands of dollars per year depending on how successful you are.

It's tricky to do though. What is considered to be a proper owner salary is not straight forward. You cannot, for example, pay yourself $1/year. There's a lot of hurdles and narrows to navigate to pull this off. So much so that I can't get into it here. Suffice it to say, you need a professional for this. Someone who can help you come up with a solid strategy to make this happen for you and the kind of company you want to run.

Now, even if you can't manage to save on the SE taxes, there's also the matter of withholding. Being able to run payroll via an accountant is handy because you can pre-calc and pay your tax withholdings on payroll. 



In terms of cash flow, what you pay might not change but when you pay it gets more flexible. You can run payroll bi-monthly, monthly, quarterly, or annually. (Accounting fees will vary). We still do it annually here, but I want to move to quarterly in 2017.

Having payroll withholding also makes it easier to (A) estimate taxes and (B) not spend them on accident. For example, our accountant determines the withholding and then I write his office a check, which is, I believe, placed in a special tax escrow account. I can't get to it after that! It's safe.  When tax time hits, it'll play its part.
Salary is also pretty nice to have if the irregular nature of author income causes you trouble. Being able to pile up all the money into the business and then pay yourself a fixed monthly check again might help with money discipline issues. 
Not to say that you, dear savvy reader, have such issues, but there are those out there that might I'm sure. ^_^ The feast-and-famine lifestyle isn't for everyone.


savvy?
C-Corps bear a special mention in that they have double taxation. See a C-Corp is basically a person, which sucks for our political system here in the USA I might point out, but tax wise the C-Corp's earnings are its own and taxed as such. If you are paid by a C-Corp, then the money is either salary or dividends. It's easier to work for a C-Corp and get that lovely salary-dividends split going, but the double taxation can ruin it.

If this interests you, you'll need to do the research and the math to see if there's any actual savings to be had. C-Corps are a lot of work to get and operate so look carefully before leaping into this loch.


Feature #4 - The Misc
Sole proprietorships and partnerships have a perpetuation issue. Mainly, it's hard / almost impossible for them to survive drastic changes in ownership. One advantage of LLCs, S-Corps, and C-Corps is that they can change ownership. Since we're talking about a business that might own your writing, I can see how this option would be off the table for most authors.

We certainly have no plans to sell off all of the lovingly made intellectual property that Rachel has crafted. That said, who knows what 50 years in the future holds, where we will be, what our attitude will be, and what we might need. Exit strategies are like parachutes in this way.



Lastly, very lastly IMO, there's the legal bundling that comes along with these. The separation of personal and business helps with keeping business agreements and such strictly attached to the business. There's many benefits here, like liability protection, but the one I think is coolest is the ability to change owners without disrupting and reassigning all your company's contracts.

More reading
If you are interested in an LLC, S-Corp, C-Corp or LLC with S-Corp election, then here's some links for more reading.

SBA.gov - LLC
SBA.gov - S-Corp
SBA.gov - C-Corp

Incorporate.com - Business Entity Types
Smallbusiness.Findlaw.com - Type of Business Structures

I'm gonna plug LLCs for Dummies again because this is territory where you need to read expertly gathered and arranged advice.

LLC with S-Corp election? What's that?

That's what Aaron/Bach, LLC is and I'd be remiss if I didn't talk about it. Fundamentally, the LLC with S-Corp election is an LLC. There's an operating agreement, member-owners, and so on. It also has stocks, perpetuity, annual meetings, and can pay owners salaries. It's more work than a straight LLC but a bit less than a full corporation.

We chose this for two reasons. One of those being because the accountant recommended it for us. I would not have known about this setup if not for our accountant. The other main reason was salaries. I suppose there's also a distant third, fourth, etc reasons being the stocks and perpetuity.

A Note About Contracts



I've covered all the bases I wanted to today, but there is one bit of advice that needs to be stuck in here. When moving from an implicit sole prop to actual company status, you will have to look into formally reassigning rights, ownership, and contracts pertaining to your books.

For example, Rachel had a contract with Audible for Nice Dragons Finish Last. When we formed Aaron/Bach, LLC we had to talk with Audible to amend that contract to point to the company instead of her. Fortunately, Audible was super nice about this and made it very easy for us to do so. They just sent over an amendment for us to sign. 

No one ever really explained to me how we were to move over IP and legal agreements when we formed a business. I'll be honest, we're still figuring some of this out. You've got at least a heads up here though, which is more than I had. Good luck!


All in All...

Forming a writing business won't make your books sell better, nor will it make you a better writer, What it will do for you is to make you operate more cleanly, efficiently, and safely. It will open up more business side options for you and hopefully some doors as well.

If you're writing your first book, then this isn't stuff you need to worry too much about. It's good to know about for the future though as you'll want to keep an eye towards this eventuality. Those of you who are getting some momentum and real earnings down, now's a good time to start examining. The more complex your writing career becomes, the more work and missed opportunities there will be.

Lastly, if you are considering a serious, long-term author team up for your career (like the SPP guys) then you should look at a business from the get go. It'll make for a cleaner entry and exit from the arrangement as well as better operations over all.

Thanks for reading today. If there's any topics you'd like me or Rachel to talk about here on the blog, please feel free to leave them below. We're always working hard to find information that is useful to you. You can also just hit me up on Twitter, that works too! (@TravBach) Rachel's social media links are here as well if you want to get live updates! (Twitter/Facebook/Tumblr/Google+)

Thanks again for reading, and I'll see you all next week!

Sincerely,
-Travis

13 comments:

Anonymous said...

It would be interesting to hear more about the IP side of things. Is it possible for the author to retain the rights but to have a contract with their company so that it is responsible for negogiating and maintaining licensing? Or does that just put the author back to square one tax-wise unless, of course, the contract is for $1.00 or it is an agreement with no monetary value?

Travis Bach said...

@Anonymous A good question.

Forming a company doesn't automatically give it all, or any actually, of the author-owner's IPs. You have to sell or transfer those over.

If you own a significant amount of the company (70%+ I believe) then you can transfer assets to the company tax-free and payment free. This free transfer can also happen when the company is formed, usually as owner assets are traditionally donated at that time.

For authors, the various rights (media, region, actions, language, royalties, etc..) are all assets that can be transferred to the company in part or in total.

IMO the key here is the liability protection. If you only give the company negotiation rights, and the company gets sued for, say copyright infringement, you are very likely going to be personally liable since you're still holding onto all the parts of the IP that matter. This is definitely, "ask a lawyer" terf though haha.

Limited transfer might be advantageous for a multi-author setup however. Say you formed a 5-author LLC. Would you want to give the LLC total ownership and control over your world(s) and book(s)? Probably not. So a balance would have to be struck.

This is a pretty flexible world here and there's a lot of roads to Rome.

Kessie said...

How much should a writer be making before they should consider an LLC? Like right now, I'm making 30 bucks a month or less (usually less). I've heard that you don't even have to pay taxes on income until it's $400/year or more. Am I terribly misinformed?

Tom Sweeney said...

BAM!!! Every once in a while I get smacked in the head by something obvious to everyone on the planet that totally went under my radar.

With all the talk about separating one's business and personal affairs, it never once dawned on me that that meant assigning copyrights to my LLC. In all my readings on the internet the past week or so, this was never mentioned, but then, in my defense, I have yet to find anything LLC-related on google that deals with authors.

So I've been reading up, and it isn't a problem. The LLC is my wife and myself. I just need a day or so for the new paradigm to be integral with my brain rather than some kind of an external callout.

I do have a question, though--why break my streak at this point :)

It concerns wages vs distributions for authors. I understand the IRS requirement to take wages before distributions, but for authors with books on Kindle, it doesn't make sense to me. Sure, pay wages while the book is being written, but after it goes up on Amazon, money is coming in year after year but no work is being done. Logic tells me that all income from Kindle sales, after the wages for writing the book are paid, should be a distribution, a return on investment.

But from everything I've read, handing out distributions without wages is a great way to trigger an audit.

Do you know of any reference or source where downstream income (wages vs distributions) from later-year Kindle sales are addressed? I skimmed LLCs for Dummies and didn't find anything, still reading it slowly cover to cover.

I know this will be an item for a CPA when I get enough income for distributions to be an issue, but I'm curious now.

(This is also a bit of a hot button topic for me because I have a gov't pension, and although I have more than enough SSA earnings to also collect SS, I cannot because of a windfall provision in SSA. I have no problme with that, but I dislike paying 15% FICA when I cannot later draw from it.)

Travis Bach said...

Costs for making an LLC csry widely by cost of expert but also filing costs per state. Its probably gonna be $500+ though.

IMO its not worth it until you are making a couple times the setup costs at least.

Travis Bach said...

Back on the day, when S-corps were first made, it was possible to take 100% of the company's profits ad distributions and not wages.

So everyone did it and it was a huge problem. And so the loophole was closed a decade or so later.

Nowadays the rule I've heard and read is that owner-employees have to be paid a "reasonable market salary" for their services to the company.

S-corps have more irs scrutiny so you can net they are looking for people who abuse this.

Now, what constitutes a reasonable salary for an author? Thats a HARD one. Ive been looking for that andwer for a year anf the problem is thst authors, as a profession, arent salaried.

Other careers can use BLS stats or job listings as market data to back up their salary ranges. Authors can't because theres no data. Its frustrating as all heck.

I wish I wish i could say i have an answer for you but I've found the answer for us that is hybrid only.

Since Rachel has numerous book contracts and contract writing agreements, those are our basis for setting her salary. As they represent industry rates for an author of her talents.

For now, it looks like the issue of reasonable salary is one that youll have to work out with an expert on your own terms for your situation.

Travis Bach said...

So many typos there I'm sorry. Answering this on my phone on the go this morning. 😅

Travis Bach said...
This comment has been removed by the author.
Tom Sweeney said...

@Travis, Thanks again for posting these business articles. It's hard to find writer-specific business information, and just knowing what some of the questions are is really helpful. Regarding the filing as an S Corp issue I was obsessing over, I took a page out of the Team Bach book and handed over the reins of admin to my wife. Okay, I guess I flipped the page, but she took charge and pointed out that first I earn more money, THEN I worry about paying taxes. We are still pursuing an LLC, but now under her supervision.

And thanks again for posting that project scheduling spreadsheet. That's been a terrific help. I made one spreadsheet per writing project and then linked the spreadsheets by having the Finish First Draft date of one project be the start date of the next project and so on. (I assume the editing of the first project will fit into spaces in the empty (wait) times of the next project.) Seems to be working as I tweak it to reflect my own writing/editing daily rate, and doing some catch-up work on weekends. I did change the start date of the current project to NOW() so that the whole shebang reflects up-to-date predictions.

Tom Sweeney said...

@Kessie The important question to ask yourself is what problem you are having that will be solved by forming a company.

The mistake I made in this process was not paying enough attention to Travis’ section on the business problems that authors face that might be solved by creating a company. I homed in on tax relief when in fact my business income rarely exceeds $5000 gross with such a pitiful net that taxes at this time really aren’t an issue. The actual problem I’m facing is, as I switch to nonfiction, the fear that a lawsuit, justified or not, will cause me to lose personal asserts. Like my house, for instance. I need to separate my business assets from my personal assets. I can see other issues in the future, like excess taxes and protecting my IP as well as personal assets, but that will come later, if and when I make so much money that taxes are a real problem and/or the value of my intellectual property is greater than the value of my house. Those are problems I’d love to have in the future, but right now my real problem/need is to separate my personal assets from my business (Problem #3 on Travis’ list).

I would recommend looking over Travis’ six author problems and see which one is such a problem that you would be willing to spend about $500 and deal with the work involved maintaining a company in order to solve it.

Talk to a CPA—I’m an engineer, not a lawyer or accountant—but I can tell you how I handled it when I was generating under a thousand a year in income: I treated my writing as a hobby tax-wise. I could claim expenses only up to the income amount (couldn’t claim a loss) but it isn’t hard to get a grand in expenses. One WorldCon or BoucherCon exceeded that. I ended up paying no extra taxes with very little work, and had zero fear of an IRS audit as I had many more legitimate expenses I didn’t claim and always kept records. I only started claiming to be a business when I started making more than a grand, and even then only because I was truly treating myself as a business. Not that I’m recommending it to you, only saying what I did in similar circumstances.

Travis Bach said...

@Tom thanks! This is a really good perspective you point out. Also, you're making my day. I'm glad we've been a help to you.

Tom Sweeney said...

There is another advantage in forming a business, at least for me, and that is mental attitude. Having formed an LLC (thanks again for doing these Business of Writing posts), I now think MUCH more like a business. Plus, making the required Articles of Organization and Operating Agreement really got me to plan out just what I needed to do.

Travis Bach said...

Thats fantastic Tom. I hope you find it as beneficial as we have.