Writing a novel and determining how to publish it—whether through an agent, a publishing house or independently—is daunting enough, but should an author also create a Limited Liability Corporation (LLC)?
Michael Banner, founder of an LLC filing service and multi-published author of apocalyptic thrillers, answered with a resounding “Yes!”
“Anybody who’s a professional should set up an entity immediately and not wait,” Banner said. “It’s a good thing for all small businesses to form an entity.”
In the business world, a business entity may be a sole proprietorship, a corporation, or an LLC.
Optimistic Wayne Stinnett, author of the Jesse McDermitt Caribbean Adventure Series, created an LLC when he decided to publish, preparing for the inevitability that he would be successful. And he was right. The author recently retired and makes his living solely from writing novels. His Down Island Press, LLC, holds the rights to his books and a corporate partnership, Down Island Publishing, LLC, publishes other authors.
He claims those entities offer peace of mind.
“An LLC gives you some protection and it limits your tax liability,” Stinnett said. “It enables you to stay rich and protect yourself. These two things combined give you ease. It makes you sleep better.”
What is an LLC?
A Limited Liability Corporation (LLC) consists of “members” or a sole proprietor, the latter known as a “single-member” LLC. According to the IRS, members may be “individuals, corporations, other LLCs, and foreign entities” and there is no limit to how many members may be involved.
LLCs are regulated through individual states and some differ from others. In most cases, it’s an easy procedure that can be done online and for a small fee. Authors will need an LLC name and a physical address.
Some states, however, require more than others.
“In California, the cost was a minimum of $800 or a percentage of your total income per year. So, it was very expensive,” said Lisa Hughey. “In Massachusetts, where I created one, it’s $500 per year flat rate.”
Some businesses, such as banks and insurance companies, can’t be LLCs, according to the IRS.
“It’s pretty straightforward,” Banner said. “When you’re creating an entity in the United States, it’s like forming a new person. You’ve created this legal person that’s separate from you.”
The pros of an LLC
“The big takeaway is the tax advantages,” Stinnett said.
The IRS taxes the LLC like a corporation, so all company expenses—from a new computer and Microsoft Word subscription to vacations taken at locations as settings for future novels—may be deducted as a company expense. The company may pay its members’ salaries of their choosing, as well as hire employees and distribute profits to its members.
An LLC also places a wall between a business and personal assets. For instance, if someone sues an author for copyright infringement, plagiarism or libel, they sue the company and not the author.
“It basically isolates your assets and protects you,” said Troy Lambert, who owns two LLCs: his own, Unbound Northwest, and a publisher he co-owns, Mooney & Lambert. “In other words, they can’t come after your house because your company doesn’t own your house.”
For traditionally published authors, the publisher may offer some form of liability protection, Lambert said, and an LLC may not be necessary. For independent and self-published authors, even those earning a small income, if it’s feasible in the state in which they live—some states require a higher income—he recommends an LLC.
Plus, there’s that success thing again.
“If the book goes viral and authors start making big bucks, having the LLC already saves them from having to do it during what may be a stressful time,” Lambert said. “It’s important to be prepared for success.”
Authors may include the company name on their copyright page to add a level of credibility or to remain anonymous. Banner used a different LLC from the one he usually publishes under to create a political parody under a pen name. This kept his novel readers from making the connection.
Just choose a company name carefully, he advises.
“You might not want to use your name or pen name as the company name in case you want to write under a different name,” Banner said. “Choosing an LLC name takes some forward thinking.” (Note: See Banner’s article in this issue of Nink for more on this topic.)
Transferring an LLC makes selling publishing assets easier, as well as transferring ownership of intellectual property after an author’s death, another benefit.
How to form an LLC
Banner insists that anyone can file an LLC on their own with little time and a small investment, then maintain that LLC with a relatively small fee every year.
“In most states, it’s fairly inexpensive to start an entity and to maintain one,” he said.
For those with questions and who are not confident about the process, they may hire any number of companies that will take care of the process for a nominal fee. Banner suggested SmallBiz.com, a filing services company he founded, as an example.
“The process was simple,” author Annabel Chase said. “I hired a local lawyer who specializes in small business formation. A couple of documents and a filing fee, plus the cost of the lawyer.”
The first step to creating an LLC requires a name. Once an author decides upon the company name, a Google and trademark search is called for to make sure it’s not already taken.
Then the author must file for an LLC with their state, using a physical address. Again, different states offer unique requirements.
“I think it depends on where they live and how much they earn,” Chase said on who should file an LLC. “It wouldn’t have been worth it to me in Pennsylvania beneath a certain income threshold because of the additional costs involved, but once I cleared that number, it’s been well worth it.”
It’s not necessary to create an operating agreement outlining the details of the company, but it’s recommended. Authors may list what the company represents, its intellectual property such as books and pen names, and its members and their percentage in the company. Those previously published may list their books, copyrights, and ISBN numbers under their names, transferring those rights to the LLC. (In the future, it’s advisable to obtain those in the LLC name.) Blank operating agreement documents may be found online to download for free.
Once the LLC is in place, authors should open a separate bank account and a credit card in the company’s name, then use both for all company expenses, Lambert said. “It makes the process simpler, especially at tax time.”
The LLC must also have an EIN (Federal Employee Identification) number, otherwise known as a tax ID number, for tax purposes and for opening financial accounts. If an author already has an EIN, they must file for another under the LLC name.
For authors first starting out, use the company to register ISBNs and have all royalties sent to the company bank account.
For authors who are already doing business, use the operating agreement to list all intellectual property, such as ISBNs, pen names, and books created. This shows how the author is transferring those rights to the company.
“And, in return, you’re getting ownership in the LLC,” Banner said.
As with all financial and legal undertakings, it’s good practice to check with your accountant or attorney.
In the end, an LLC gives authors a level of authenticity, Lambert said, “It adds a certain amount of legitimacy. Publishers take you seriously. It definitely sets you apart.”
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Note: Michael Banner gave a presentation at the 2019 NINC conference on the topic of 13 Reasons Why Authors Need an INC (or LLC) Now!, and an article outlining that speech is available in the December 2019 issue of Nink.