Monday, March 31, 2014

Should Authors and Illustrators Form an LLC (and Other Business Questions)?

© 2014 Sylvia Liu

Once you start taking your writing and/or illustrating seriously, it may be time to treat your work as a business. This can include keeping track of expenses and income and reporting them on your taxes, obtaining a business license, or creating a limited liability company (LLC).

Although I was once an attorney, this post does NOT constitute legal advice. Instead, it raises some of the issues you may want to consider when treating your writing/illustrating as a business.


FIRST ISSUE: Should I treat my writing/illustrating as a business for tax purposes?




If you consider what you do a hobby that nurtures your soul, that is perfectly fine. Write or paint away to your heart's content.

If you are not making any money but you are serious about becoming a professional author or illustrator and are taking steps to getting there (taking classes, going to conferences, buying supplies, putting in significant time), it may be worth deducting your business expenses on your taxes. You do so by filing Schedule C and any net losses from your business (likely in your early years) can offset other household income.

Be careful about taking too many losses over too many years, or the IRS can treat your work as a hobby and disallow the deductions. Keep meticulous records of all expenses, income, and mileage driven.

If you are making money from your work through freelance assignments, art sales, and other sources, you are legally a sole proprietor and you may be required to comply with requirements such as federal and state income taxes, appropriate business licenses, and the like.


SECOND ISSUE: What?! If I sell something or make money from freelance assignments, I need a business license? I need to file or pay taxes?


If you sell art, self-publish, or make money from designing a website banner or selling stories, you are a freelancer who may need to comply with your local and state business requirements. Research your locality's rules. Some of these can include:

  • A Business License: Your local government may require a business license to work as a freelancer. In my city, I had to obtain three business licenses: nonstore sales (paintings/art that I sell at art shows or Etsy), personal services (design work for nonprofits and websites), and commissioned merchandise (the category they figured my publishing contract fell under, though it's likely I did not really need this license). If your sole income is from writing, it is not clear that you need a business license, but double check with your locality.
  • Doing Business As (DBA): If you are using any name other than your own, you need to file a DBA with your locality. If your full name is in the name of your business (e.g. Art by Sylvia Liu, or Sylvia Liu, Author), you do not need to file a DBA.
  • Local Home Business Permit or Zoning Approval: Some localities require permits to work from home. In my locality, I had to sign an acknowledgement that I understood the restrictions (e.g., no change in the outside appearance of my home, no traffic is generated, no sales to the general public from the house, no commercial vehicles may be parked).

If you sell actual items such as art, crafts, or self-published books, you may need to comply with sales tax requirements:
  • State sales tax license: You may need to obtain a permit to collect sales taxes.
  • Collect and pay sales taxes: You may need to collect and file monthly or quarterly sales taxes on your sales. Many states have online filing.

If you have net income, you may need to comply with federal and state income and other tax requirements.
  • Self Employment tax: If you earn more than $400 a year from your writing or art income, you may need to pay self employment tax. This is the equivalent to the Social Security and Medicare taxes that are withheld from an employee's paycheck.
  • Federal and state taxes: If you are in the lucky position to be earning net income after deducting expenses, you get to help the collective good by paying taxes. Freelancers make quarterly estimated tax payments. Clients who pay you more than $600 in a calendar year will send you a 1099 form but you are required to report all income, whether or not you get a 1099 form.

THIRD ISSUE: Do I need a FEIN?


For all of the above, when you are a sole proprietor, you do not need a Federal Employer Identification Number (FEIN). Using your social security number is fine for all of those transactions. If you want to create a separate bank account for your business, or if you have employees, you may need to obtain a FEIN (easily obtainable through an online application).


FOURTH ISSUE: Should I Form an LLC?


The main reason to create a Limited Liability Corporation (LLC) is to insulate yourself from personal liability. An LLC is a separate legal entity that can hold bank accounts and conduct business. If you ever get sued for activities arising out of your work (for example, for copyright infringement), your liability is limited to the assets of the LLC and creditors cannot (usually) go after your house or personal assets.

If you do create an LLC, check your state's requirements. Forming an LLC is not so complicated that you need an attorney, but it doesn't hurt to have one look over the papers you have prepared. Rules and fees may vary, but generally, creating an LLC involves these steps:

  • Choose a Name that Complies with your State's Rules. An LLC usually has to include "LLC" or "Limited Liability Corporation" in its name and cannot include words such as "Corporation" or "Bank" or other specific terms. (Also, be sure to check your company name against both state and federal databases to make sure it is unique and doesn't infringe on someone else's trademark).
  • File Articles of Organization. These are generally simple forms requiring basic information (name of member, place of business, and name of a registered agent).
  • Prepare an LLC Operating Agreement. Many states do not require filing an operating agreement but it is helpful to have.
  • File annual report. Some states require this; others do not.
  • Pay required filing and annual fees. Many states have reasonable filing fees (around $100) while others are quite expensive (California requires an $800 annual fee in addition to a filing fee).

Once you create an LLC, make sure you use it when conducting business. In order to get the benefits of being shielded from liability, you need to have your LLC be the face of your business. That means signing contracts under the LLC name, opening a bank account in the name, keeping correspondence and emails under the LLC name, and not commingling your personal assets. Some additional thoughts:
  • When signing a contract. The proper way to sign a contract as an LLC is to have the official name of the LLC be the named party, and the signature block should look like this:  NAME OF LLC, By _________, and under the signature line: "Your Name, its Manager"
  • Taxes. For federal taxes, LLCs are not treated as separate taxable entities. Instead, you need to file as a sole proprietor, partnership, or corporation. A single member LLC is usually treated as a sole proprietor, which means you pay income taxes through your personal income tax form on a Schedule C.
Note: Other corporate forms exist, such as partnerships and corporations, and in some situations, they may be the better option. Do research the ramifications of each option in your state for your situation.

FIFTH ISSUE: What Else Do I Need to Think About?


Other issues you might want to think about: obtaining liability insurance, obtaining health insurance, contributing to an IRA, and legal requirements that come with hiring employees, should you get to that point.

SIXTH ISSUE: Am I Ready to Hang My Shingle?


So you've decided to treat your freelance work as a business, whether as a sole proprietorship, LLC, or other form. Here's a summary of what you may want to do before you hang out your shingle:

  • File for a DBA (if necessary)
  • Apply for a FEIN (optional, see above)
  • Open a bank account (optional for sole proprietors)
  • Apply for business licenses & permits (if required)
  • Apply for sales tax license (if selling tangible objects)
  • Establish a business presence (website, business cards, stationery, email account)


Again, this post DOES NOT PROVIDE LEGAL ADVICE. It is meant to give you some food for thought and encourage you to do your own research or hire an attorney or accountant if necessary.





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19 comments:

  1. This is some good advice, Sylvia. Depending on the city and state you live in, your self-employment costs can range from low to high, depending on your business structure. The town where I live charges little for a business license compared to neighboring towns. But living in California, I can't afford the LLC costs, even though I want to create one someday. The tax laws aren't very friendly to aspiring writers, that's for sure.

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    1. I was very surprised to learn about the costs of an LLC in California - it sure is a deterrent for aspiring creatives. In Virginia, where I live, it's a $100 filing fee and that's basically it. A business license in my city is $50/year, so also quite reasonable. Thanks for stopping by!

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  2. I'm SO GLAD you wrote this post! Such important considerations for all authors and illustrators.

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    1. Thanks, Julie! Our conversation about signing contracts in our business names, along with a conversation with my critique group, prompted me to write this post.

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  3. Sylvia, that was extremely comprehensive. Great work!

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  4. Good stuff here. Much of it doesn't apply/or applies in a different way for me now that I'm in Canada. I don't know if the rules changed or if things are different in states other than Ohio but in Ohio you could get back dated Vendors Licenses. Other business licenses might be the same way. It's not much, but if you don't want to pay the fee for these licenses right away you might be able to wait until you have made some money before you actually pay for the license.

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    1. Interesting twist, Dani. Thanks!

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    2. This is great advice. I'm in Canada too and I believe at this point I have to earn a lot more before I pay tax. I will look into the license and art sales though. Thanks, Sylvia.

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  5. Great info, Sylvia! For my freelance work, I've been paying the self employment taxes.

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    1. Thanks for stopping by; I appreciate it.

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  6. Thank you for expanding our conversation and providing such robust answers to my questions! Many of us will be referring back to this post--

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    1. Thanks for being part of the inspiration for this conversation!

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  7. Lots of excellent points to consider, Sylvia! I only know some of these sorts of tax for business things from briefly selling soaps, but not as a writer. Thanks for explaining this issue!

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  8. Excellent post, Sylvia! I thought about it briefly, but not sure if worth it for a few bucks. You said something that made me think about this even more. "Be careful about taking too many losses over too many years, or the IRS can treat your work as a hobby and disallow the deductions."

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    1. Romelle, if you spend money on things like conferences and travel, it can add up and be worth deducting. The test is whether you are engaged in the activity for profit. The IRS will presume you are if you have made a profit in 3 of the last 5 years. If you don't meet this standard, you can show other indications that you are actively seeking a profit (time & effort you put in; the knowledge you have; your business-like practices, etc). All of this is relevant if you get audited. So it's up to you to weigh the benefits and risks.

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  9. Wonderful post, Sylvia. I bounce back and forth on whether or not I should "take the next step" to officially declare 'writing' as a business. I thought that the first step was 'to sell something', but you've given me food for thought. Thank you.

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  10. Thanks so much, Sylvia. This wonderful post!

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