Happy Sunday, WG2E-Land!
Have you given any thought to Managing Your Epublishing Business as an LLC?
WG2E Guest SK Holmesly has, and here she is to share the scoop…
First, right up front, I want to say that I’m neither a lawyer nor a certified tax accountant. Because of that I’m definitely not giving out advice, but will share some personal experiences choices we’ve made for managing the business side of publishing, as well as the pros and cons for us that led to us favoring one approach over another.
One of the first things to consider when setting up an LLC is whether it’s actually the way you want to go. For us it made sense, because we’re a family business. Originally, my son and I created and published software together, then when my son married and when my daughter-in-law started writing and providing art work for our then current game, it made sense to include her in the business too. Additionally, I had already self-published one book, so we had the beginnings of the book side of our publishing business in place and had intended to expand in that direction as time went by. The advantage of the LLC owning our intellectual properties is that if anything happens to one of us the business is still intact and the remaining partners can do whatever it takes to keep the business in operation to ensure that we have income to support the family–which includes my two granddaughters. Income to the LLC includes: royalties from certain software products we have published over the years; licensing fees for our framework needed for both our own applications and applications written under contract for third-parties to compile and run; income for writing the third-party proprietary portion of those customer applications; and royalties for the eBooks we’ve published. Additionally, a small portion of the LLC’s income (less than 1%) comes from the publisher share (the LLC) of in-app ads for a free app we have on the AppStore.
With or without the LLC, we all must fill out a schedule C for our personal business expenses and income, and of course, put any W-2 income for any one of us on our individual (or joint in the case of my son and his wife) form 1040. That’s just a heads up, since in a way tax accounting gets more complicated, but it does help to have the LLC for writing off shared business expenses, so that in the end, since I’m the one that does the accounting and taxes, I feel like it simplifies things overall. Shared expenses for us (those allocable to the LLC) include shared computer equipment needed for the business to operate: printer and printer supplies; co-located (i.e., offsite) server costs; and other tangible / intangible assets, such as cloud access, certain business applications (business accounting packages, for instance), internet connection for uploading / recovering source files, and various advertising costs for which the company is responsible.
So, for us good reasons to have an LLC were:
• We co-write software and share costs, such as office space and equipment.
• We wanted to manage intellectual property and income from such as part of a family estate.
• We needed to allocate royalties for shared properties: An LLC can split out royalties and issue K-1s for each of the partners, and then each partner handles his/her share of the royalties on his/her individual (or joint) income tax.
Note also that, just because you commit some royalty income properties to the LLC, doesn’t mean that you have to commit every income property you have. You can also have multiple LLCs. It’s more common with software, but if you manage a single property through an LLC, you can always sell it without affecting any of your other properties. With writing, think a property like “The Hardy Boys”. If you have a series that is hugely popular and has a large following, but that you’ve gotten tired of and want to move on, you can sell it more simply by selling the LLC, particularly if the LLC owns the copyright and the property is its own brand. Again, this is more common with software, where a company has a single cash cow, or even multiple cash cows, with each identified by its own brand, but can be applied to any high income intellectual property.
There is a cost to having an LLC, so it isn’t something you want to do casually. Most states have some sort of rules for setting up a partnership or LLC, so you’ll want to read your state’s rules. We set up as a Delaware Corporation 11 years ago, although we didn’t live in Delaware and still don’t. We knew we were moving, however, and Delaware is one of the few states, if not the only one at the time, that would permit an agent to represent a partnership, when the principal members of the partnership did not live in that state. Although I believe some of the other states have modernized their rules somewhat, at the time the state we were living in required that the principal members of the company reside in the state in order to be incorporated there. Since we knew we were moving within a few years, we chose Delaware, so that we wouldn’t have to form the company, disband the company, and reform the company when we got to the new state.
With Delaware, we pay a Franchise Fee to the state each year ($250 in 2012) and an agent’s fee ($129 + $25 service charge) to represent us and manage the yearly Franchise Fee payment. Although, like everything else, the various fees have gone up over the decade since we began, incorporation for a simple partnership / LLC in Delaware (depending on your agent), still runs under $500.00, a year. The agent, for a small additional fee, has also written us letters of proof of longevity as a corporation, when we’ve needed to prove that we were an established company.
Last year, for the first time, we had to file what basically amounted to a statement of non-residency with Delaware at income tax time. My understanding based on feedback I got when I called Delaware was that this was because some partnerships use the LLC as a haven to avoid paying taxes on property they actually own in Delaware and on income they earned in Delaware. Unfortunate that people do that, but since none of the partners own property in Delaware or earn income there, it was a simple matter to file the required form. Whether that was a one time occurrence or we’ll have to file every year, I won’t know until I get to filing taxes after the first of the year.
One last note, that’s very important to understand for tax reporting. With an LLC for tax purposes you have to disperse 100% of the income collected by the LLC in any given tax year to the partners, based on whatever distribution formula you use. If it’s a sole-proprietorship you get it all but still have to account for it for tax purposes. You don’t have to close your company bank account each year, of course, but we treated the money left in the account to hold it open at the end of the first year ($11 that year) as collected in that first year for tax purposes and even though it wasn’t physically distributed, we did distribute the responsibility for the income it represented so that the taxes were properly paid on 100% of the earnings. If you find that your income has increased beyond what you want to / need to spend in a given year, the next step up is an S Corp. As our business has grown, we have discussed taking that step, but currently don’t feel that the additional costs (Franchise and Agent fees) and time to manage an S Corp make it worthwhile for us yet.
One of the best things for us that incorporating has provided, is that we already have an EIN number when we’re contracting corp-to-corp (something more common in application development, than in writing, but just as useful if you want to freelance as a writer).
One of the best places for information on LLCs and Partnerships is the IRS ( www.irs.gov ).
If you click on the link to acquiring an EIN (employer identification number), you can find out about the purpose of the EIN, if you aren’t already familiar with it, and on the same page, you can find the link to the “Partnerships” home page ( currently: www.irs.gov/Businesses/Partnerships ).
From that page, if you click on the link “Forming a Partnership”, it will take you to the main page for “Publication 541″ ( currently: http://www.irs.gov/publications/p541/ar02.html#d0e252 ).
For our agent in Delaware, we use American Incorporators: www.ailcorp.com We have been very satisfied with them and they are always helpful when we call. There are many others however, both in Delaware and in other states, or if you incorporate in the state you live in, you may be able to represent yourself. I’m offering this link not as an endorsement, but because they have a number links to tutorials about incorporation that might be useful for learning more about how incorporation might help your business with some discussion about what incorporating doesn’t do for you. If you incorporate, you want to, as with any service provider, make sure they fit your personality and style and are easy for you to work with.
For taxes, I use TurboTax ( www.turbotax.com ). I’ve also used other programs in the past and if you definitely don’t want to do your own taxes, there are, of course, tax services available. Being a control freak and mildly paranoid, I always do my own taxes; however, I know many people who use tax services and are quite content. Again, I’m not endorsing TurboTax, it’s just the one that I’ve used the most consistently. It never answers all my questions, though, and I still spend a lot of time over at the IRS ( www.irs.gov ) finding publications to clarify the things that the TurboTax people didn’t seem to fully understand either–at least they weren’t able to explain clearly enough for me to understand which option I should choose.
SK Holmesley lives in Florida with her son, daughter-in-law, and youngest granddaughter. She self-published her first published novel (Taggert House: Jareth) in 2003, then republished it as an eBook 12/2011 and will be publishing the second book in the series (Taggert House: Rand) 12/2012. She only wants to write, but supporting all the other creative people in her family with editing, formatting, proof reading, code review, testing, and the myriad concerns of managing the LLC, as well as staying current in IT for her W2 job when she has one and so that she can get another one, leave her with little time to spare. Her mantra this time of year is: after taxes, I’ll have more time.