Are You Ready For Limited Liability?

As writers sell more books, it becomes more and more important to protect their assets. More accurately, it may be important for the writer to separate their business assets from their personal assets while still being able to sell their books. This difference is more important for self-published authors (as traditionally published authors usually have the aegis of their company to fall back on), but any other doing business is going to want to expand their business at some point. This means that may want to make the leap from a single proprietorship to a limited liability company.

What Is A "Sole Proprietorship"?

A sole proprietorship is pretty much the default for most writers. In effect, if you don't file the paperwork for a different form of business (such as LLC), you're effectively a sole proprietorship. This means that all of the assets of the business are yours and that there is no separation of your funds from that of the business, even if you use different bank accounts for each. You have total control of the business, meaning that all of the risks and therefore all of the rewards are yours. Fining taxes Is easy (in the US, this means using Schedule C), and there are no real costs intrinsic to creating the business (although local business permits, etc., may apply). You can also register the business with your social security number rather than an employer identification number (EIN).

While this means that dissolving the business is easy (all you need to do is cease operating), it also means that if you get sued, your business assets can be just as at risk as any of your other assets; they can be awarded to the person suing you. It also means that it's harder to raise money in a hurry, as you can neither sell stock in the company nor banks rarely give loans to sole proprietorships. There are also potential problems with probate unless the business is part of your will.

It should be noted that if you decide to bring in a partner, the nature of the business changes and different rules apply (different tax schedules apply and you need to file for an EIN). You would fall under the rules of a "greater partnership," but that's beyond the scope of this article.

[A "Doing Business As" should be filed just to make business a lot easier. In short, it's a form followed by posting a newspaper that allows you to do business as an entity with a name different than your own. This means that you could accept checks in the name of a business, set up a merchant account, or otherwise act as the business. For an author, this is important as it allows them to establish themselves as a publishing company, which is important as brick-and-mortar shops prefer to not deal with independent writers (especially those dependent on Amazon) and prefer to deal with actual companies. By filing for a DBA, the writer has taken the first steps to create their own publishing company and giving themselves a veneer of respectability.]

What is a "Limited Liability Corporation"?

On the other hand, a limited liability corporation provides certain legal advantages. The biggest advantage is in the name itself: As long as you keep your finances separate from those of the business, the assets of the company do not count if you are sued; the company would need to be sued individually. Unlike a sole proprietorship, this means that if you are sued, the assets of the company are not subject to being awarded should you lose the suit. It also means that if you run afoul of bill collectors, they can't touch the business assets, only your personal assets (this also means that if the business is sued, your personal assets can't awarded if the company loses the suit and the business' creditors can't come after you)..

The company is in all ways a separate legal entity from its owner.

You can also choose to be taxed as a sole proprietorship or a C-Corp, whichever is better for your business. The LLC also has greater credibility than a sole proprietorship, and banks are more willing to lend money to one (for writers, this means that it's easier to get your books into brick-and-mortar stores). You can also add members to the LLC, enabling the LLC to exist past the death of its owner. You can also sell stock to raise funds, but that creates its own headaches.

However, you do need to assign a representative to handle the legal details of the LLC. It's also more expensive to create an LLC, plus there are additional taxes you need to pay. It's also easier for the LLC to be dissolved by outside forces. You are also required to add "LLC" to the name of the business and may need to publish the news of incorporation. In short, you may want to hire or retain the services of an accountant.

In essence, the LLC affords the writer greater protections and a greater ability to raise money but at the cost of increased paperwork and fees while a single proprietorship allows the writer greater freedom but greater potential risk. Each writer should decide the type of business that works best for them and then file appropriately.