Author 101: Why an LLC might be right for you

I thought this would be the perfect topic to kick-off my new Author 101 blog series. Hope you agree!

I spent some quality time with my accountant this morning doing my 2014 taxes. By the time I left, I was inspired to write this post. Why? Because there were some valuable things I learned that I want to share with you all. So, I’m paying it forward, and following my mantra: “Authors helping Authors.”

Here’s the scoop…

Before I published my first book, I had my accountant apply for an EIN number (like a social security number for businesses) and open a Limited Liability Company (LLC) for me to use for conducting publishing business. In case this sounds daunting, it’s not.

He charged me $150 for the set-up, and the initial part of the process took maybe twenty minutes. I had him do it all while I was in his office for our 2012 personal income taxes. Before you balk at the cost, hear me out until the end of the post. You’ll make it back in spades. But if you really don’t want—or can’t afford—to pay, you can do it all yourself, and just pay the nominal registration fee (which may vary by state). For me? It was well worth handing it over to my accountant and avoiding the headache.

The paperwork arrived in the mail from there, and all I had to do next was file for a Sales & Use Tax certificate online. The only reason I did this was because I planned on hand-selling books at events. Trust me, you don’t want to conduct commerce publically without a tax number if the tax man decides to show up… and they sometimes do at places like fairs, etc. The other advantage is that you can file for tax exempt status with Ingram (I can only assume this applies to Createspace since I don’ use them) to avoid paying sales tax when ordering your books for hand selling.

Advantages of forming an LLC

• Personal Asset Protection: exactly what the name implies, an LLC provides for limited liability, and protects your personal assets in the case of a lawsuit. Think nothing can happen to you? I’m sure American Sniper’s Chris Kyle thought so too. Jesse Ventura won a defamation suit against his estate, read about that here. Lucky for him, HarperCollins shared the burden as part of their libel insurance, but for small time authors? Not happening. If you are a published author, I hope you’ve read the fine print on your publishing contracts around liability and had a good lawyer make the necessary modifications. The standard contract language will push the burden onto the author.

For this reason, I sign all my contracts – and publish – under my LLC, not as an individual.

• Tax Benefits: When I hit the total key on all my business-related expenses for last year, I almost fainted. No surprise, the business ran at a loss for the second year in a row. People sometimes try to write off expenses without forming a company, but according to my accountant, where they run the risk of an audit and being considered a “Hobbyist” is when they comingle funds in a personal bank account. It's essential to set up a separate business account for paying business-related expenses.

 So here comes the benefit. Are you sitting down? Depending on your financial situation, writing off your expenses can do one of two things: 1) Help you get a refund, or 2) reduce your tax bill. This year, I reduced my taxes…not by hundreds, but by thousands. My 2014 tax benefit exceeded my book sales by roughly 300%. Meaning, I would’ve magically had to come up with thousands of dollars by April 15^th had I not had a business to write them off against. If that doesn’t convince you to spend the $150 up front, I’m not sure what will.

Tax Implications of hand sold books vs. selling books through your publisher

Beware of this little tax implication. Royalties are taxed using Schedule E, while hand sold books are taxed using Schedule C. What’s the difference? Books you sell yourself are considered merchandise, and in addition to state sales tax, they are subject to self-employment tax.

Your obligations as an LLC

There are four obligations that I have as a sole proprietor LLC in my state:

1. I have to file an Annual Report online and pay a $50 fee. It’s easy. I promise. The state will send you a reminder in the mail well in advance of your anniversary.
2. By January 31^st every year: I must issue individual 1099-MISCs to any vendor / service provider that I've paid $600 or more during that tax year (i.e., editors, cover designers, formatters, etc.). You’ll need their tax number, name, and address. No need to file if their business is a designated corporation.
3. By February 28^th every year: I must also file a 1096 to the government with a list of my 1099-MISC recipients. My accountant prepares both my 1099-MISCs & 1096. All I have to do is sign and send them in. You have longer to file if done electronically.
4. Quarterly: submit Sales & Use tax online, even if my sales were $0 for the quarter. Takes 5 minutes.

Hope that was helpful! Happy Tax Day, and many happy returns! (Pun definitely intended!)

Do you have an LLC? What are your thoughts? Has it helped or hindered you?

Photo credit for image of Taxes above under Creative Commons: TaxCredits.net

In addition to being the author of an Urban Fantasy / Paranormal Romance series, The Angelorum Twelve Chronicles, L.G. O’Connor is an executive at a Fortune 250 and holds an MBA in Marketing. For more of her new Author 101 series, subscribe to her blog at www.lgoconnor.com. For perks and other ‘bookish’ things, subscribe to her newsletter on her homepage at www.lgoconnor.com .

Check out her books on Amazon by clicking HERE, or any of your favorite indie or traditional retailers.