Writers frequently ask me whether they should incorporate or form an LLC (short for limited liability company) for their writing, blogging, and self-publishing businesses. They have heard that forming a corporation or LLC will protect their personal assets from liability, and who wouldn’t want to protect their assets.
Like most legal answers, it depends. But in my view, it rarely makes sense for writers to form a corporation or LLC. Their money is better spent other ways.
Crazy? Not really. Let me explain.
Incorporation May Not Work
It is true that businesses operate as corporations or LLCs in order to protect the personal assets of the owners from business liabilities. If you were manufacturing bicycles in a factory full of employees, a corporation or LLC would create a separate entity with its own assets and would “shield” you from claims of creditors, such as parts suppliers in case the business runs out of money, and personal injury and other tort claims from someone who says the bicycles were defective.
Writers work alone. Most of us don’t have a staff helping us create our products. So there is no “business” separate from the writer’s own actions.
A writer’s greatest legal risks are defamation, privacy, and infringement claims, all of which result from the writer’s own actions. Even if a writer had a corporation, someone would sue both the corporation and the writer for these claims.
If you are publishing, whether traditionally or independently, then you have signed contracts that say you will indemnify the publisher, Amazon, Smashwords, etc. against defamation, privacy, and infringement claims arising from your work. This means you have agreed to hire attorneys and pay any damages or settlement costs. You must dig into your pocket to meet these contractual obligations whether or not you have incorporated.
The Technicalities Will Get You
Many people have heard the expression “piercing the corporate veil.”
Translation: Unless you keep enough assets (money) in a corporation or LLC to cover its potential liabilities, AND you keep the entity’s finances separate from your personal finances, AND you keep up with certain formalities and state filings, your corporation or LLC may be disregarded by a court and not provide any protection.
Most of us won’t keep all this straight. We won’t leave a lot of money sitting in our business accounts. We’ll forget about state filings and maintaining corporate minutes.
Most Writers Don’t Need the Protection
Most writers are not writing high-risk material. Fiction writers are rarely sued for defamation, unless they have been lax about masking identities. Memoir and other non-fiction writers take more risks, but they can and should learn how to minimize them. As a starting point, take a look my post How to Use Real People in Your Writing Without Ending Up in Court.
However, if you are going after Big Oil, Big Food, Big Med, City Hall, Wall Street, or any deep pocket, then you are taking greater risks. Instead of spending money on forming a corporation or LLC, you are better off hiring an experienced publishing attorney to review your manuscript. An attorney should be part of your publishing team.
How to Get More Protection For Your Money
Forming and maintaining a corporation or LLC costs money. In California, it’s $800 a year. If your risk or anxiety level is high, that money is better spent buying liability insurance.
If you have insurance, then the insurance company hires the attorneys and manages the claims, saving you time, money and stress. A business liability policy ($500 to $800 a year) covers unintentional infringement and defamation, but be sure to ask your insurance agent about the coverage since policies vary.
For more protection, take a look at Media Liability Insurance. These policies provide more protection at a higher cost ($1,500 and up). If you are a member of the Author’s Guild, you may be eligible for a discount. https://www.authorsguild.org/member-services/media-liability-insurance/
Maybe you are reading this post too late and have already formed a corporation or LLC. No problem. You have not made a mistake. If the cost of maintaining the entity in your state is low, then you might as well keep it in existence. It serves as one more indication that you are operating your writing as a business for tax purposes. But if the annual fees in your state are more than you want to spend, consider terminating the entity.
Who Should Incorporate
Of course, there’s an exception to every rule.
If you are making a lot of net income from your writing, let’s say $50,000 a year or more, then you may want to form a corporation or LLC for tax reasons. Some accountants use a strategy of allocating income between salary and profits in order to reduce self-employment taxes. When I asked my accountant about this, she rolled her eyes.
If you are making that kind of money, great for you. You are living the dream. But it’s time to hire someone to help you with business set-up and tax planning. This is what I call a “problem of success,” a problem I hope every writer enjoys.