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To prepare to incorporate your publishing business we need to collect some data and make some decisions. Going through this material will leave you with a better understanding of why we are doing certain tasks and get organized as to the information you need to incorporate.
Here are the resources you will need to complete this module. Besides the worksheet, you will find many of your questions answered by accessing the Incorporation Resource Center.
Here is a link to a worksheet to collect the information you need for incorporating your business Business Identity Summary Sheet
The Incorporation Resource Center is a separate page with state-specific information. This resource page will help you to deal with the nuances of the state you plan to set your business up in with ideas as to costs and the steps to get the job done.
Incorporation Resource Center This link will open in a new tab.
- Sole Proprietor – not a structure best solution under $10,000 a year.
- Doing Business As -not a structure and a waste of money.
- Limited Liability Company – structure
- Corporation -structure
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Before we discuss legal structures let get a basic understanding of what is a Sole Proprietorship. 80% of Indie publishers operate this way and it is recommended that until you earn more the $10,000 a year from books you should do the same. You can still use what you learn to manage your business.
When shouldn’t you wait?
- If you have substantial personal assets you need to keep separate and protected.
- The business could be used as a shell for other ventures you or your spouse have going on.
- You have the capital to invest and want to get things set up right; early on.
Doing Business As DBA
You may have heard of DBA. This is an option is to register a name to do business instead of your personal name, you typically register with the county clerk. I do not suggest doing this as you get absolutely no protection from creditors and you will need to pay fees and do things like run ads in newspapers. If it is important for you to do business under a different name then set up a company it is marginally more expensive and delivers real protection.
Let’s get to the real structures.
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There are a variety of structures for incorporation, but for simplicity sake, we will talk about two, the Limited Liability Company and the Corporation. Both create an entity that is separate from you and your partners and limits (not eliminates) liability. For US Residents we will look at the Limited Liability Company, for overseas authors earning significant income in the USA we will look at the C Corp as a solution. Now that I just made that blanket statement, keep in mind this decision is a state by state one. Certain states it may make sense to set up as a corporation based on state regulation or fees.
Limited Liability Company (LLC)
Chartering a Limited Liability Company creates an independent entity. It provides flexibility with how you want to structure the rights of membership, share profits, and operate. All the ins and outs should be documented in an operating agreement. You don’t need an operating agreement if you are a single member LLC or two members that are husband and wife but in this course, we will go through the process of doing so because it is the right, organized thing to do.
The liability that is limited is your obligation for debts incurred by the LLC. Unsecured debtors have limited recourse if your LLC goes bankrupt. A note of caution: if you personally guarantee loans for the LLC, you have the liability again, so beware.
Corporations are a different structure where there are strict guidelines as to the governance and how profits are dispersed. In a corporation, profit is divided equally across the total number of shares. In the LLC we can write any types of rules about how equity and profits
Some differences on Corporations. First Corporations pay a corporate tax rate on profits unless the Corporation is Subchapter S (more on this in the Tax Module. Corporate taxes create a double taxation where there are taxes paid on corporate profits, and then again by shareholders on dividends.
Corporations also have stricter rules around distribution on profits. Retained profits increase shareholder equity equally on a per share basis, and profits that are distributed go out as dividends per share. The profit is split equally across the shareholders of the same types of stock. There can be different stock classes that have various rights and payment priority, but in the case of a company with just common stock, dividends are split equally among those shareholders.
One benefit is that a corporation can employ owners. You can draw a salary and be treated like any other employee.
You can elect to have your corporation set up as a subchapter S, then the company’s profits flow to the shareholder’s tax returns. There are limits to the number of shareholders (100) and who can be shareholders when you can elect to be a subchapter S. This is done with the IRS and has no bearing on the state you set your company up in.
In this course, it is our opinion that you should set up a Limited Liability Company rather than a Corporation. Unless you are an overseas author and have been dealing with the 30% withholding by platforms. In these cases with the new 21% corporate tax, there can be advantages to a C corp.
Nexus and Why it is Important
Nexus is the concept that a state applies to determine if you owe income tax or are licensed to do business as a separate entity. Most states legislate that you are obligated to pay taxes and fees for operation if you have a physical location, employees, inventory, or actively conduct business in that state. This is the case even if your LLC/Corporation is registered in another state. Later you will be shown how you have yourself as an employee, therefore you will pay the state an federal payroll taxes for where you reside. The simplest way to set up is to create a company in your home state and pay the associated fees. This means if you go and register a domestic company in Nevada for example while residing in California, then begin paying yourself a payroll you will need to qualify your domestic Nevada company as a foreign California company resulting in higher fees.
Be careful there have been recent cases where states have proven people have nexus where they do not reside. This has come from the person using third-party fulfillment and having your inventory stored and shipped from another state. One qualifier is where your assets are located (inventory) and that can establish nexus. Many Amazon sellers found that out the hard way when Amazon moved inventory to a new Illinois distribution center.
I am not a US Resident
As a foreigner deriving income in the USA, it may make sense to set up a company to reduce your tax burden. To do so you will need to use a registered agent that can supply an address in state and a person to be served official documents within the state.
I have plans to raise money
Professional public money likes businesses incorporated in the State of Delaware. This should be a consideration if you plan to have investors and raise money, given Delaware has favorable laws and it is seen by professional investors as an appropriate choice, if you think this is appropriate then you can leave a message in Office Hours with your situation and discuss it to see if the situation is appropriate. Remember you will need an address and a Registered Agent in that state so those will be additional costs on top of your fees to register the company.
Wait I’m in a high tax state and I heard that if I incorporate in a low tax state I don’t pay state income tax. Wrong! Later we will get into tax issues but for now, understand that your state income tax will be based on the state that you reside.
Now that you know the state you will be incorporating, You need to have a registered address for the business. This will be a public record and will be where the state and others send mail or serve you papers if you are sued. You can use your home address there is nothing wrong with it. Keep in mind that people will be able to access the public record and you will start to receive business-related junk mailings. People could source the location of your business so if you require a high level of confidentiality you should explore using a registered agent.
2.0 Cost to Incorporate
The process of setting up your business will require you to spend somewhere from $50-$1,000 to set up the company than from $0-$1,000 annually.
What determines these costs? The State where you incorporate.
Once you incorporate you need to pay that fee. You will learn how to do this yourself directly with your State to eliminate paying fees to other administrators. Also understand that almost every state has a required annual fee, to remain in good standing, as well as a fee to wind up a charter. Not paying these fees results in your charter being dissolved leaving you exposed.
3.0 Business Identity
A company or corporation is in many ways like a real person. Treated like an individual with certain rights and responsibilities. Therefore we need to create an individual business identity for the company. The rest of this module will go through the mechanics of doing so. While doing this think how your business identity needs to strike the balance between what you want to achieve with privacy and brand.
The identity is created when you file Articles of Organization or Articles of Incorporation. This is done when you file with the state. The difference is Articles of Organization are for Partnerships and Limited Liability Companies, and Articles of Incorporation are for Corporations. The Secretary of State issues these once they approve the company. While these sound fancy or complicated this is just the certificate the state creates for you upon registering.
In module three you will learn the process of setting up a Company. To prepare you should spend some time thinking about the name of your business. Some states have a multiple step process where you have to reserve a business name first, then form the business. You will also need to do some research to make sure the name is not taken. This research can be done in our Incorporation Resource Center. It provides links and directions for doing name searched and the incorporation process for each state.
Do your research for an available name at The Secretary of State sites, not a search engine. The Secretary of State has the complete list of registered business names for that state.
- Keep it simple, funny complex names may be interesting to you but a struggle for vendors or customers (I know from experience).
- Don’t spend too much time thinking about it.
- Once you have a name, check to see if it is available. Most Secretary of State websites have a process for checking if a name is used.
- If it is important for the domain name and your business to be the same or similar do a web search to confirm that the domain name is also available.
- Do make sure you’re happy with the name. You can change it later but most state’s charge a fee.
- Stuck – use your initials plus publishing or your last name plus publishing.
3.2 Registered Address
In the end, you need an address for your business. It will need to be in the state that you incorporate, so we need to discuss the issue of what state to incorporate your business.
This is pretty simple. Your first choice should be your home address. This will simplify matters because your home address can be the business address and you can be the Registered Agent.
One option is to register your LLC in another state. States like Wyoming and Arizona have lower fee structures. But now you will have the added costs of a Registered Agent in that State and you will most likely need to register as a foreign corporation in your home state. Evaluate paying the annual fee for a Registered Agent in the state of incorporation versus your local state fees to make sure there are savings to be had.
3.21 Virtual Addresses
If you are using a virtual address for privacy it is typically not acceptable as a registered office address. The state expects the agent to be on premis during regular business hours so court documents can be served.
3.3 Registered Agents
Every company needs to designate an agent to receive official documents. Most states it is legal for you to be the agent if you are a resident of the state, over 18, and available at the address noted during business hours. If not you need to hire a registered office. You can find these agents online for annual fees. If this is something you plan to do please do research and let us know in office hours to help you with your selection. While most are good this there are a few seedy firms looking to hit you with added fees. You can find one with a reasonable flat annual fee.
This section is very simple if you are a single member LLC, meaning you are the sole owner. You may see these referred to as a disregarded entity. yours will not be disregarded as once you elect to be subchapter S it is considered a corporation.
The great thing about an LLC is that you can structure ownership however you would like. You can have different rights to the profits, voting, ownership, the possibilities are endless, but all will need to be captured in the operating agreement. from the perspective of your registration of the company, you only need to register one managing partner, but it makes sense if you know all of the owners when you create the company to note the membership as a matter of public record.
The Husband & Wife Partnership
For many, a husband-wife partnership makes sense, but if you are not comfortable with having a 50/50 or other ownership splits you can set up as a sole member. At a minimum, I would suggest having your spouse be an employee to leverage contributions in retirement funds.
If you choose to not name your spouse’s on the business and establish rights you can make your spouse a successor member within the operating agreement. If something happened to you there is the ability for your spouse to control accounts and rights happens through the successor member rights. This can also be done through revocable living trusts, but you still need to set up the LLC first.
For anyone, you designate a member of the LLC you will need their personal details at registration including their social security number.
One last iteration is the ownership of an LLC by a corporation or another LLC. This is possible but not something in the scope of this course.
Corporations & Ownership
The difference between an LLC and a Corporation is that Corporations issue shares and share ownership have the claims on equity. Governance is separate and done by officers and the board.Shareholders can serve on the board and elect the board but don’t have to have the day to day management of the business. You can be a single owner corporation but you will need to still meet the needs of a board and officers (They may all be you) and fill this out when you register.
For overseas owners, you or your company can own a US C corporation (not S) and you can be a director but you can not be an employee without a work permit.
Please Complete this Quiz
For the Next Module:
We will be going through the process of filing for chartering your LLC. After the module you will have the step by step instructions for doing so and could have your new company set up. You will need to make sure you have the items on the check list to do so.
It may be prudent to go through the entire course then go back after you have a deeper understanding of business structure and operation. That being said for those of you that start putting the Ikea together on your first read of the directions we will be setting up a company in the next module.