In 2010, the rapper Jay Z wrote a memoir. A couple of years later, one of his readers sued him for plagiarism. Sadly, lawsuits like this are common, even when the author being sued is not guilty of plagiarism. Copyright trolls are a real threat to any author who wants to make money.
According to US law, the penalty for copyright infringement is up to $150,000 plus court fees per infringement. If you don’t have $150,000 on hand, a copyright troll could seize your car, your investments, and in some states, even take your house.
Publishing a book can open you up to millions of dollars of liability, even if your book is not a financial success. A book that earned only a few thousand dollars for you can still lead to a lawsuit that could bankrupt your whole family.
Even if you didn’t actually infringe on someone’s copyright, you might still lose a lawsuit to a copyright troll.
Copyright trolls are real. They make millions of dollars by suing authors and musicians in court. Whether you’re indie or traditional, published or unpublished, you need to know how to prepare for and defend against copyright trolls.
How do you fight a troll?
First, a disclaimer: I am not a lawyer or a CPA.
However, the famous Tom Umstattd, CPA, is my dad. I did go to business school, and I took an entire semester class on copyright infringement. I have also founded a couple of LLCs myself. I will be summarizing a semester’s worth of education in a 30-minute episode, so I will be glossing over a lot. As with every discussion about taxes and laws, the details get technical very quickly.
So while I am familiar with this topic, this article is for general education. This article should not replace specialized advice from an attorney or a CPA about your specific situation.
Additionally, we will only cover American law. I know some international authors who make most of their money in the US sometimes form an American LLC to receive that money. If you live outside the US, you will definitely want to talk with a legal or tax professional familiar with your local laws.
What is an LLC?
An LLC is a Limited Liability Company. So what is a Limited Liability Company? To answer that question, we must go back in time.
Five hundred years ago, the hottest business of the day was international shipping. If you could afford to build a ship and hire a crew, you could send that ship to India. That ship could return to you with spices that were worth a fortune. I could change your life. Your ship and crew could also sink or get attacked by pirates.
As a way to reduce risk, merchants started forming companies. A company is a legal entity and functions as an artificial person. In the eyes of the law, a company can own property, sue, and be sued. So instead of ten merchants each owning a single ship and assuming all the risk as individuals, they would form a company. Each merchant owned 10% of the company, and that company had ten ships. While some of the ships might sink, enough of them would return to keep the operation profitable.
Unlike humans, companies live forever until they are killed. They are a bit like the elves of Middle Earth in that way. And just as the elves of Middle Earth fought the trolls of old, forming a company protects you from the evil copyright trolls.
There are many kinds of legal entities you could form to protect you from trolls.
- S corps
- C corps
- and more.
The vast majority of authors form a type of company called an LLC, which is the legal entity we will discuss here.
Why Get an LLC?
King Solomon once said, “The rich can pay a ransom for their lives, but the poor won’t even get threatened.” (Proverbs 13:8, NLT)
What is true in kidnapping is also true in court. If you want to win and keep your life and livelihood, you must either be wealthy enough to win every lawsuit or be so poor that no one wants to sue you in the first place.
Creating an LLC allows you to be legally poorer than you are because it keeps your publishing assets separate from your personal assets. If someone sues the LLC, they can only go after the assets in that LLC. Therefore your liability is limited, thus the name Limited Liability Company.
If a copyright troll sued your LLC for copyright infringement, they could only go after the assets of your LLC. The LLCs assets likely include the copyright of your book and any royalties sitting in the LLC’s bank account. Which is to say, if you have an LLC, the troll can only take from the pocket that holds your book and its earnings. The troll can’t reach into your retirement savings pocket or your home-ownership pocket.
Additionally, forming an LLC makes you an unappealing target for copyright trolls in the first place. If ten bicycles are locked to a bike rack, but one of them has two locks, a thief will leave the double-locked bike alone because the second lock is too much hassle. The other nine bikes are an easier target.
Copyright trolls who want to sue an author with an LLC will likely have difficulty finding an attorney to take their case. Attorneys call these kinds of cases “trying to squeeze blood out of a stone.” The attorney squeezes hard and sees lots of blood, but when he takes his hand away, he realizes all the blood is coming from his own hand.
No one wants to spend $100,000 in time and fees to win a lawsuit that yields $5,000 in return. That is truly blood from a stone.
Bottom Line: The main benefit of having an LLC is that it keeps trolls from wanting to sue you at all. The best way to win in court is to stay out of court. Court battles are like the game of thermonuclear war. The only way to win is not to play.
One Novel Marketing listener asked the following question about forming an LLC:
Hi, Thomas, fellow Texan here. I love the podcast. You’ve taught me a lot over the years. Here’s my question: For indie authors, does setting up an LLC help hide the fact that your book is self-published? If so, does this increase the odds of your book getting into bookstores and libraries that tend to avoid stocking indie authors? Thanks.
Yes. It does help hide the fact that you’re independently published if that is your goal. There has been a boom of small and medium-sized publishing companies in the last ten years. With print-on-demand technology and e-book technology, it no longer costs $1,000,000 to start a publishing company.
It’s difficult for bookstores and libraries to tell the difference between an indie author with a publishing company name (not linked to the indie author) and a small publishing company. If you are an indie author, I recommend having an LLC for your publishing company. Instead of being “John Smith, LLC,” you want to be “ACME Publishing, LLC.”
Indie authors often make more money than small publishing companies. Indie authors commonly make hundreds of thousands of dollars while a small publisher may be struggling to make tens of thousands of dollars. You can hide the fact that you are an indie author if you want to.
Hiding your self-published status may help you get past the bias, but it doesn’t replace the fact that you still need to call libraries and bookstores on the phone. To to get shelved in stores, you must talk with the book buyers.
There’s no button you can push to get shelved automatically. Sometimes you still have to pay money, just like the big dogs. Having an LLC behind your publishing company name doesn’t magically put you in the bookstore, but it helps you get around some bias in parts of the industry.
Creating a publishing company makes it a bit easier to get your books into bookstores and libraries. You’ll still need to hustle to get your book on the shelves, but you will receive more return calls from libraries and bookstores if you leave a message saying, “Hi, this is John Smith with ACME Publishing, and I want to talk with you about This Book Title.” It sounds more professional than saying, “Hi, this is John Smith, and I want to talk with you about shelving my book.”
I’ve talked with indie authors who have successfully used this tactic to get their books into supposedly indie-free areas.
One author I spoke with got Library Journal to review his book, and supposedly they don’t like reviewing indie books. He figured his LLC prevented them from realizing his book was independently published.
To increase your chances of being shelved in physical stores, you must have a professional-looking book. Listen to my episodes on book covers because there are many common mistakes indie authors make with their book covers.
- 10 Things Every Book Cover Needs
- Book Cover Mistakes That Can Sabotage Your Marketing
- How to Create a Design Brief for Your Book Cover
I can spot an indie book cover right away, and I can tell whether or not they’ve listened to my episodes on book covers. There are little things, particularly around the bar code, that indies get wrong every time.
When you publish independently, you essentially own a publishing company that publishes the books you write. The more you think like a company, the more people will treat you like a company.
That said, many of the more militant indie authors are proud to be indie published, and they display that fact in their company name. John Locke Books, LLC or Susan May Warren Fiction are good examples. They are not hiding the fact that they’re independently published, and they’re very successful.
My advice is to name your company with your own name, as the two authors above have done, or name your publishing company something totally different. If your book is titled Love Better, don’t name your company Love Better Books, LLC.
American copyright law is an absolute mess. It’s designed to benefit .01% of people at the expense of 99.99% of the people at the bottom. As a result, many books are being orphaned.
The copyright on your book lasts for 70 years past the date you die. If you live for another 50 years, your copyright won’t expire until the year 2146.
Do you know who your ancestors were in 1896? Do you know what they were writing 125 years ago?
According to American copyright law, the copyrights on books your ancestor wrote in 1896 are still in force. As a descendant, you can’t republish, reprint, or do anything at all with those books. The books become orphaned.
If you are not careful, your book could become orphaned.
But if you package all your copyrights and place them in your LLC, your LLC owns them. You can pass down the LLC to your heirs, and they will have the flexibility to divide the copyright assets during that 70 year period where the copyrights are still valid.
This is particularly helpful if you have multiple children. If you want to share the money, copyrights, or intellectual property with them, you can give the LLC to multiple children and assign who has more or less control of the assets. It’s very flexible.
Talk to an estate planner if you have an LLC you want to include in your will.
Another option is to indicate in your will that your books should go into the public domain. The law says your book’s copyright lasts for 70 years unless your will says differently. You have control, and you can choose to have your books in the public domain.
Once a book is in the public domain, people can share and save it in various online libraries. In the public domain, your book will live forever. The public domain will preserve it for posterity and future historians.
Congress never got around to writing a chapter of the tax code for LLCs, which means you get to decide how you want to be taxed.
Normally, Congress chooses how you get taxed, but not for an LLC. When you fill out a W-9, there’s a checkbox for LLC and a second checkbox where you can choose what kind of LLC it is.
You can be taxed as a sole proprietor and still have the liability protection of an LLC. If you want to be taxed as an S corp, you can do that too. LLCs are the only business entity I know of where you get to choose which chapter of the tax code applies to you, and it’s one reason LLCs are so popular.
Downsides of Owning an LLC
For all the advantages of owning an LLC, there are a few disadvantages.
LLCs Are Not Free
Hobbyists and amateur writers are often unwilling to spend money on their writing. They don’t want to buy software like Publisher Rocket (Affiliate Link) or market research like k-lytics (Affiliate Link). Likewise, paying for an LLC isn’t a priority, and that’s okay.
If you are writing for your own enjoyment and don’t plan to publish any time soon, you don’t need to pay for an LLC.
It costs money to form an LLC. Depending on your state, there is an additional annual fee (or tax) to keep it active. For a professional writer whose goal is income, the cost of forming an LLC is completely justified. But for a hobbyist, it probably isn’t worth the cost.
This distinction goes back thousands of years. The word amateur comes from the Latin word amor, which means “love.” The word professional comes from the Latin word pecuniam, which means “money.” Amateurs get paid in love. Professionals get paid in money. Forming an LLC is a major milestone in transitioning from amateur to professional.
LLCs Make Filing Your Taxes More Complicated
Complicated taxes aren’t necessarily bad. You can potentially take advantage of more tax deductions with an LLC. But if you typically go to Walmart with your W2s to get your tax return filled out for free, owning an LLC may change your tax preparation routine. It won’t make your taxes higher. It will just take a little more work.
You can still do your own taxes, but you will need tax software like TurboTax to help you fill out your return.
But since an LLC is flexible in that you can choose how you’re taxed, filling out your return may only be a little more complicated. Most authors will want to set up taxation for your LLC as a sole proprietorship.
To determine the best tax strategy for you, talk with a CPA familiar with the publishing business. You can also take my course called The Tax & Business Guide for Authors. In the course, my dad and I will walk you through specific tax strategies for authors.
- Which tax deductions authors can claim
- How to create a business plan
- How to make a living as an author
- How to be a business in the eyes of the IRS
- How, when, and why to form an LLC
- How to reduce the likelihood of being audited by the IRS
The course also comes with PDF documentation from four tax court cases involving authors. You can give this documentation to your CPA and save them a lot of research time and thereby save yourself a lot of money. The court cases also help dispel myths that spread between authors and accountants who haven’t done their research. The Tax & Business Guide for Authors is one of our less expensive courses, and it will likely pay for itself after your next tax return.
When to Form an LLC
As I was preparing for this episode, I asked our authors at AuthorMedia.social what questions they had. Many of you asked when you ought to form an LLC. The timing depends on a few factors.
How wealthy are you?
Novel Marketing listener Shauna asks:
“In regard to forming an LLC, is there an income threshold where an author should form an LLC?”
No, It is not simply a matter of how much money you are making as an author. It is also a matter of how much personal wealth you have to protect.
How much money do you and your spouse have? Your assets include IRAs, investments, property, and the value of your cars and home. The more money you have personally, the more likely you are to be a target of lawsuit trolls.
Wealth is a matter of perception. Some people are very good at appearing wealthier than they really are. They drive nice cars and live in nice houses, but they fund the lifestyle with a lot of debt. People who look wealthier than they are may attract lawsuit trolls who don’t realize how broke they really are.
You can also ask your self how easy it would be for you to go bankrupt? When an author with no money and no assets gets sued, they can simply file for bankruptcy and clear the judgment. Even if the plaintiff won the court case, the plaintiff would get nothing because bankruptcy washes the slate clean. The author would lose nothing because they have nothing to lose.
If you have a lot to lose and declaring bankruptcy would be painful for you, you need an LLC.
There’s no income threshold because it’s not really about how much money you’re making with your books. It’s also about how much money you’re protecting.
How close are you to publication?
If you are publishing traditionally, I recommend having your LLC set up at least a year before the publication of your first book. LLCs don’t have Social Security Numbers. They have Employer Identification Numbers, and your publisher will need that number before they can deposit your advance into your LLC.
Plus, it takes a while for all the paperwork to process. You don’t want to be distracted and dealing with entity formation while planning your book launch.
If you are publishing independently, I recommend forming your LLC about six months before you plan to hire your first editor. You want all payments to employees and contractors to come out of your LLC. You don’t want a disgruntled cover designer suing you personally and taking away your car.
You open yourself up to liability when you start hiring people.
Sooner is Better Than Later
In general, you want to form your LLC before you think you need it. It will cost you $80 to $100 to set up an LLC, but the process gets expensive if you are in a rush. Rush fees can double or triple the cost of forming an LLC. Whether you go through your state office or a company like LegalZoom, you’ll be charged extra for expedited service.
Set up your LLC before you need it, and you’ll save yourself money and anxiety.
How to Form an LLC
Forming an LLC used to mean hiring a lawyer, but now you can easily do it yourself by using LegalZoom.com. I formed one LLC through an attorney and one through LegalZoom, and I’ve been much happier with the version from LegalZoom.
To form an LLC, visit LegalZoom.com and click “Start an LLC.” Choose the cheapest option and click “next” until you have an LLC. It will cost around $100 plus your state filing fees.
One commenter on AuthorMedia.social said she paid $800 to form an LLC. There is no need to spend that much. Spend that money getting tax advice from a CPA, not on filing paperwork.
It really is that simple. LegalZoom will ask you a bunch of questions, and they will fill out and file all the paperwork for you. It will be worth the cost.
I tried filing the paperwork myself. I didn’t know all the answers, and I got rejected by the state of Texas. Even if you do it yourself, you still have to pay your state filing fees. LegalZoom will provide a lot of help in answering the questions.
I asked for LLC-related concerns on AuthorMedia.social, and I received a bunch of great questions. I have tried to answer many of them already, but here are a few I want to address directly.
Q: What is the difference between an LLC and a sole proprietorship?
A sole proprietorship is what you have by default. If you run a lemonade stand in front of your house, you are a sole proprietor. You, the human being, are the legal entity. The human being who is the sole proprietor has 100% liability for everything. A sole proprietorship is like being legally naked. Adding a DBA (Doing Business As) offers no legal protection. It’s simply a nickname for your sole proprietorship.
I see some authors referring to sole proprietorship as a DBA, but they’re not the same thing. Any entity such as an LLC can have a DBA.
Sole proprietors don’t file a separate tax return. They list their business income and expenses on Schedule C of their 1040 tax form, and they can count business expenses as tax deductions.
S corporations offer the same liability protection as C corporations. If you want your company to be traded on a stock exchange, it should be a C corp. C corporations are more fiddly and complicated than S corporations, and you would have to pay taxes twice. I can think of no reason for an author to form a C corporation.
Unlike a C corp, S corps allow for “pass-through taxation,” which means you only have to pay taxes once. While S corps are less complicated than C corps, they require more paperwork than LLCs.
LLCs are arguably the simplest form of liability protection. The best part is that you can choose how the IRS treats your LLC. You can choose to be taxed as a sole proprietorship, a partnership, an S corporation, or a C corporation.
When I was in business school, one of my professors invited company CEOs to give guest lectures. One guest lecturer was a serial entrepreneur. He said, “I am sure you are all studying the different kinds of entities: S corps, C corps, LLCs, and others. Trust me, just start with an LLC. It is always the best option.”
I don’t think LLCs are always the best option, but I do think they are the best option most of the time. Unless your attorney tells you differently, LLC is the best option because it gives you the same liability protection as an S corp or a C corp, but with more flexibility, fewer rules, less paperwork, and less hassle.
Q: What is the benefit of pass-through taxation for authors?
I see two benefits of pass-through taxation. The first benefit is that during the early years of your writing career, your business expenses will exceed your income. You’re buying courses, going to conferences, and hiring editors. All the while, you have little or no income from your writing because you don’t have a published book.
In those early years, you can count your business expenses against the income from your day job and potentially your spouse’s day job if you are married filing jointly. During your initial lean years, you get some nice tax deductions.
The second benefit is that you only have to pay taxes on the income once. Entities like C corps that don’t provide pass-through taxation have to pay taxes on the income twice. The United States has some of the highest corporate tax rates in the world. When the C corp distributes money to you, you have to pay taxes on it a second time. It’s the biggest tax burden you can have, and it’s not necessary for authors planning to write a few dozen books throughout their careers.
Q: What is the difference between a DBA and an LLC?
The difference between DBA and LLC is one of the biggest points of confusion. DBA stands for “Doing Business As.” Some states call this an Assumed Name. My company is Castle Media Group, LLC, but I have a DBA called Author Media.
Most of the time, when you’re interacting with me, you’re seeing Author Media, and that is a legal name for the LLC Castle Media Group.
You can even get a DBA as a sole proprietor. It doesn’t provide any legal protection, but it can make you look a bit more professional.
Q: Do I need to include LLC at the end of my LLC name every time I use it?
It depends on your state. Some states require you to include “LLC” every time. The easy way around that is to get an Assumed Name or DBA. You won’t have to include LLC every time, but you will have to pay a little bit extra to get an assumed name if you don’t want to include LLC at the end of your company name.
If you’re going for the credibility strategy, a company named ACME Publishing LLC sounds very good. You look like a professional rather than a hobbyist with an LLC in your business name.
Q: Should I form a partnership or an LLC?
General partnerships come with something called “joint and several liability,” which is the worst. It is like co-signing a loan with your partner but you assume all the liabilities. To put this in Biblical terms, the partners become surety for each other. Partnerships are the height of foolishness, as King Solomon would say.
The worst part of a general partnership is that you can form one without realizing it. You don’t file to create a general partnership. You just become one by acting as a partner with another person.
If you are independently co-authoring a book with someone, at least one of you had better have an LLC. You should also have a contract defining your relationship as something other than a partnership. If you don’t and your co-author gets into a car accident on the way to a book signing, the injured party could sue you for 100% of the damages even if you were not in the car. Why? Because you are “partners” and you have “joint and several liability.”
My business law professor told horror stories of ruined lives because of accidental partnerships. She just about made us all raise our hands and pledge never to form a general partnership either on purpose or by accident.
The only time a general partnership ever makes sense to me is if you are already married to your partner. Then, maybe, it makes sense. But I would still check with a CPA and an attorney first.
All of that said, you can have a multi-member LLC that is taxed like a partnership but still has all of the liability protection of an LLC.
There is no reason to form a partnership.
If you’re independently publishing, you can form one by accident. It’s less likely to happen by accident if you are publishing traditionally because the contract from your traditional publisher will define the relationship between the two of you. You get a little bit of protection from your traditional publisher, and you’re less likely to form a partnership accidentally.
The laws governing partnerships are a little like the laws governing marriages.
There are two ways to get married. You can have a ceremony, file the paperwork with the county clerk, get a marriage certificate, and you’re considered married.
But there’s another way to get married, and that is to have what’s called a common-law marriage. If you present yourself as being married to someone long enough, you’re considered married, whether you have a marriage certificate or not. If you were married in another country or on a boat, and you don’t have paperwork, but you present yourself as married, you are married in the eyes of the law.
You can also get divorced. I know people who never had a wedding, but they did have a divorce. So marriages and general partnerships are very similar. And if you’re going to do it, do it on purpose.
In this course, you will learn
- 19 tax deductions authors can claim
- how to qualify for tax deductions for your writing-related expenses (not all writers qualify)
- How to create a business plan
- How to make a living as an author
- How to be a business in the eyes of the IRS
- How, when, and why to form an LLC
- How to reduce the likelihood of being audited by the IRS
The course is taught by Tom Umstattd, a CPA with over 35 years of experience working with authors, and his son Thomas Umstattd, Jr, founder of Author Media and host of the Novel Marketing podcast.
Learn more at AuthorTaxTips.com.
Patrons save 50%! So it pays to become a Novel Marketing Patron here before signing up for this course.
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