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LLCs for Writers
by Daniel Steven
Q.. Some writers have formed limited liability companies (LLCs). What’s the advantage?
A.
An LLC is an entity with the advantage of limited member liability and
flexible tax structure. Although a single-member LLC by default
is treated by the IRS as a sole proprietorship, a single-member LLC
also may choose to be treated for tax purposes as a corporation (either
a “C” or an “S”). Major Features of an LLC:
- Income
taxes. For C corporation LLCs, tax rates start lower than
individual rates, but when you withdraw corporate profits, there is a
double taxation: it is taxed again at your personal rate. (Double
taxation can be avoided, however, by simply paying out all corporate
profits as salary.) By contrast, the sole proprietorship LLC or S
corporation LLC “passes through” all income (and losses) to the member,
thus eliminating double taxation -- but you cannot retain earnings in
your LLC account for future use.
- Employment
taxes. As a sole proprietorship or partnership LLC, you must pay
the self-employment tax of 15.3% on salary or earnings. If you
elect corporate status and pay yourself salary, the corporate FICA and
Medicare tax contribution, plus the employee’s FICA and Medicare tax
contribution, also equal 15.3%.
- Fringe
benefits. In general, in sole proprietorship, partnership, and S
corporation LLCs there is lesser deductibility of fringe benefits and
smaller retirement plan contribution limits and plan flexibility than
in C corporation LLCs. For example, a C corporation LLC can have
a tax-free medical reimbursement plan for you and your family members –
a major advantage.
- Fees and
Paperwork. There are initial and annual fees to the state where
you set up your LLC, and your state may impose a minimum tax on your
LLC, no matter how much (or how little) income you have. If you
choose C or S corporate status (or are a partnership LLC), a separate
tax return will be necessary, and you can count on a larger bill from
your accountant.
- Limited Liability.
Being an LLC will protect you personally from certain creditor’s claims
against the LLC. Freelance writers, however, rarely accumulate
much business debt – and most lenders will require that you personally
guarantee the payment of an LLC loan in the event of a default.
More importantly, even if you assign your copyrights to a limited
liability company, you cannot avoid copyright infringement, defamation,
or invasion of privacy lawsuits – as the author, you always can be sued
individually for these claims. Likewise, publishers routinely
require authors to personally pay the publisher in the event of a
defamation or copyright infringement claim resulting from the author’s
writing.
In summary, there are some tax and fringe
benefits to be gained by choosing to form an LLC and electing corporate
status, especially if you generate high income and can afford expensive
benefits and high pension contributions. Likewise, if you
self-publish and accumulate large debts in the name of your writing
business, the limited liability of the corporate entity may be useful.
© 2008 Daniel Steven
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