Disclaimer: I am not a lawyer or CPA. So I'm not in a position to give individualized and specific legal or tax advice. This article is meant to give general guidance on considerations. However, it would make sense to consult a lawyer and CPA before acting on this general guidance, because benefits and drawbacks will change from state to state.
With that out of the way, this is one of those questions I receive every so often from writers. In most cases, the writers are not earning a significant income from their writing yet, but I get it. I'm a writer too, and I feel like writers are especially gifted at dreaming up possibilities—both good and bad.
Reasons I've heard writers give for incorporating or forming an LLC usually have to do with protection. Some people have heard that incorporating as an S Corp or creating an LLC will protect them from lawsuits and provide tax benefits.
So let's go through when it makes the most sense for writers to incorporate or create an LLC.
Do Should Writers Incorporate or Create an LLC?
Let me answer that question with another question, "Why?"
That is, why do you want to incorporate or create an LLC? Is it to protect your personal assets from lawsuits and claims? Are you looking to save money on your writing-related taxable income? Or are you trying to legitimize your freelancing business?
These are all good questions to ask, and the answers will vary from writer to writer. But for the most part, writers who earn less than $50,000 a year should probably avoid incorporating or creating an LLC.
We'll discuss more below, but the long story short is that there are likely better options for each concern unless you're already finding a great deal of success. Let's look at each question.
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Is It to Protect Your Personal Assets From Lawsuits and Claims?
One reason writers give for considering incorporating or creating an LLC is to put a wall between their freelance business and personal assets. On its surface, it sounds like a good reason. However, the most common liability for writers is different than other businesses that have employees, investments in production, and other business costs.
The most common liabilities for writers are tied to possible lawsuits for defamation, privacy, or infringement. In all those cases, plaintiffs would likely file suits against both the company and the writer. This is why most publishing contracts have language to cover them against the actions of their writers.
The good news is that you're not completely helpless if this is a concern for you. Writers can look into Business Liability and/or Media Liability insurance policies. If you go this route, be sure that your policy covers defamation, privacy, and infringement claims.
Are You Looking to Save Money on Writing-Related Taxable Income?
While it's true that corporations can save money on taxes that sole proprietors cannot, the threshold is such that you've probably already got a CPA and lawyer if this makes sense for you. Filing taxes as an S Corp incorporation could save writers money...if they're making around $500,000 a year.
Even in those cases, I've seen tax professionals discuss how it doesn't always make sense at this level. Because there are other considerations, including the impact on estate planning.
Of course, the tax code is constantly changing. So if seriously in doubt, check with a CPA.
Are You Trying to Legitimize Your Freelancing Business?
I'm going to make the assumption that you're asking this question as a single writer. That is, you don't have a team of writers working under you. It's just you. In most cases, I don't see how incorporating or creating an LLC would help legitimize your business.
As an editor, I don't make decisions based on how a freelancer files their taxes. The more important consideration is the freelancer's writing ability and track record of hitting deadlines.
The one place where I could see it helping is if you want to do business under a company name (even though you're the only employee). For instance, a self-published author may want to say they're published by a press that's not their own name. In music, the artist Ani DiFranco releases all her albums on the Righteous Babes label, which is her label.
I could also see a freelancer working with businesses as a copywriter or specialized content provider finding value in contacting businesses as a business instead of as a writer. Sometimes it's all about perception.
Final Thoughts on Incorporating or Creating LLCs
Most writers will find the benefits of incorporating or forming an LLC aren't worth the cost. However, it's always a good practice to know your options and constantly search for ways to improve your writing business.