Self publishing authors are sometimes surprised to discover they are starting businesses. For many, this is a new and scary experience. They don’t know where to begin. Recently, the process forced me to take my own advice and put it into practice. I’d been a business lawyer for almost 30 years when I decided to self publish my historical novel, Coyote Winds. I wanted to set up my self publishing business correctly in order to maintain control over my work and to maximize tax deductions. Here’s the guidance I offer my clients and followed myself.
Choosing a Form of Organization
Unless your self publishing business also publishes other people’s work, it’s unlikely that you’ll need to incorporate. Businesses incorporate to shield the owner’s personal assets from business liabilities, but incorporation provides little benefit to an author. The same is true for other entities such as limited liability companies (LLCs). In publishing, your greatest risks are claims of infringement, defamation, and invasion of privacy. These claims are based on your conduct as an individual, so forming a corporation or LLC will not help. The corporation is not infringing. You are. Besides, forming and maintaining a corporation or other entity costs hundreds of dollars each year. That money is better spent buying insurance (see below). If your net income from self publishing is $400 or more a year and the cost of maintaining a corporation or LLC is less than $300 a year in your state, then it might be worth setting up an entity for tax reasons. In that case, check with a tax professional. I recommend that your business be a sole proprietorship. Despite its name, a sole proprietorship may be owned by you alone or by you and your spouse. You do not have to file any documents with governmental entities to create it. You do not need to give it a business name, although I recommend that you do so. You create a sole proprietorship simply by going into business. If you will be producing and sharing income with one or more people (other than your spouse), then you are forming a “general partnership.” This, too, requires no governmental filing. The partnership is created as soon as the partners agree to combine efforts to earn a profit. Your agreement can be verbal, but I recommend you capture it in writing, partly because that will force you and your partner(s) to discuss issues you may be avoiding. Many cities and counties require that businesses obtain a business license. The Small Business Administration website will help you search your local jurisdiction. Also, do a web search for “business license” and the city, town, county, and state where your business is located. City and state websites often have sections to help you with this process. Check for such section titles as Doing Business, Starting a Business, or Business Portal.
Choosing a Name
Even if your self publishing business is a sole proprietorship, I recommend you give it a name, commonly known as a DBA, short for “doing business as.” Operating under a DBA name encourages you and others to see the venture as a business. Your company name will also be your imprint name, and you will list it as the “publisher” of your book online, in catalogs, and on the book itself. This will make it less obvious that your book is self published, which is useful with bookstores, reviewers, bloggers, contests, and readers unwilling to consider self published work. Choosing a company and imprint name is a creative process. Optimally, the name will imply some characteristic of or promise about your books, such as romance (Passion Press), adventure (Kick-Ass Books), travel (Rickshaw Riders), or life-changing insights (Next Chapter Publications). My novel, Coyote Winds, is set in the American West, so I chose Ten Gallon Press as the name of my imprint. I tried dozens of other names, such as Prairie Winds Press and Coyote Publications, but I found they were already in use. Your imprint name may include the word “company,” but should not include Corp., Corporation, or Inc., unless you have set your business up as a corporation. Before you fall in love with a company and imprint name, search the market. Avoid any name that infringes on the trademark rights of others. To research U.S. registered trademarks, start with the database at the U.S. Patent and Trademark Office (USPTO) http://www.uspto.gov/trademarks/process/search/. Also, search your state's trademark database. Trademark law is tricky. If you find a registered trademark that is the same or similar to your dream name, do not despair. Most of the time, you may use a name similar to an existing trademark as long as you do not “create a likelihood of confusion in the mind of the consumer as to the source of the product.” What does that mean? Here’s an example: I searched the trademark “Goody Two Shoes” and found one “live” registration by MaxWax Inc., for a “hair removal service using wax or sugar that removes hair from women or men up to two inches inside the bikini line.” If you name your imprint Goody Two Shoes, you are highly unlikely to be infringing on MaxWax’s trademark because your products and services are so different. However, if you find your dream name being used as a trademark for books or anything related to publications, communications, or education, keep brainstorming. If you use it as an imprint name, you will be asking for legal trouble. Also, do not use a well-known or strong trademark such as McDonald’s, Sears, or Exxon, even if you would be using it on a noncompeting product. Owners of strong marks have the right to challenge any similar trademark that may “dilute” the value of their trademark, regardless of the product or service, and they have lawyers who can make your life miserable. To research unregistered trademarks, check several search engines because one may show results that the others missed. If you find a company using your dream imprint name as a trademark, apply the likelihood-of-confusion test. Once you have settled on a shortlist of names, search your county’s DBA listings. Many counties have online databases. By law in most states, you cannot use a DBA already in use in your county regardless of whether or not your businesses are different. I do not know how often these laws are enforced. Also, search domain names to see if the one for your imprint is available. Try various spellings and misspellings. See where people land if they type your domain name incorrectly. If the domain name you want is not available, try adding words such as press, publications, or books to yours.
Claiming the Name
When you have decided on your company/imprint name, file a Fictitious Business Name Statement (FBN Statement) with the county where your business will be located. Some people call this a DBA filing. It is a simple and inexpensive task. An Internet search of “Fictitious Business Name” and the name of your county will pull up services that handle the recording and publication for a small fee, typically less than $100. Why bother filing an FBN Statement? If you get a check made out to your imprint name, you will have trouble cashing it unless you show your bank a recorded FBN Statement. The Statement also lets you set up bank accounts and obtain credit cards in the imprint name, which simplifies keeping track of your self publishing expenses and income. Should you register your imprint name as a trademark with the USPTO? Although that is not required (you will own a common-law trademark as soon as you offer your books for sale under your imprint name), Federal registration has several advantages. It puts the world on notice of your claim of ownership of the mark; it creates a legal presumption of ownership nationwide, and it gives you the exclusive right to use the mark on or in connection with the goods or services set forth in the registration. You may file an intent to use (ITU) application to trademark your imprint name before you actually offer your books for sale. The USPTO has various publications to help (and befuddle) you. Foreign trademark registration is also available. The Community Trade Mark System covers European Union member states, and the Madrid System for the International Registration of Trademarks permits a trademark registrant to use one basic application to register the trademark in various countries. Trademark protection comes at a cost. Currently, the application fees for U.S. registration are $325 and up, with no return of the fee if the USPTO decides that your imprint name does not qualify for trademark registration. Also, you may need a trademark lawyer to assist you, another expense. Think about how much you are likely to lose if someone uses a name that infringes on your imprint name vs. the costs of trying to stop them, in terms of money, time, irritation, and distraction. Registering your imprint name as a trademark could be overkill. Once you decide on an imprint name, buy the domain name ASAP. It’s most helpful to obtain the .com domain, but consider buying .net, .info, and other tags as well. They are small and worthwhile investments. Also, buy domains for your name (or pen name) and your book title (or alternative tentative titles). Registering a domain makes your name, address, phone number, and email searchable on whois.net. This is fine for your author website, but you should purchase Private Registration from the hosting provider for your imprint website to reduce the chances of people seeing that you are both writer and publisher.
Numbers You Need
EIN Here is something most people don’t know. You may, and should, obtain a Federal Employer Identification Number (EIN) for your self publishing business, even if it is a sole proprietorship, even if you never have employees, and even if you sell only a few books. An EIN is equivalent to a Social Security Number for a business. If you have a separate EIN, then you won’t have to give Amazon and other sellers your Social Security Number. To obtain an EIN, go directly to the IRS website—www.irs.gov. Sham sites that look like the IRS site pop up every day and ask for your Social Security Number, mother’s maiden name, birthday—all the tools they need to steal your identity. ISBNS If you plan to make your book available at bookstores, libraries, and online retailers, then each version of the book should have its own International Standard Book Number. I recommend you purchase a package of at least ten ISBNs (go to http://www.bowker.com/en-US/). You will be able to use them with any print-on-demand (POD) company or your self publishing service company (SPSC) provider. POD and SPSC companies are likely to offer free or low-price ISBNs, but obtaining ISBNs through them has drawbacks. If you purchase an ISBN through your POD or SPSC provider, then, typically, it will control that ISBN. If you change providers, you may have to get a new ISBN, which could tank your ratings since many book rankings are tied to these identifiers. Why ten ISBNs? You will need one for each version of the book, each format, and every translation. For instance, you will use one ISBN for the paperback and a different ISBN for the e-book, plus still others if you make significant changes such as adding an introduction or substantially redesigning the cover. ISBNs are not transferable; so do not buy an ISBN from a friend or through an advertisement. That number could be canceled or your book could be listed as published by someone else. Also, ISBNs are not recyclable. If a version of your book goes out of print, you may not reuse its ISBN for another version or book. The Bowker site offers a variety of products and services, with links to other providers and companies. Don’t jump into those without researching your options. While Bowker is the source for buying ISBNs, the other services it offers are widely available. Shop around before you commit. Resale Certificate Numbers Unless you live in a state that does not charge sales tax, you are required to obtain a resale certificate, sometimes called a seller’s permit. In California, you apply online with the State Board of Equalization. Each state has an equivalent agency. Applications are easy. I recommend that the resale certificate be in the name of your imprint and that you use your EIN to separate your business activities from your personal ones. Once you provide a copy of your resale certificate or your certificate number to CreateSpace, Lightning Source, or other POD provider, you won’t have to pay sales tax on books you intend to resell. When you resell the books at book fairs and through your website, you may be obligated to pay sales tax to the state in which the transaction takes place, although you may charge it to your buyers. Calculating, collecting, and paying sales tax is a headache beyond the scope of this article. If you will be taking credit cards and transacting business on your website, purchase an SSL Certificate, which will ensure that data is encrypted. If you will be processing sales through PayPal or a similar site, you do not need an SSL Certificate; such sites provide encryption and security. LCCNs Library of Congress Control Numbers are free, and you should obtain one for your book before you release it. So you don’t forget, get it as soon as you have assigned the book an ISBN. POD providers will get LCCN numbers for you for a fee, typically $50 or so, but you can save the expense. The process is quite easy. Go to the Library of Congress Preassigned Control Number Program (http://www.loc.gov/publish/pcn/) and click on Open an Account. Fill out the form and submit it, and you will get an account number and a password by email. Go back to the site and sign on, using them. You will fill out yet another form specifically for your book. Submit that form, and the LCCN will come to you via email. Then send one copy of your book to the Library of Congress, using the mailing address in the e-mail confirming your registration and LCCN.
To keep finances straight, I recommend you open a separate business bank account for covering expenses and depositing income. You may also find it useful to get a credit card and debit card in your company name. You will need your FBN Statement to open any account in a name other than your own. There is no rule against using your personal bank accounts to deposit income and pay expenses for your self publishing business. But you do need to keep track of your self publishing income and expenses for tax purposes. Setting up business accounts with USPS, UPS, and FedEx will help you keep track of expenses, and may get you lower rates and better service as a business customer. Go to their websites and register. Most will ask for your credit card information and for your Social Security Number. Provide your EIN instead if you have one. When you start selling books, sign up for PayPal Here, Square, or a similar service that permits you to accept PayPal, debit, and credit card payments by using a little gizmo you plug into your cell phone. When I wrote this, the fee was 2.75% (give or take) of the charge, and there was no minimum monthly fee. This is a bargain compared to traditional bank credit-card accounts. Keep good contract and financial records. They are critical for protecting your rights, getting what you have bargained for, and saving money at tax time. All too often, I hear from a client in a panic because a freelancer refused to deliver the final product, or a self publishing service company charged an extra $1,000 on the client’s credit card, or a threatening letter arrived about use of an image without permission, but the client can’t find a copy of the contract, license, receipt, or correspondence. The typical explanation: “I never thought anything would go wrong.” The result: Sorting out the mess is a thousand times more difficult, and potentially more expensive. Dedicate a file drawer or box, real or virtual, to your self publishing business long before your book hits the shelves. And use it to keep the following: Contracts and Licenses Retain copies of all agreements with your freelancers, publishing service companies, advertising/social media companies, and POD providers. Also retain copies of all related correspondence, especially if it contains assurances, explanations, and offers. Keep receipts and licenses for images, fonts, lyrics, and other content. Most online contracts and licenses have a print-friendly version, and you can always print out the webpage showing the relevant terms or save a screenshot. Note the date you saved the webpage or contract. Financial Records Tracking income and expenses can be as simple as maintaining folders (virtual or printed) of receipts. Or use software such as QuickBooks. Online sites provide basic bookkeeping templates free or at a low cost. Do a search online for “small-business bookkeeping,” and you’ll find options and reviews. Retain records to reflect both your income and expenses, including:
- royalties, whether paid by check or electronic transfers into your bank account
- direct sales and speaking fees
- office supplies and postage
- relevant magazine subscriptions
- dues to relevant organizations
- telephone charges
- printing costs for business cards, bookmarks, and postcards
- advertising costs
- costs for design, video editing, manuscript editing, and analytics software
- fees and royalties paid for fonts, images, music, etc.
- writing club dues
- website hosting and online backup costs
- subscription costs for online services such as HootSuite
- payments to freelancers, such as your web designer, editor, copy editor, cover designer, and publicist
- cost of books sent to reviewers or given away in promotions
- contest entry fees
- copyright registration fees.
Whatever method you use, keep up with it. Once your book is launched, you may deduct many of your expenses, including those paid in years before your book’s release. Insurance When you publish a book, post on your blog, or comment on the Internet, you are exposing yourself to a set of risks, such as copyright and trademark infringement, invasion of privacy, defamation, and other horrors. Can you get insurance to cover claims, attorney fees, and legal damages? Maybe. The availability of coverage varies state by state, policy by policy. Your homeowner’s insurance and umbrella policies may provide some coverage for defamation claims arising from your negligence (meaning that you took reasonable measures to make truthful statements, but ended up being wrong). However, your homeowner’s insurance might not cover business pursuits, in which case you may have to purchase a separate business insurance package. Ask your insurance agent. Of course, policies are unlikely to help if you knowingly make a false and defamatory statement. Large publishers purchase broader coverage called media liability insurance. Writers’ organizations, such as the Authors Guild, have arranged for discounted media liability policies for their members, but the premiums are still so high ($1500 to $5000 per year) that insurance doesn't make sense for most self publishers. As more people self publish, carriers may offer media liability coverage at more affordable rates. Property insurance may be necessary too. If you will be stocking inventory at your home, check with your renters or homeowners insurance agent about how much inventory your existing policy covers. If you are storing thousands of copies at your home—or a storage facility—it may be worth paying for optional coverage (known as an endorsement) to cover losses from fire, theft, and other such risks.
As a writer, I find crowdfunding an exciting resource. As a lawyer, I find it full of dangerous pitfalls. Here are some thoughts on avoiding these pitfalls. If you will be soliciting funds from anyone and everyone on an online site, call the funds contributions, not investments or loans. Even if you are raising only $2,500, if you are selling an “investment,” then you are selling a security (like a stock or bond), subject to a complex array of federal and state laws and requiring registration and detailed disclosure statements (there are some exemptions from the registration requirements, particularly if you are raising money exclusively from family and friends and only in small amounts). Do not say donations are tax deductible. Better yet, stick with “contributions” and avoid the word donation altogether. Unless you are a nonprofit entity that has applied for and received tax-exempt status from the IRS, the donations are not deductible by the donor. You may have heard that the JOBS (Jumpstart Our Business Startups) Act legalized crowdfunding. In theory, the law will expand crowdfunding opportunities, but the rules are so complex and technical that its provisions are unusable. Note: Contributions may be taxable income. From what I have read, the IRS has not decided whether funds raised through crowdfunding are taxable income or nontaxable gifts. The more cautious approach treats contributions as taxable income because they are funds obtained in pursuit of a business venture. If you have deductions for expenses at least equal to the contributions received, you may offset this income. Also, sales tax may apply. If you are offering to send crowdfunding donors copies of your book in exchange for contributions, then you are “selling” the book and owe sales tax on the sales.
For Rewarding Results
Bottom line: Nothing is simple. On the other hand, all this is do-able and well worth doing because, among other reasons, it will save you money at tax time. You may have heard the old rule that a business is considered a hobby unless it shows a profit during three out of five years. If the IRS decides your business is a hobby, then you may not deduct book-related expenses from other income. You may offset those expenses only from your self publishing income. In practice, the hobby rule is not as strict as the three-out-of-five-year rule. If you demonstrate that you have a serious intent to operate a business at a profit, the IRS will generally give you some slack. To demonstrate this intent:
- Set up your business as outlined above
- Actively promote your book(s)
- Join relevant professional organizations and network
- Attend writing-related conferences, and better yet, speak at them
- Most important, for the IRS and your own well-being, keep writing.