Business Models

I'm going with Canadian law as that is what I got in my schooling.

Under Canadian tax law, sole proprietorship and corporations get the same base rates under business income. I do not know if royalties get treated differently (I'd have to go home and leaf through the Act.) The typical expenses for an author are for the most part no different. The only benefit with corporations is the ability to CCA the organisation cost, which runs into perpetuum until what remains is less than a cent. The only drawback is that you have to incur those expenses.

If the income you receive is large, a corporation is advisable to keep the assets coming in a distance away from you. That is, you can do some actions that are available to corporations that you can't do with assets directly attributed to you. One of them is to protect yourself if you hire staff (think of the big name reporters and bloggers out there) or are likely to remain vigilant on maintaining your contracts and project to require legal recourse.

The question you need to be asking though is what is the risk? Are you a novelist whose revenue from writing mostly comes in as royalties and advances? Or is it more varied? Are you a blogger who receives much of your income from advertising? How much of the revenue is from other sources?

That is only a starter. I'm sure someone with CGA or CA designation can either correct or provide further comment on that.

My experience is that by the time a writer is making enough money to worry about a business model, he's in a position where he doesn't have to worry about a business model.

PeterD said:

I suspect you act as a sole proprietorship? So contractually your agreement with a publisher is between you, as an individual, and the publisher as a corporate entity?

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I already have an S Corporation, but I don't use it for my writing. I'd judge that you have to turn over $10K to $20K a year just to break even, and most writers don't do that, especially in the first few years. There are record-keeping requirements, directors and officers, government reports, and other things to be considered and managed. They are a big consumer of time.

There is also the issue of distinguishing writing as a hobby or business, even if you're a sole proprietor. There are criteria that have to be satisfied to determine what deductions you can take as a sole proprietor.

You also have to be careful as you could end up paying corporate taxes and then taxes on the dividends/salary you pay yourself. It really isn't worth the hassles and possible pitfalls unless you're self-publishing, and even then, it's very 'iffy' as to whether it's a preferable option.

Actually, what shadowwalker said would only be true if you set up a "C" Corporation. These days, most businesses set up S Corps or LLCs, where there is no "entity-level" tax, so you don't have to worry about being taxed twice. C Corps are only required for certain complex shareholder schemes, mulitple classes of stock, as well as a few things like excess net passive income rules that can terminate S status.

I did a search and found this thread--ironic that it was only started yesterday. I, too, am trying to figure out for my dad what is the best way to report income from his book sales.

Since net income (and hopefully there will be) is subject to self-employment tax under a sole proprietorship, I'm thinking that setting up a corporation (and paying the shareholder/writer a portion vs. all of the net income as wages) would save approx 15% on the remaining income not taxed as wages; i.e., taken as shareholder distributions. The IRS cautions S Corps not to abuse this "loophole" - that is, the shareholder who generates the income must receive a wage, but it doesn't have to be total net income, so there's a potential for self-employment tax savings there.

Additionally, limited liability provided by a corp or an LLC is always a good thing, as (I believe) Xelebes referred to above.

However, I'm curious if anyone knows: does the copyright have to be owned by the corp, since the corp would be the one reporting the income from the copyright?

I don't live in Canada ,But I guess it's much the same as England. Limited Liability is is to protect your self from Creditors , should you become bankrupt.But you will need to register your company and keep proper audited books.As a writer you don't normally need to raise capital or credit ,so it would be a unnecessary expense. In the UK you do need to register with the tax man, as self employed, and fill in their forms .if you are earning money as a writer ,that all you need to do.

Limited liability would also protect your personal assets in the case of being sued.

You'd need a lawyer to create a company the right way. So why not use those fees to help you negotiate better publishing terms? Or at least know precisely what you are getting into with that publishing deal of yours?

-cb

I looked into an LLC, with the aid of an attorney, and for me, at least, I found I'd be paying more taxes. Not much more, but some.

And the other disadvantages also, for me, seriously outweighed any advantages. Unless you have a specific type of risk, and a specific type of business, we couldn't find any reason at all to go with an LLC. Even if you save a small amount on taxes, you have to red tape yourself to death to get it. It just wasn't worth it for me.

And, of course, until you're making a significant amount of money from writing, it's all a complete waste of time, even if it would otherwise be a good idea.

@Jamesaritchie, I agree. The upside for my dad is that he gets all of his legal work/taxes done for free, courtesy of moi.

I want to ask the question again, in case it got lost in the shuffle: does anyone know, if you are using a corp/LLC to report your earnings, does the copyright also need to be owned by (assigned to) the corp/LLC?

I know Elizabeth Peters' (her pen name) books are copyright MPM Manor, Inc. for example. I've seen other corps hold a copyright in other books, too, but can't remember exactly which ones.

Jamesaritchie said:

I looked into an LLC, with the aid of an attorney, and for me, at least, I found I'd be paying more taxes. Not much more, but some.

And the other disadvantages also, for me, seriously outweighed any advantages. Unless you have a specific type of risk, and a specific type of business, we couldn't find any reason at all to go with an LLC. Even if you save a small amount on taxes, you have to red tape yourself to death to get it. It just wasn't worth it for me.

And, of course, until you're making a significant amount of money from writing, it's all a complete waste of time, even if it would otherwise be a good idea.

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Bolding mine. When I explain the red tape part to clients, they decide they didn't really need an LLC or corporation after all. If you are making a significant amount of money, you can afford to pay someone to deal with the red tape.

MM

Staggering your income only works if you can negotiate with the customer over payment terms. Otherwise there is little flexibility with that regard. The whole revenue recognition principle is at play.

The only other issue that may come up is possibly delaying the payment of the tax payable, which only works if you have a) a sizable payable and b) enough risk attached to it that it is dempt worthwhile.

I think income smoothing doesn't work as you think it does.

Just a note: You can't create an LLC in Canada. You have to incorporate to create a Ltd or an Inc.

As for a salary vs. dividends, it doesn't matter from the owner of the corporation - you will be taxed the same.

However, as you put it:

Business Income:

$5 000 taxable @ 15% = $750 tax payable, Y1
$0 @ 15% = $0 tax payable, Y2


"Smoothed"

Assumed Personal Taxable sans dividend, Y1: 35 000 @ tax rate = $5 250
Assumed Personal Taxable avec dividend, Y1: 39 250 @ tax rate = $5 888

Difference: $638

"Unsmoothed"

Assumed Personal Taxable sans dividend, Y1: 35 000 @ tax rate = $5 250
Assumed Personal Taxable avec dividend, Y1: 43 500 @ tax rate = $6 551

Difference: $1 301
Double the Delta Smoothed: $1 276
Difference between Delta Unsmoothed and Smoothed: $25

Selected 35 000 as that is a common clerical wage many writers earn. It is also just close enough to a tax bracket limit that 10 000 might do some harm. 55 000 does not make a difference as the next bracket is near $80 000.

PeterD, your scenario sounds like a C corp set up here in the U.S. The revenue is taxed when the corp receives the income, and you are taxed when you take it out as salary--but the C Corp receives a deduction for paying that salary, so it's a wash. If you own the corp, you're still paying the taxes on the revenue when it's received, so I don't see any benefit. Really, you're restricting your personal cash flow for no reason. But this is from a U.S. standpoint, maybe Canada is different.

In the U.S., the entity set up would most likely be an S corp or an LLC, which is known as a "passthrough entity." So, the money earned by the corp/LLC is taxed to you. In the year of receipt, but only once. Then, you as the shareholder can take money out tax free, with the exception of payroll taxes as I tried to describe above in post #6.

Sole proprietor here. LLC's aren't meant for individuals, in the US at least. Here you'd normally do a Sub-chapter S Corporation. But why bother? There's no real legal or financial protection and, normally, it's hard to get sued for much in the publishing world.

There are no tax advantages, and a few potential disadvantages, and there's more paperwork involved. The idea of hiring and paying yourself as an employee actually adds to your tax burden over time and reduces some of the deductions you can take.

Talk to an accountant for the best advice, and especially to see what deductions you may have available. Simple things, like 85% of a health insurance policy being deductible. Nobody remembers that one. An that's a sole proprietor, no need to incorporate.

Jeff

The problem is that if you make a 10 000 dollar advance, it is going to be rather miniscule. It doesn't matter if you make 80 000 or 35 000, the hammer is going to be within less than 1% of the increment in income. When you start talking about money with larger orders of magnitude, say that you bristle against the Small Business Minimum, that it is going to make a material difference.

But then you also have to get the money back to you from the corporation, which is also taxed to recover that difference.