A: Stan
Gibilisco, TAA Member:
"I
tried this when I lived in Hawaii and discovered, to my horror, that
my royalty income was subject not only to their income tax, but to
their 'sales' tax as well (they call it a general excise tax). I figured
that if I formed a Nevada corporation and had all my income channeled
into it, and then became an employee of that corporation, the royalty
income would not be subject to that onerous tax. It was a beautiful
theory, but, like so many theories, did not work. The legislators
in Hawaii had thought of that before I did and the law was airtight.
Love it or leave it. I left.
The corporation
introduced so much new paperwork into my life, and so many new fees,
that not only did I find myself paying more for the services than
I would have paid in tax to the state of Hawaii, but I had less time
to write (or do anything else) because of all the red tape. So I fled
Hawaii to Nevada in part to assassinate the monster that I created.
To this day, the state of Hawaii actually owes me a little bit of
money, for I paid the tax as a Hawaii resident employee of the corporation,
as per their law, and then split before the advance was earned back.
(As a matter of fact it never was). It was a triple whammo. Tuition
in the School of Hard Knocks, one might say.
There may be
some advantage in incorporation for the purpose of personal asset
protection, and I have been looking into this on account of the fact
that our society seems to be evolving into an entity 'of, by, and
for corporations,' and one might rather join 'em than try to beat
'em. This has more to do with discouraging frivolous litigation than
getting around oppressive taxation. As a matter of fact, in some states,
incorporation could subject a writer to the state's corporate income
tax, where there would be no state income tax for a sole proprietor.
(Texas, I believe is an example). Another problem is that some states
might tax an out-of-state corporation for freelancing, but not an
out-of-state sole proprietor. Better talk to a good lawyer before
taking off on this sort of venture. And be prepared to spend upwards
of $2,000 for the advice.
When I was incorporated,
my publisher issued contracts that specifically maintained the liability
and indemnification clauses for me personally, apart from the corporation.
Therefore, if someone were to sue for copyright infringement or libel,
I would have no more protection than if I were 'totally exposed.'
So my conclusion
is that incorporation might work for any person interested in protecting
their assets generally (again, a lawyer would know better than I),
but as far as an author doing it with the idea of solidifying his
or her security in this dangerous world, I doubt there is any benefit."
A: Ric
Martini, TAA Member:
"Stan gives a
good overview of some of the pitfalls of setting up a corporation.
However, there are some things that can either make it worth the trouble
anyway, or that can ameliorate some of the expenses. Here are some
thoughts worth considering, in any event. Incorporation as a C-corp
(which I suspect Stan was addressing) probably isn't cost effective
unless you:
- Have royalty
earnings of $150,000 or more.
- Need medical
coverage or anticipate large medical expenses.
- Want to set
up a pension plan that will build a retirement pool quickly.
- Want to rent
office space or other facilities from yourself or others.
- Intend to
hire employees (who may be family members).
- Need additional
liability protection (which is available to corps).
- Are advised
to do so by your accountant/financial planner/attorney, who knows
your financial situation and the applicable laws.
Some but not
all of these issues also apply to S-corps. you can, however, switch
from a C-corp to an S-corp -- so if you set up a C-corp initially,
you can change over at some point if that becomes advantageous. In
any case, I am personally convinced that if your income is substantial
and you are still a sole proprietorship, you are paying a lot more
in taxes than you should be or need to be. Every factor here has its
own complications and expenses (other than the first), and whether
or not it sorts out will vary from one case to the next. The paperwork
load -- not just forms to file but records to keep, annual meetings,
payroll, and so forth -- is notable but I don't find it as much of
a problem as Stan did. I guess one can adapt to such things given
enough time.
The last item
is the biggie. It's a major step, to be sure, and you need to sort
out the parameters with a professional."
A: Jay
Black, Poynter Jamison Chair in Media Ethics, Emeritus, Univerisity
of South Florida, St. Petersburg:
"One more thought
regarding incorporation, for what it might be worth: My tax guru had
me create an S corporation when my children were young (teenagers,
saving money for important stuff such as college, a piano, etc). We
had them own and operate the S corp. Everything I earned on royalties
went directly to them, and was taxed at their income levels. It worked
really well for the several years we had it in place. Of course, you
really have to trust your children!"
