Comics Startup 101: Legal and Business Tips
for the Independent Comics Creator
Part 2: Choosing a Business Entity
This post is part of a series that grew out of my Comics Startup 101 panel I presented with comics creators at various comic book conventions around the Midwest. You can find the first post discussing doing a clearance search here. Today, we will be discussing different business entities to consider when launching your career in comics.
As always, I must
disclaim that this is not meant to be an in-depth guide, nor is it meant to be
complete legal advice. Any information provided in these posts is general in
nature and should not be relied upon as legal advice. Meaningful legal advice
cannot be given without a full understanding of all relevant facts relating to
an individual’s situation. As such, you should consult with an attorney for
specific legal advice that you might need.
Diving In – Choosing a Business Entity
You’ve
conducted a clearance search and have decided to move forward with creating your comic.
The next thing to consider is whether to form a corporation. As I mentioned
before, this is a good time to discuss your goals with an attorney and
accountant. They can help guide you in the process.
You
do not have to form a corporation in order to create your comic. Many people
are self-employed without doing so. However, the benefit of forming a
corporation is that you limit your personal liability for your business.[1] In
this section, I’m going to primarily discuss the formation of a limited
liability corporation. It is one of the most popular and easiest to form corporate
entities for small businesses. Every state allows for the creation of LLCs. However,
the laws and regulations governing an LLC vary by state.[2] You will have to choose the proper state for
the creation of your LLC. Most likely, you will choose to form the LLC in the
state where you reside or will conduct most of your business. However, some
people choose to register in other states, such as Delaware, that cater more
toward corporate entities. Cost, taxation, and personal and business location
will be the main factors to consider in determining whether to form a
corporation in your home state.
In determining
whether or not to form a corporation, you will need to consider your risks,
your ability to grow, and your ability to follow corporate formalities. If you
are still uncertain about the longevity of your career as a comic creator, you
may not want to form a corporation. If you do not believe that there is much
personal risk to you in creating this comic, then you may not want to form a
corporation. If you are not very good at observing and following certain,
specific procedural rules, then you may not want to form a corporation.
1)
Sole
Properietorship
There
is no requirement that you form a corporation in order to make your comic. There
are many people out there who do not form a corporation to conduct business. If
you don’t want to deal with the hassle and formalities of forming and running a
corporation, you don’t have to. You may conduct your business yourself. However,
you will be responsible for all of your business’ debt, liabilities, and losses. The
main reason to form a business entity such as an LLC is to limit your personal
liability for the expenses of the business.
2)
Limited
Liability Company
In order to
create an LLC, you must file articles of organization with the proper state entity (Sec. of State, Department of Financial Institutions, etc.).[3]
Depending on the state and the structure of your LLC, you may also have to
draft and adopt an operating agreement.[4]
You will also have to determine how your LLC will be taxed. Many LLCs are
treated as separate tax entities, and instead of the LLC being taxed, the
profits distributed to members are taxed on their personal income tax returns.[5] Different
types of LLCs have different default classifications.[6] By
consulting with an attorney and accountant, you can determine what LLC and tax
classifications are the most appropriate for your business. As stated before,
these rules can vary from state to state.
a)
Single-member
In many states,
you may form a single-member LLC.[7] If
you are going to be the only person running the company, then this might be your
LLC of choice. A single-member LLC provides you with many of the same legal
protections as a multi-member LLC. However, the primary difference between the
two is how the IRS treats a single-member LLC. Unless you specifically opt-out
of it, the IRS will treat a single-member LLC as a disregarded entity for tax
purposes.[8]
This means that you will not have to file a separate tax return for your LLC.
You will file the earnings and losses of your LLC along with your personal tax
return.
b)
Multi-member
A multi-member
LLC is appropriate if your business will involve more than one person as an
owner/member. The requirements are the same as for the single-member LLC. You
must file with the proper agency in your state. However, it is more important
to draft and adopt an operating agreement when you are in a multi-member LLC.
You need lay out the responsibilities of the members, liabilities, voting
procedures, dissolution procedures, and many more issues.
3)
Corporations
Even though I
said I’d mostly focus on LLCs, I felt I needed to at least touch on corporations.
Generally speaking, there are not many instances where a corporation would be
the proper entity of choice for an independent comic creator. Corporations are
complex legal entities that require a significant amount of time and money to
start and operate.[9]
If you are just starting out making comics, then I would recommend an LLC or
sole proprietorship. If your career is advancing and growing, then it could
make sense to try and form a corporation.
a)
S Corp.
The S
Corporation deserves a short mention based on possible tax benefits it confers.[10]
The primary benefit of an S Corporation is that it avoids possible double
taxation on a corporation (corporate income tax and shareholder tax).[11]
However, there are specific requirements a corporation must meet before they
can qualify as an S Corporation.[12]
Additionally, it is possible for an LLC to be taxed as an S Corporation, which
could provide some tax savings.[13] In
order to determine if an S Corporation or an LLC taxed as an S Corporation
might be the right business entity for you, it is recommended you speak with
your attorney and accountant, as the laws governing the taxation of these
entities can vary from state to state.[14]
Next week: Using Contracts.
Next week: Using Contracts.
[1]
Small Business Administration, Limited Liability Company, https://www.sba.gov/starting-business/choose-your-business-structure/limited-liability-company
(last visited May 16, 2016).
[2]
Id.
[3]
Id.
[4]
Id.
[5]
Id.
[6]
Id.
[7]Internal
Revenue Service, Limited Liability Company, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Limited-Liability-Company-LLC
(last visited May, 2016).
[8]
Id.
[9]
Small Business Adminstration, Corporations, https://www.sba.gov/starting-business/choose-your-business-structure/corporation
(last visited May 16, 2016).
[10]
Small Business Adminstration, S Corporations, https://www.sba.gov/starting-business/choose-your-business-structure/s-corporation
(last visited May 16, 2016).
[11]
Id.
[12]
See Internal Revenue Service, S
Corporations, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations
(last visited May 16, 2016).
[13]
Small Business Adminstration, S Corporations, https://www.sba.gov/starting-business/choose-your-business-structure/s-corporation
(last visited May 16, 2016).
[14]
Id.
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