Comics Startup 101 - Choosing a Business Entity

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.

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[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.