Why should a self-publisher incorporate?
If you are selling a product (in this case, books), you should form a company to pay taxes, get a business license and all the other wonderful things federal, state and local area regulators want you to pay for.
Also, one of the aims in self-publishing is to produce a book that is as professional-looking as possible. When was the last time you opened up a book and it said "A Billy-Jo Bubba Production"? Or maybe you can't even find out who published it. If that was the case, you probably got it from a friend... it wasn't on the shelf of a bookstore.
Here's the most important reason to incorporate: The IRS audits 1 in 10 "Mom & Pop store" tax returns. They'll do the same to a Mom and Pop publisher.
Many people tell me they don't want to incorporate because it's a hassle, or it's too complicated, or it's too expensive. All of these reasons are poor. If you plan to be in business, do it the right way. The minute you decide to sell your book, you've chosen to be in business!
What Type of Corporation Should I Choose?
The two forms of incorporating are:
Corporation. This is the traditional form for incorporated businesses, suitable for businesses both small and large. Its primary drawbacks are that its affairs must be conducted with a high degree of formality to maintain liability protections, and its income is taxed independently; distributions (dividends) are taxed again at the personal level. For very small corporations (in terms of the number of shareholders, not revenue or value), the IRS allows the corporation to elect to be taxed under "Subchapter S"; this is desirable because it avoids double taxation by allowing all income and deductions to flow through to individual shareholders in proportion to their ownership. Gotcha Alert: All net income of the company electing Subchapter S treatment becomes net income of the shareholders. But that doesn't mean they get free access to the money. Subchapter S shareholders must generally be compensated by traditional wages (with traditional withholding, etc.); the IRS takes a dim view of dividend distributions unless shareholders are already being paid fair market wages for their work. Don't think you can take draws from a Subchapter S corporation with out full wage treatment and accounting. Also, owner-employees of traditional corporations (whether or not Subchapter S) are not generally exempt from unemployment and worker's compensation expenses.
Limited Liability Company. This is the most popular incorporation form today because of its vastly reduced governance formalities and its flexibility to meet a wide range of needs while providing strong liability protections. LLC's are classified as either "single member" or "multi-member'; "member" being the term for the owners (shareholders) in the company. The owner of a "single member" LLC reports all business activity on her personal tax return–usually on Schedule C of Form 1040–avoiding having to prepare a separate return for the business. "Multi-member" LLC's have several options for their tax treatment: they can elect to be treated as a partnership, or can elect Subchapter S treatment. Married couples who are the sole owners of a multi-member LLC can elect either partnership treatment OR flow-through to Schedule C as a sole proprietorship. Gotcha Dodge & Parry: choosing partnership or sole proprietor (where appropriate) treatment for your LLC effectively dodges the Subchapter S gotcha noted above, including (depending on the jurisdiction) unemployment and workers compensation insurance requirements. However, this option has its own tax gotcha for those not used to it: the necessity to pay quarterly estimated taxes to cover your anticipated regular and self-employment taxes.
By the way, while liability limits are a central feature of corporate forms, liability protection is not unlimited. Your entire investment is at risk. And, if you commit a crime or civil fraud, that protection is worthless.
Because incorporation shields you from personal liability for ordinary business activities, many vendors will insist that you give your personal guarantee (and personal credit) on company obligation. Fight back. Insist on signing only as an officer of the company. Bring your Articles of Incorporation/Article of Organization to dealings with banks, office space landlords and the like. Decline to sign personal guarantees unless you have no choice; in which case negotiate limits–in time or amount–to the guarantee. If they won't negotiate, walk.
Forms are readily available from online sources, including most Secretary of State offices (which is where you will file your papers). For more full service approach, including appointing a third-party registered agent for the company, you can use your favorite attorney or The Company Corporation to set up your corporation and provide basic required services.
What should I name my company?
Try not to name it after yourself. That shouts to the world that you're a self-published person, and your aim should be to create a product so professional looking, no one will ever know if it's self-published or not. So avoid "Joe Blow Publishing" if your name is Joe Blow.
What kind of books are you planning to publish? If it's children's books, think of a "kid friendly" name, like "Bubbles Press" or something. Conversely, Bubbles Press is a horrible name for a company that puts out tomes on financing.
Hey! This is more expensive than I anticipated! Is there start-up capital available?
If you are entering publishing with the idea of getting rich, it might be a wiser investment to buy a lottery ticket. There's just not a lot of money in publishing: margins (what you actually earn of the cover price after expenses) are very thin, fewer people are reading than ever before, and the big publishers have a huge market share... and they aren't interested in sharing.
There's a very old publishing joke:
How do you make a small fortune in publishing? Start with a large fortune.
There's not really any venture capital out there looking for a publishing company. Publishing has a very low ROI (Return On Investment), so your bank is unlikely to be thrilled to invest in your company.
You can get a home equity loan, but think very carefully about this before you take this step.
You can always try the SBA (Small Business Administration).
Check out C. Hope Clark's Funds For Writers website and discover if you are eligible for a grant.
You can try to raise money through crowd-sourcing sites like Kickstarter and Indiegogo. To date, I've only seen one person successfully raise the capital necessary for a book, but that doesn't mean that you can't. Be aware that the key to crowd-sourcing is having a BIG network of friends who are willing to chip in some money (and they have friends who are also willing to chip in).
Family and friends might want to risk investing money in your publishing company. Make sure you have a firm agreement in the form of a contract. Call your lawyer for this.