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I have heard of some (rather successful) writers incorporating - that is, creating a corporation of which they are the sole member. What are the potential advantages (or disadvantages) of doing this?

As this probably varies a bit by location, I am specifically interested in how this applies in the United States.

Also, I know this veers rather close to being a legal question, but I am not asking for legal advice, nor am I asking if I should incorporate. I am merely wondering why people consider this option. Obviously someone seriously considering this would want to consult a lawyer and/or accountant.

If people still think this is "too legal", we can talk on meta or chat.

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Officially, the reason to incorporate is to protect your personal assets if someone decides to sue you over your writing. If you're incorporated, they would instead have to sue the corporation, and your personal property can't be touched.

My own reason for incorporating was to get access to only-somewhat-ridiculously-priced health insurance. Buying health insurance is a pita if you're self-employed. In California, though, corporations (with two or more employees) are what's called “guaranteed issue”—i.e., insurance companies have to offer you a plan. The two employees of the corporation just happen to be my husband & myself, allowing us access to insurance options we couldn't otherwise get.

There are also some advantages in terms of non-fiction writing opportunities. Corporations these days are very leery of hiring freelancers who might appear to be employees, and they're more likely to hire you if they can pay a corporation.

For an individual who writes fiction and doesn't have serious assets? I'm not sure what advantages there would be, if any.

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  • 2
    Very interesting comments about insurance.
    – JSBձոգչ
    Jan 15, 2011 at 0:58
  • In most countries, the social insurance advantages run the other way: here in Germany, I'm enrolled the "Künstlersozialkasse", which is a subsidised social insurance program for "creative" workers: it's easier to enroll if you are self-employed and run your accounts on a cashflow basis (i.e., not P&L).
    – Charles Stewart
    Jan 17, 2011 at 7:19
  • "Corporations these days are very leery of hiring freelancers who might appear to be employees" - There are very clear rules pretty much everywhere governing this. Britain has the rule that if more than 1/3rd of your income in a tax year comes from a particular company, then you count as a part-time employee. I haven't heard of anywhere that has a harsher rule than this. Germany is absurdly lax about this. Do talk to a tax advisor about this.
    – Charles Stewart
    Jan 17, 2011 at 7:22
  • @Charles - you wrote In most countries, the social insurance advantages run the other way — me, I would have phrased that as "In all civilized countries, the social insurance advantages run the other way" (sigh). Don't get me started…
    – Dori
    Jan 17, 2011 at 7:31
  • @Dori: I should have said "in countries with social provision" - in Russia, say, it doesn't really matter either way. "civilized countries" - well, the US is civilized, it just has a different notion of civility...
    – Charles Stewart
    Jan 17, 2011 at 7:41
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Not sure how much the insurance thing applies outside of California, although that would be an important consideration there.

Otherwise, keep in mind that corporations are subject to a different tax structure and are harder to setup than other forms of incorporation including limited liability companies, or LLCs, which offer the same liability protection as a corporation.

Also, you will want to have some form of business organization, even if it is just a sole proprietorship, so that you can use a tax ID number for reporting purposes. Otherwise, you have to give out your social security number to everyone you earn more than $400 from.

I wrote up a thing about it in more detail on one of my sites a while back. (Hopefully linking via the word "thing" keeps anyone from freaking out about it being some sneaky SEO trick.)

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  • While LLCs are not officially corporations, in practice they're functionally equivalent. For instance, the IRS doesn't have LLC-specific forms; instead, most LLCs just file as corporations. Also, sole proprietors don't need EINs, as they can just use their SSN.
    – Dori
    Jan 17, 2011 at 21:31
  • You CAN use your SSN, but that isn't a good idea. A successful freelance writer, for example, can write for dozens or even hundreds of clients per year. How many places do you want to give out your SSN? Also, LLCs cannot file as corporations. Only S-Corp and C-Corp can file that way. The IRS forms allow for an LLC to file as a partnership (taxes like an LLP) or as a "disregarded entity" (taxes like a sole proprietor).
    – ArcticLlama
    Jan 28, 2011 at 16:16
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It's usually about taxes and protecting your assets. A corporation is a person under the law, so it can be sued and can defend itself and pays it's own taxes. If you set up a corporation, you become an employee of your corporation and it pays you a salary. It also pays the gov't a share of your employment taxes.

One way to get the benefit of asset protection, without the hassles of paperwork requirements that come with corporations, is to form an LLC, or limited liability company. The IRS will, if you tell it to, treat your LLC as a "disregarded entity" -- which means you are taxed as though you're a sole proprietor, report your business income and expense on schedule C but still get the legal protections that come with having an LLC. The IRS will, also, at your request, treat the LLC more like a corporation.

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