Category Archives: Legal Issues

My friend said to get an LLC

Business Jace Killan Taxes The Writing Life 1 Comment

19389749In my work, I’ve helped many people set up new business ventures. Proper entity structure is extremely important as it will have liability and tax implications. When discussing a new entity structure, I often hear, “My friend said to get an LLC.”

Regardless of the reasons we write, money will come if we’re good. As in any venture, those that make money need concern themselves with two things:  Liability and Taxes.

Someone whose interviews were used in the novel Memoirs of a Geisha sued the author for $10M. Another author sued Dan Brown for stealing his ideas and using them in the Da Vinci Code. Penguin Publishing sued a group of authors who failed to produce anticipated manuscripts even though they had cashed their advances. Liability can exist anywhere a contract exists.  And unfortunately, lawsuits seem to follow fame and fortune.

In the US, income taxes can claim more than 50% of an author’s earnings and in certain circumstances estate taxes can claim upwards to 50% of an author’s legacy when he/she dies. Taxes were discussed earlier this month here and here so I will only touch on them briefly.

Proper entity structuring can help with both liability protection and minimizing income taxes, and can be used extensively in good estate planning (though I won’t be discussing estate planning here).

There are a few different entity structures to consider. Each has pluses and minuses, its just a matter of finding what works best for your situation.

A sole proprietorship is the simplest of entities, it basically means that the company is you and you are the company. The work could be done under your name, or maybe a DBA (doing business as). 

According to the Small Business Association, a sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.

From a liability standpoint there is no protective veil between your business and your personal assets in a sole prop, meaning, if you are found liable in your business, anything you own personally can be used to satisfy that liability.

From a tax standpoint, any earnings of a sole prop are typically recognized as earned income so they are taxed at the standard income tax rates and typically require some self-employment tax as well.

A partnership is a business owned by two or more people. Often these have agreements dictating the cooperation of the partners and the shared liabilities.  I have seen businesses where a partner was held liable for the actions of another partner, however if the documents are structured appropriately, a veil can exist between the business and the individual partner. Taxes in a partnership are most often treated as they are in a sole prop.

There are a couple different types of corporations we will discuss here. A C Corporation is probably the most common. A clear veil exists between the company and the individual, though a lot of paperwork and documentation go into maintaining this veil. A downside for the C-Corp is the tax structure. A C-Corp’s earnings are taxed first at corporate income tax rates, then as the earnings are passed on to the company owners, they are taxed again at the individual level as dividends.

An S Corporation is a type of corporation designed to avoid the double taxation feature of a C-Corp. Earnings of the S-Corp are not taxed at the corporate level, instead passed on to the individual and recognized as either earned income or a combination of earned and ordinary income. An S-Corp structure may help minimize taxes when compared to a sole proprietorship or C corporation. A corporate veil exists between an S-Corp and the individual as long as proper accounting, governance, and documentation exist.

So what is an LLC? LLC stands for “limited liability company.” Each state (in the US) has its own laws regarding LLCs and how they ought to operate.

An LLC is designed to fortify the corporate veil between individual and business liabilities. The owners of an LLC are called Members, and those individuals that run the LLC business are called Managers. An LLC’s operating agreement usually limits the liabilities of the Members and the Managers, creating a shield to protect any of the individuals from being held personally liable for the company’s liabilities.

Of course in order to maintain this shield of protection, certain practices must be maintained like those discussed earlier this month here and here.

The beauty of the LLC and probably why your friend suggested to get one is that along with the liability protection, you can elect to be taxed as Sole Proprietorship, a Partnership, a C Corporation, or an S Corporation based on how the entity is established. 

In an interest of self preservation let me just add a final note. The information contained herein is for informational purposes and is not legal advice or a substitute for legal counsel. IRS CIRCULAR DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

Editorial Comment:

The Fictorians are aware that many of our readers are not United States citizens, and consequently conduct their lives and businesses under statutes and regulations that are markedly different from those in the U.S.A. Most of our posters for this month are American, and the few who aren’t are Canadian, so the perspective in this month’s posts will of necessity be somewhat limited. Nonetheless, if you are one of those readers from somewhere other than North America, as you read of issues in our laws and practices, perhaps they will make you mindful of things you should be aware of in your situations as well.

The Basics of Copyright

Business Guest Posts Legal Issues The Writing Life 1 Comment

A guest post by Scott Boone.

Why are we talking about copyright?

As a writer, copyright is one of your primary assets. I’d put it right next to your reputation. If you are trying to build a career, copyright provides you with a legally enforceable means to reap monetary benefits from your work. It also gives you a high level of control over what is done with your work. Realize that what that means is that once you give up the copyright (by transferring it to someone else), you lose both, and you are limited to whatever the contract gives you.

What is copyright?

Copyright is a set of rights in a work of authorship. The exact scope of those rights differs slightly from country to country, particularly with respect to limitations and to moral rights, but the basic ones are the same. In the US, copyright gives the owner the exclusive right to reproduce the work, to prepare derivative works based on the work, and to distribute copies of the work. US copyright also gives additional rights depending on the types of work: to publicly perform the work (conduct a book reading, put on a play), to publicly display the work (hang a painting in a gallery), and to digitally transmit an audio work (streaming a sound recording).

These rights are “exclusive.” That means that they give the holder of copyright the power to prevent others from doing them. They do not affirmatively give the copyright owner the right to do them. So, the owner of a copyright in a work might not be able to distribute the work if some other law made it illegal to do so (e.g. because it was obscene or defamatory).

The rights last for a long time. In most countries, the duration is set at the life of the author plus an additional 70 years.

Importantly, copyright can be transferred in small bits and pieces. In other words, you do not have to transfer all the rights as one unitary block. You can limit a transfer by time (e.g. 6 months from publication for a short story) or by geography (e.g. North America) or by type of copy (e.g. hardback or trade paperback or eBook). The key is not to give away more than what a publisher is paying you for it.

 What does it take to get copyright?

For the vast majority of countries, you simply need to either (1) create the work or (2) create the work and fix it in a tangible medium of expression. That’s the standard set for countries that are members of the Berne Convention (166 countries and the Holy See). That’s it. Now, the US gives you some nice benefits for doing more (registration and notice), but it’s not required for obtaining copyright.

 US Copyright Law

I’m going to focus the rest of the discussion on US copyright law. Partly because that is what I know best and partly because the US cut its own path in copyright law for a long time and so has some differences in its law and lingering confusion among its creative professionals. Essentially, most of the rest of the world agreed on the basics of copyright in the late 19th century and the US dragged it feet screaming it didn’t want to play for the better part of a hundred years.

 Registration – Not required, but recommended

Registering your work with the Copyright Office is not required for you to obtain copyright. Remember you have copyright in your work as soon as it is fixed in a tangible medium of expression. However, registration does convey significant advantages that you may want to consider. First, after five years, registration of the work serves as prima facie evidence in a lawsuit that the registrant owns the rights in the work. In other words, it shifts the burden to the other party in the lawsuit to prove you don’t own the copyright. Second, timely registration of your work makes statutory damages available to you in an infringement lawsuit. Actual damages are often quite hard to prove. So having the option of statutory damages, where the court just sets a dollar amount for each work infringed, can be quite helpful. Third, timely registration also makes attorney’s fees available if you prevail in an infringement suit. If you win a suit, the infringer has to pay your attorney’s fees. The latter two benefits can make a huge difference in whether it is financially worth it to pursue an infringement claim. They can also serve as a large sword hovering over infringers, making them more amenable to settlement.

So what constitutes “timely registration”? A published work is timely registered for these purposes if it is registered either within three months of first publication or before the infringement begins. An unpublished work needs an effective registration date prior to the infringement.

 Copyright Notice – Not required, but useful

Copyright notice is either the word “copyright” or the copyright symbol (a ‘c’ in a circle) followed by the date of first publication and the name of the copyright holder.

Before the US became a signatory to the international copyright treaty, the Berne Convention, copyright notice used to be required for obtaining any federal copyright protection. If you published the work without copyright notice, it was dedicated to the public. In other words, it was not protected by copyright and was free to all. However, since 1989, the US has not required copyright notice. This was a part of the US harmonizing its law to the international standards set by the Berne Convention.

But you still probably want to put copyright notice on your published works. First, it tells the world that someone is claiming the rights in the work. There are still people out there who think what they find on the internet is free. Second, copyright notice removes the statutory defense of “innocent infringement,” a defense that can lessen damages in an infringement suit. Lastly, it is cheap. In fact, it’s pretty much free. So why not do it?

You will note that I did say “put copyright notice on your PUBLISHED works.” I specified published works because you can create confusion about the works publication status if you put copyright notice on something that has not yet been published. If you submit a work to an editor with a copyright notice on it, the editor may think it has been previously published because the industry practice is to use copyright notice after publication. At the very least, the editor will think you do not know how the industry works or think they may have a potential problem with prior publication. Do you really want to create more hurdles for yourself?

 

Guest Writer Bio:
M. Scott Boone lives in Atlanta, Georgia, where he works as a law professor in order to support a clowder of cats. He writes about legal issues affecting writers at writerinlaw.com. When not writing or teaching, he is a self-proclaimed soccervangelist.

Intellectual Property – What Is It?

Business Guest Posts Legal Issues The Writing Life 1 Comment

A guest post by M. Scott Boone.

One of the very first things I teach my first year law students is the difference between what a layman thinks property is and what a lawyer thinks property is. If we were to ask most non-lawyers what property is, they would give us examples like a ring, a car or a parcel of land. However, a lawyer (or at least one that has taken my property class) would say that property is a set of rights in a thing. So property is a bundle of rights that attaches to the ring, the car or  the parcel of land.

Intellectual property is also a bundle of rights, but unlike personal property (the rights in a car) or real property (the rights in a parcel of land), the thing to which the rights attach is not physical. Instead the thing is an intangible such as a work of authorship, an invention, or a source identifier.

Because intellectual property covers an intangible while personal property covers physical objects (called chattels), both types of property can be embodied in the same object. For example, a book is a physical object made of paper, ink and binding materials. As such, an individual can have personal property rights in it. At the same time, the book represents an embodiment of an intangible work of authorship. Thus, copyright applies to it as well. Note that each type of property is frequently owned by different people.  You might own the personal property rights in the book, but the author or publisher still owns the copyright rights in the work of authorship.

The three primary types of intellectual property are copyrights, patents, and trademarks. Trade secrets are a fourth type of intellectual property, though you will see debate as to whether they are better characterized as property or torts. Rights of privacy and publicity are torts often listed as types of intellectual property. Finally, there are a number of very subject matter specific types of intellectual property, referred to as sui generis protections; examples include federal protections for the designs of boat hulls and semiconductor chips.

Let’s look at the basis of the three main types: copyrights, patents, and trademarks.

Copyright subsists in any original work of authorship fixed in a tangible medium of expression. It is based almost exclusively on federal statutory law, primarily the Copyright Act of 1976. Examples of types of works that copyright attaches to include music, written works, visual art, computer software, and audiovisual works.

Copyright provides a set of six exclusive rights – to reproduce the work, to prepare derivative works based on the work, to distribute the work, to display the work publicly, to perform the work publicly, and to transmit a digital audio performance of the work. The last three apply to only certain types of works. Creation and fixation are the only requirements for obtaining copyright, but registration of the work and copyright notice placed on copies of the work can provide additional benefits.

Patents are grants of exclusive rights and can be gained in the US only through an involved application process before the United States Patent And Trademark Office. The US has three types of patents: utility, design and plant. Utility patents are what people typically mean when they say patent; for inventions that are novel, nonobvious and useful, utility patents provide the exclusive right to make, sell, use, or import the patented invention.

Both copyrights and patents provide exclusive rights. That doesn’t mean that they are kept behind a velvet rope and your name needs to be on the bouncer’s clipboard. What it means is that what you get is the right to exclude others. This distinction is best understood through what exclusive rights are not. Exclusive rights do not provide the holder a right to use the work in and of themselves. For example, you might have a right to exclude others from making copies of your book but might not be able to sell copies yourself if your book violates some other law (for example, if it is defamatory or obscene). In the case of patents, you might have exclusive rights to a new pharmaceutical drug but not be able to sell the drug because you do not have FDA approval.

The purpose of both copyright law and patent law is to create incentives that ultimately benefit society as a whole. They exchange private property rights for the creation and publication of works of authorship and inventions. Essentially, both bodies of law say, “If you put in the work and tell us about it, we’ll give you exclusive rights that you can exploit in the market.” Note that modern US copyright law has removed publication component as a requirement for gaining copyright.

Trademarks serve as identifiers of source. In other words, a mark (in the broadest sense) is a word, image, product configuration, or product package that communicates to a consumer the source of a product or service. Examples include the term Xerox, the apple silhouette with a bite out of it used by Apple Computers, and the curved shape of glass Coca Cola bottles. Trademarks originated in the law of unfair competition but are treated very much like property today.

The owner of a trademark can stop someone else from using the same mark or a similar mark that is likely to cause consumer confusion as to the source of goods or services, and, in the case of famous marks, is likely to dilute the mark’s distinctiveness. The purpose of trademark law is to prevent consumer confusion and to allow entities to develop goodwill in their provision of products and services. The latter is then understood to create incentives to provide higher quality goods and services. Trademark rights are obtained by using a distinctive mark to identify the source of goods or services. As with copyright law, registration is not required, but registration can convey significant advantages.

Guest Writer Bio:
M. Scott Boone lives in Atlanta, Georgia, where he works as a law professor in order to support a clowder of cats. He writes about legal issues affecting writers at writerinlaw.com. When not writing or teaching, he is a self-proclaimed soccervangelist.

Record Keeping, Part Two: . . . But Necessary

Business Contracts Legal Issues Taxes The Writing Life No Comments

Okay, now for a couple of specific issues:

Tax Records (U.S. version)

It is a commonly held belief that the IRS requires you to keep your tax records for seven years.  Actually, according to the records manager of a company I used to work for, that’s not quite the case.  According to her, the IRS regulations require you to keep your records for three years.  However, if they do decide to audit you, they can go back seven years.  And since no one would want to depend on an adversary for records concerning his or her own interests, everyone just automatically keeps seven years’ worth of records.  And just so we’re clear, that means not only your tax filings, forms, and schedules, but also all of the supporting documentation:  receipts, 1099 forms, spreadsheets, QuickBooks reports, e-mails that pertain to the taxes, and anything that would be necessary to defend deductions or interpretations, most especially any communications from the IRS.  In this area, it’s better to err on the side of caution; if you’re not certain you need to keep it, you should probably keep it in the file.

Contracts (U.S. version)

Every state in the U S has regulations that define certain types of records which businesses must keep, even self-employed businesses like writers. As long as you as a writer are a one-person shop, most of them won’t be an issue.  If you get to the point, however, where you are paying people to perform business functions for you (accountant, secretary, researcher, etc.) then you need to educate yourself on what your state requires.

There is one type of business record retention about which even the one-person writer shop needs to know, and that is your contracts and agreements.  Almost every publishing contract between an author and a publisher or a publishing platform will contain a clause that says that in the event of disagreement between the parties, the contract is to be interpreted under the laws of a certain state.  Most of the traditional publishing contracts indicate they will be interpreted under the laws of New York.

Obviously you want to keep the contract or agreement as long as it is active; in other words, as long as there are obligations between you and the other party which must be observed or performed.

But at such point in time as the contract has basically terminated—all parties no longer owe anything to anyone under its provisions—what do you do with it then?

Hint:  don’t throw it away.

Every state has statutes or regulations that stipulate how long such a terminated contract must be retained by the parties subject to it.  Here’s the summary:  if you or your publisher reside or work in Louisiana, or if the contract says it will be interpreted by the laws of Louisiana, the rule is to hold it fifteen years past termination.  All the other states have settled on a term of five years.

In states other than Louisiana, the only caveat I would raise would be if the contract had provisions that dealt with finances, you should probably keep it until the last year it operated has passed its seventh year tax retention.

And finally, the contract file should contain anything that would have a bearing on the intent of the parties in drafting the agreement, as well as anything that might bear on how it should be interpreted.  So yes, you may need to keep some letters or e-mails to support that contract.

In summary: be organized, back everything up to protect yourself, and manage your records.