This is a modified excerpt from a book I’m working on called The Business of Freelance Comic Book Publishing. It examines the utility of forming a company for your freelance work. While this can’t be taken as legal or financial advice, it can help you decide if and why you might want to incorporate your business.
The clients of a freelance comic creator are often well-known companies. Archie, DC, Marvel, Penguin Random House and hundreds of other companies often use freelance talent to produce comics. But you can also be a company, even if you are working alone.
The advantage of this relationship goes beyond optics. The business and legal relationship with your clients, the amount of taxes you pay, your protection from legal attacks and your perception in the market can all be influenced by your decision to establish a company for your freelance business.
What is a Company?
A company is an artificial person, established by the laws of a specific state or country, formed to operate a business enterprise. A company does not require a building, an office, a logo, or any of the outward symbols of modern corporations. It does require compliance with the laws of the state where the company was formed in terms of its creation and its ongoing business. There are several different types of companies available in most states of America, and even if the corporate form that you are looking for isn’t available in your state, in many instances, you can live and do business in one state and form your company in another state.
Why Should You Form a Company?
There are three major legal and financial benefits of forming a company. The specific impact of each of these benefits will be based on the type of company you choose to form, but in general, companies have the following main advantages:
Liability Protection: is designed to protect your personal assets if your business runs into debt. For example, if you order a large print run on behalf of your client and then you fail to pay the printer on time because your client didn’t pay you, the printer can sue to recover the unpaid fees. Depending on what kind of company you form and how closely you conform to the rules of your state, the printer could only come after the assets owned by your business and not your bank account, car, or house.
Tax Advantages: Some types of companies can claim tax deductions for certain business expenses. A tax deduction reduces a person’s taxable income, which can reduce the amount of tax they have to pay. For example, let’s say you make $50,000 a year. You attend a convention and pay $2,000 for flights, hotel, meals, and other related costs. As an individual, you wouldn’t get any benefit from spending that money beyond the pleasure of being at the con. Depending on the company you create, some or all of that $2,000 could be deducted from your income which could lead to more money coming your way at tax time.
Legal status: Your professional standing is defined by your relationship with your client. Depending on the way you work, you can be considered either an employee or a freelancer. There is a substantial difference between the two titles. While you and your client may be very clear about your role, the reality is that you don’t get to make that determination. The IRS and other government agencies have to power to determine your status relative to your employer after your work has started.
This sudden shift in your legal situation can have several negative consequences. First, if your client is suddenly forced to pay for your employee benefits or alter your compensation, they may reduce your rate to cover the taxes they have to pay on your behalf, or they could stop working with you altogether. Second, you could lose all of your self-employment deductions, and you may have to file a completely new tax return. Finally, this can create confusion and uncertainty around intellectual property rights for the work you completed for your client.
This legal status minefield is further complicated by the fact that the tests to determine whether or not you are an employee or a freelancer are often confusing and subjective, so there are no magic words you can use or silver bullet you can employ to ensure your freelance status. Your best option is to stack the deck in your favor in terms of your behavior towards your client, your financial situation, and your day-to-day working connection with your client.
Behavior: You are more likely to be considered a freelancer if you offer your services to the public and not a single client. This includes only taking project-based work and not an ongoing engagement, signing explicit work-for-hire agreements and refusing to sign any non-compete contracts.
Finances: You are more likely to be considered a freelancer if you operate your business as a separate entity from your employer. This means paying your own expenses and showing profit and losses from multiple clients if possible.
Connection: You are more likely to be considered a freelancer if you have an independent business existence from your client. This means that you and not your client controls how, when, and where your work is done. It also means working for multiple clients and setting up a legal business entity apart from your clients, which means forming some type of company.
Have fun with your comic.
Gamal
If you’d like to learn more about freelance comic book publishing, subscribe to the Comics Connection newsletter for blog updates and information about the upcoming Kickstarter campaign.
If you have questions about the business or legal aspects of your comic book publishing and you'd like a free consultation, please contact me and we can set something up that fits in with your schedule.
PLEASE NOTE: THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. IF YOU HAVE AN ISSUE WITH YOUR COMIC PROPERTY, DISCUSS IT WITH A QUALIFIED CONTRACT ATTORNEY OR CONTACT C3 FOR A FREE CONSULTATION