Setting up Business Structure for Book Project

Dear Tax Talk, Several writers are collaborating on a nonfiction self-published book. Profits will be used first to offset startup costs, then profits will be distributed to writers according to their contributions. I plan to open a business account to which the profits will be deposited and from which I will cut checks on a quarterly basis.

What's the simplest business structure to use to set up this venture? Would an LLC work? Someone I know suggested setting up a sole proprietorship. I'm wondering if the business account should be in my name or in the name of a business and how the taxes would work. Where do I need to register this business?

You can see I'm rather green about business matters. Thanks for any help you can provide. -- Joseph

Dear Joseph, I subscribe to the KIS philosophy, and to keep it simple would mean you operate as a sole proprietorship. A sole proprietorship does not require you to set up any formal organization. In its most basic form, a sole proprietorship is just another source of income that may have some associated expenses or deductions. Tax-wise, it's quite similar to an LLC. That is, you're basically in the same position as an LLC member when it comes to your overall tax bill. By overall tax bill, I mean income, self-employment taxes and the availability of tax deductions and credits.

As a sole proprietor, you can function under your own name or create a fictitious name. A fictitious name could be the title of the book (it would still be considered fictitious even though the book is nonfiction) registered to you as the individual owner. In most states, fictitious names are registered with the Secretary of State's Division of Corporations. A fictitious name registration basically makes a public record of the persons behind the name for purposes of process service (i.e., if someone sues you).

When the book becomes profitable and you begin to distribute moneys to the other authors, you'll need to secure their tax identification numbers by requesting they complete IRS Form W-9. If you pay them more than $600 during the tax year, you'll need to issue them a Form 1099-Misc. From the income you receive on the book, you would deduct your startup costs (in the year the book is published) and amounts paid to your collaborators. You would pay income and self-employment tax on the net profits.

Good luck on your book.

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