Most creative professionals start their businesses without doing anything more than accepting the first freelance project offered. That is, they don’t bother to do anything about forming a legal entity like a corporation. That’s fine; if you don’t do anything and you work solo, you are a sole proprietor. After that first project, if you continue doing business, getting projects, cashing checks, you probably won’t think about your business structure any further.
At least for a while.
One day, you, the now-successful creative pro hires an accountant to do your taxes and that CPA tells you you should incorporate or form an LLC. The accountant is concerned about the relative tax burdens and, often, it does make immediate financial sense to form an entity; that is, you can save a bundle on your taxes. But, the accountant doesn’t (probably) know about the copyright ramifications, and (usually) neither does the average creative pro.
Yes, there are copyright ramifications.
Overall, there are a whole host of legal issues to consider when it comes to potentially forming an entity. Most people focus on the tax issues, and that makes sense, but there are other legal issues and I highly encourage anyone considering forming an entity to talk to a lawyer before taking that step. Anyway, for this post, I’m only going to focus on the copyright one as it is most often totally ignored, and it shouldn’t be.
So, let’s imagine you have formed a single-member LLC and, as per your CPA, you’ve made yourself an employee of that LLC. Your tax bill thanks you. Now, however, when you make your art (whatever kind of art you make–doesnt matter), who owns its copyright?
If you said you do, you’d be wrong. Even though you are the only member of your entity (the LLC), it’s that entity that owns the copyright in the art you make as an employee of that entity. It’s an automatic work-made-for-hire. No writing required.
Well, I hear you saying, but I am the entity so it’s the same thing. Nice try; but, under the law, no, you aren’t and no, it isn’t at all.
First, since the entity is now the author of the work, the length of the copyright is no longer life of the author plus 70 years. A copyright authored by an entity lasts either 95 years after its first publication or 120 years after its creation, whichever is shorter[1]. By the way, there is an exception to this to get back to the authors death +70 years length, but it requires more paperwork and I know how much y’all love paperwork.
Second, when you register that copyright, you need to do it correctly. You have to name the entity as the author and the claimant because you, as an individual, by law did not create and do not own the copyright. While screwing this up doesnt necessarily totally void a registration, it certainly will be an issue if you ever get infringed. You (and your lawyer) don’t want to have to fight about the validity of your registration. I’ve seen it in cases and it could result in a great case becoming a loser. Remember, if you sue for infringement and lose, you might end up being required to pay the other side’s attorneys’ fees and costs; you don’t want something like this to scuttle your otherwise watertight ship.
Third, let’s say you get hit by a bus and shuffle off the mortal coil, who gets the copyrights your entity owns? And what about existing licenses and royalties based off those copyrights–who gets the money? It’s not so easy, if you havent planned ahead. Do you have a succession plan in place for your entity?
None of these issues are insurmountable at all. For example, you can have a writing that keeps the copyrights created after the entity is formed as your own (if you want to do that and there are reasons to do that, or not). Overall, the issues beyond the tax ones that come up when you form an entity, including copyright ones, do require some thought and there are decisions that need to be made and new processes need to be learned if you decide to go ahead and incorporate.
Don’t go it alone and hope it all works out–thats a lousy business strategy. Talk to your own attorney and get good, personalized advice.
[1] 17 USC 302(c).