Turning your Blog into a Business – what you need to know

This post will address the steps required to turn your blog, or other cottage industry into a business.  I am going to dig into matters such as Incorporation (entity type, and location) monetization strategies and pitfalls.  I will preface this with the reminder that I am not a Tax Professional, nor am I offering legal advice, I am just sharing my experience garnered from establishing several profitable businesses in the US.

Considerations

Turning your blog into a business a decision that can be made at any time, there are serial ‘blog’ entrepreneurs who start a new site from the beginning with a clear monetization strategy, and there are those who decide that they have invested sufficient time and effort into their blog and wish to capitalize on this.  If you are in the latter category of blogger you will face your first series of challenges here, and they will be:

Don’t be a dick to your readers

I see this one constantly.  People spend incredible amounts of time and effort building a loyal base of support, readers come to trust you for your excellent, impartial opinions and ideas.  Then, monetization occurs, and you decide to advertise.  Instead of offering the best advice you take your credibility and hope to sell crap based on it.  You select offers and deals that are not in the best interest of your reader- for example promoting a Credit Card deal that is inferior to what they could otherwise obtain, but you say it is excellent because you get a commission on every reader you convert.

This is a short term race for money, in the process you burn your reader, betray their trust, and basically are saying that money is more important than their well being.  This process will generate money for a while, but your new business has just started cutting the legs out from everyone that reads it, and you will not have a sustainable operation.

Hate your job, hate your blog

When any hobby becomes a business it can turn it from a labor of love to a job you hate.  Many people think that they enjoy the blogging lifestyle of drinking coffee and making tons of online income, and can give up their day job.  However, once you switch off  your primary income source you might find that you hate blogging too.

Remember, it is not that blogging is so much better than what you had before, it was primarily that you were beholden to someone else.  Running your own business can create those same feelings of resentment if you are overly dependent on money from the site, and fall out of love with what you are doing.

Still want to turn you Blog into a Business? OK – here goes

Incorporation

This one stumps most people, since explanations are typically fluffy and don’t help at all, therefore I am going to try to explain in more practical terms regarding the entity types.  However, I would not bother to incorporate until I had revenue, or sufficient (genuine) start up costs.  The latter would never apply to me because I have never set up a business that lost or cost money, and I don’t advise you to either, lets look at Entities:

LLC – Limited Liability Company

An LLC is becoming the most popular form of company, it offers a degree of separation between personal and business finances, and to some degree offers protection to the owner (the limited liability part relates to how liable you are for business related issues) however, all Entities have a degree of liability protection, and frankly it is a lot less than you might think.  Typically the value of a LLC is that it provides the documentation required to apply for a Federal Employment Identification Number (EIN) which is then used to establish Business Bank Accounts.

For Tax purposes, a LLC is most frequently used as a pass through entity, similar to an S-Corp.  In that sense, should you earn a $50,000 salary from your primary job, and the Blog LLC earns $5,000 you would add that onto you salary and be earning $55,000.

The primary advantage of any business entity would be the ability to offset business income with business costs, so should that blog LLC earn $5,000 and you have genuine business expenses, such as the need to attend a seminar, or buy a laptop for writing upon, you could use these expenses to pull down the $5,000 income from Blog LLC, therefore meaning less money goes onto your salary and you pay less tax.  This applies to S-Corps and C-Corps also.

 S-Corp

An S-Corp is not really a business structure by itself, rather a manner in which to elect to pay your taxes on the business income.  You typically get a LLC or other entity as the corporation, and state that you wish to be taxed in a pass through manner (just as highlighted in the example above) the S-Corp has several advantages when it comes to distributing funds from your business income, the best being the ‘distributions’ aspect where you are allowed to take a dividend like distribution,which is not subject to FICA payments.

EG – if your blog earned $5,000 you could offset $1,000 for a laptop, and then from the remaining $4,000 you could pay yourself $2,000 as W2 income and $2,000 as a distribution, the latter would be subject to tax, but not employment tax.  You must be careful with such distributions as the IRS doesn’t like it when you pay too little employment tax.

C-Corp

C-Corps are the grand-daddy of Entity types, many people avoid them because they are told they have complicated filing demands, however they are just as easy to operate as an S-Corp and both require the filing of just the 1120 (or 1120 s) as a corporate return.  The C -Corp is also intimidating to many as it is the subject of Double Taxation.  People think that means they pay double the tax, but it isn’t the case.

Double Taxation means that the corporation itself is taxed (at the corporate rate) but if you are an employee of the corporation your W2 income is deducted from the income.  EG C-Corp with $5,000 if you pay yourself $2,500 in Salary that amount will go onto your AGI and taxed at your current rate of personal income tax, the remaining $2,500 would be taxed at the current rate of corporate tax (2013 is 15% for the first $50,000 in revenue).

The advantage of a C-Corp is that you do not need to pass through the income to your Pay check every year.  That means you can set up a C-Corp to hold the money that you earn from the blog, and distribute it later, this can defer income tax.

State of Incorporation

When thinking to incorporate you may have heard that Delaware is the best State, because they are favorable to business owners.  The reason behind this is that Delaware has a reputation of defending and protecting small businesses when they are under litigation.  However, a greater consideration in your State should be Taxation: South Dakota, Wyoming, Washington, Nevada.  Since these States do not demand corporate tax you get to keep a lot more of your money.

If you live in any of the above Tax advantaged States then you are going to be able to keep more of your business income.  If you do not live there you can still incorporate in that state, but your home state will want a piece of the pie too.  Typically, if there is anything that connects your business to that state they will demand that register and file in both States.

This will not mean double taxation (since one of the States does not Tax) but it means more cost and more work.  Being a resident of State and owning a business in another State is allowed, and it doesn’t necessarily mean you will have to register/file in both, but you can believe that your resident state will be looking for ways to get your money, so be prepared for investigation if you seek to incorporate out of state and not file in state.

Should they find you liable for Resident State incorporation and you did not do this, be prepared to pay the owed taxes on your income, and penalties too.  This is a risky move.

State Of Residence for Incorporation – Personal Income Tax

Building on the above.  If you are incorporated in Wyoming but resident of NYC and you pay a salary through any type of entity, you will be required to pay State/City taxes on your W2 income as a resident employee, so you wouldn’t save money.. the only way to hope to avoid taxes is if you hold the money in a C-Corp in Wyoming et al, pay the Corporate Tax annually on your income there, and should you ever move away from your home State to one with less or no Personal Income Tax then pay out.  Again – risky business and I am including this just to let you know that a lot of ideas about tax avoidance have already been figured out by the people collecting the money.

Registered Agent

A Registered Agent is required to be present in the State that you are incorporated in.  This person is responsible for collecting official correspondence.  If you are incorporated in your own state you may act as your own Registered Agent, it just means you can sign for a letter if it arrives via Fedex, for the most part, though it could mean more if there is an investigation into your company and they send official agents to your place of business.

People with offices and reputations that might be harmed by such a visit would be more inclined to have the Registered Agent someone else. If you elect to incorporate in a foreign state (such as Wyoming when living in NYC) then you will need to retain a Registered Agent for that state, and either elect yourself or a second Registered Agent for NYC if you are filing there also.

Applying for an EIN

The EIN from the IRS is a number similar to a Social Security Number, it identifies your entity for tax purposes, gets you the Bank Account, and also will be needed by your Monetization partners for payment purposes.  When you set up a business online you will be offered this service for a horrendous fee, something like $30-$100 (or more) for the service.  Do it yourself, here, free instead using the IRS Assistant just make sure you know what type of Entity you plan to establish, and get the name of it correct from your Articles of Incorporation to save any further headaches.

Monetization Strategies

In order for any business to function it requires income.  For a blog to monetize you have limited options available:

Display Advertising

The advertiser use the following terms, which can be reverse engineered to help us understand how to earn money:

• CPM = Cost Per 1000 Views (Roman Number M for 1000)
• CPC = Cost Per Conversion

You can earn money simply from an advert being viewed on your site, both Google Adsense and certain private advertisers will pay in this manner.  For privates you would take your average page views per month, say that is 50,000 and then offer them a fixed number of views for a fixed sum.  EG 100,000 views for $1,000 which would mean that you would, in that case allow an advert to sit on your site for 2 months, and earn the $1,000 regardless of whether the reader clicked through and signed up or not.

You can also earn money on pure click through’s, this is a Pay Per Click (PPClick) approach, rather than Pay Per Impression above.  Google Adsense again is most common for these adverts, they pay you regardless of what the reader does once they bounce through your page.

Pay Per Conversion (PPConv), these are closest in terms of steps to the CPC calculation, what that means is that if you take a reader and fully convert them into a customer by using a targeted advert and tracking code you earn much more than with a Pay Per Click approach.  This is because out of the Click throughs many will not complete the conversion.

Example you get 10 clicks, 2 people sign up:

• PPClick would pay you 10x 50 cents~$5= $5~$50 Revenue
• PPConv would pay you 2x$75 = $150 Revenue

The rate for PPClick is secretive by Adsense, but it is worth noting that they take a lions share of revenue from the conversions and clicks.  The PPConv rate conversely is known to you when you get the advert code.

Watch out for Bad People – you are the buffer when it comes to money

You will encounter people that are not interested in your readers, they only care for conversions.  Be careful not to allow their agenda of selling more adverts to harm your greatest asset, the relationship between yourself and your readership.  A short term influx of cash that destroys your integrity is a mistake too many people make.

Genuine Business Expenses

The goal of a Business is to make a bunch of income, and then reduce the amount of that income with Deductions, just the same as your personal income tax.  However, your deductions must be valid, so excessive action here will be frowned up.  That doesn’t mean that you cannot deduct each and every one of your genuine business expenses, but don’t start writing off everything you can think of regardless of its relation to your business.

Certain expenses are treated differently, such as Meals, where you are only allowed to deduct 50% of the cost, where as some offer different methods of deduction, such as Computers etc which allow you to depreciate the cost over years, or write off in full depending your tax situation.

The biggest and best Business Expense you could hope for would be Retirement Accounts.  Just be aware that certain accounts come with certain rules that can trip you up.  For example I have certain retirement accounts have rules that all employees must be paid the same percentage of salary as I elect.

What that means is that if I earn $100,000 and put $25,000 into my Retirement Plan, reducing my taxable income in the process to $75,000 being added to my salary rather than $100,000.  I would have to match the same Percentage for my employees.  So if you decided to hire an employee to work for my Blog, paid them $40,000 as a Managing Editor, they would have to get $10,000 more paid into an Plan for them. Making their cost of employment rise considerably.

Do your research if you plan to establish a Retirement Plan for your business, and make sure you know what you are getting into.

When to Incorporate

The answer differs based upon the needs of the individual.  You can take income from your monetized blog without it being Incorporated as a business, but things like the Business Expenses Deduction would not be available.  Other factors that might influence you to Incorporate would be business partners for monetization who demand a Business Entity to be in place prior to working with you.

Personally, I have never incorporated a Business that did not already make money, though this is not necessary and you can run at a loss, I prefer to see some money come in, then incorporate, assign profit/loss to that business once it is proven.  Taking this route has reduced the startup time, because you can have all the corporate structure in the world, but if you haven’t built a product and brand first its all a waste of time, and frankly this is why most businesses fail.

Remember, the above thoughts are just from my personal experience and understanding.  I currently own several businesses and in my case have elected to operate S-Corps and C-Corps in tandem to help me achieve my financial goals.