Presented By Jon Tandler¹
Independent Book Publishers Association University 2010
New York, New York - May 25, 2010

1.  Creating a Business Plan

A Business Plan is a diligence and planning mechanism, and fosters evaluation, organization, quantitative analyses, and careful thought as to the factors and items which can make your publishing business successful or not. It requires research into various areas, assumptions and realistically assessing your near term capabilities and your long term objectives.

Areas of coverage can include:

• What you plan to write/‌publish and why and to whom you think your books and other publications will be saleable;
• What's the market for your publications;
• Who or what is your competition;
• Why are your expectations realistic, or are they;
• A schedule for writing and releasing your company's publications(s);
• How you will generate, write or acquire content, as the case may be;
• How many books you plan to publish and over what time period;
• How you plan to sell and distribute your books into the marketplace; Potential customers/‌sales and distribution channels;
• Assessment of both print and e-publishing opportunities and channels;
• For e-publishing, how soon after publication will you e-publish (if not right away), who will you e-publish through, how you will try and price the books; and how you will pay your content providers based on the uses to which the content will be e-published;
• Branding - trademark and title diligence;
• What subsidiary rights opportunities do you foresee; how can these be exploited - foreign translations and audio books as examples;
• What you may need - equipment, software/IT, data, interviews, research information, third party content, clearances, contracts, office space (home or not) travel, insurance; supplies; Internet and phone; what these assets will cost (capital requirements);
• Who you may need editorially - researcher, editor, graphic artist, third party clearance firm, indexer and others;
• On the professional side - book keeper, accountant, lawyer, insurance agent;
• On the sales side - marketing, promotions, publicity and distribution; As to fulfillment - paper, printing, binding, shipping and related insurances;
• Financial and cash flow projections (P&Ls for first titles); 12 month P&L - will this make money if you meet ____% of sales projections;
• Overall capital requirements and sources;
• Self funded, borrowing if one can find debt financing or equity financing from third parties;
• Other items;
• Periodic updates
• They're not one size fits all; design and make it work for you.

2.  Choice of Legal Entity, Capitalization and Separation of Assets

     a.  Choice of Entity

i.   Sole Proprietorship.  A sole proprietorship is an individual owning and conducting a business activity in his or her personal capacity; it requires no formal legal organization, there is no limited liability to the sole proprietor, and all income and losses from the activity are taxed at the individual level.

ii.  General Partnerships.  A general partnership is a function of two or more individuals or entities carrying on a business for profit; a written partnership agreement is typically not necessary to establish a general partnership; partners are jointly and severally liable for the debts and obligations of the business; if two individuals in their individual capacity work together and expend monies and resources to publish books, they do not have limited liability as to the debts and obligations of the business.

General partnerships are not typically a preferred method of structuring business organizations today, unless partners themselves are entities and the partnership is in the nature of a corporate joint venture with related entity structuring.

iii.  Limited Partnership.  A limited partnership is a creature of state law, by which a "general partner" controls and manages the business and is responsible for its debts and obligations, with limited partners who have
equity/financial interests, limited voting rights as to certain matters pertaining to the business, and limited liability (their only economic risk is intended to be the investment itself and not personal liability for the debts
and obligations of the business).

These entities are typically governed by relatively detailed agreements (limited partnership agreements) governing the financial, voting and other rights of the general and limited partners. Limited partnerships typically must file certificates of limited partnership with state secretaries of state to establish and make a public record of their existence. These too are not the entity of choice today for small businesses, given limited liability companies (discussed below).

iv.  Corporation.  A corporation is formed under state law with individual or multiple owners ("shareholders"); corporations require formal legal organization and are intended to provide limited liability to shareholders, directors and officers unless circumstances exist which warrant a third party creditor to "pierce the corporate veil".

In a piercing situation, a plaintiff creditor endeavors to convince a court that shareholders, directors or officers should be personally liable for corporate debts. A plaintiff's argument to pierce would be based on one or more factors which point to the owners of the entity inadequately capitalizing the entity, disregarding it and treating the assets as their own to the detriment of creditors, fraud on creditors, not separating out the financial or business or legal workings of the entity from the owner's individual activities and expenses, and other factors a court would examine based on the evidence before it.

Corporations are taxed at the corporate level, except for Subchapter S Corporations; with Subchapter S Corporations the earnings and losses are allocable to the shareholders in proportion to respective share ownership and taxed to them directly.

Subchapter S Corporations have particular requirements to be met as to number of shareholders (not more than 75), U.S. citizenship of shareholders, and no "entity" shareholders (except for certain qualified trusts). Organizational documentation includes Articles, Bylaws, Board minutes and consents, tax and regulatory filings, and likely voting or buy-sell agreements unless there is only one shareholder/owner.

v.  Limited Liability Company (LLC).  A limited liability company is formed under state law with individual or multiple owners ("members"), requires formal legal organization, and is intended to provide limited liability to the members and managers, unless circumstances warrant a "piercing of the LLC veil" (see above factors under Section 2(a)(iv) for corporate piercings) and holding the members and/‌or managers personally liable for LLC debts.

Unless otherwise agreed earnings and losses of LLCs are allocable to members based on percentage interests and are taxed to them accordingly.

Organizational documentation includes Articles of Organization filed with the state, federal tax and regulatory filings, and an Operating Agreement covering the management and operation of the entity and the terms and conditions of the owners' membership interests; for certain items and transactions, consents or minutes akin to corporate papers are appropriate but one benefit of LLCs is that they are intended to be simpler and require less formal governance than corporations; in the absence of an Operating Agreement, state laws governs items as to the management and governance of the LLC.

The other benefit to LLCs is that they have the same tax advantages of Subchapter S Corporations (that is, no taxation at the entity level and earnings and losses directly allocable to the shareholders), yet for small businesses with a limited number of owners they can be easier to organize and have less corporate maintenance and governance formalities going forward.

LLCs are the preferred mode of setting up small businesses in a legal entity in many states today (in Colorado certainly). Single member LLCs for small publishers should be generally simple to properly legally organize and maintain.

     b.  Capital Contributions and Separation of Assets

Consider your business plan and contribute (in exchange for your ownership interest in your entity) a sufficient amount of capital to meet your reasonably anticipated near term business financial needs - until you can generate cash flow to fund the business.

When an individual organizes a legal entity, in order to initially capitalize it the individual can contribute assets in exchange for the individual's ownership interest. Such assets should include some amount of cash/liquid funds and potentially other assets such as office equipment, contracts and intellectual property in order to establish the initial capital of the entity for capital adequacy, business planning and tax purposes.

Separate personal assets and books and records, from business assets and books and records. Do not commingle business and personal assets or related financial items or information.

If you have other members or investors involved, you need to determine their capital contributions, comply with securities laws, and consider what arrangements (voting and buy-sell/‌restrictive interest) you need to discuss and document with multiple owners.

3.  Recordkeeping, Insurance and Professional Advisors

     a.  Good Recordkeeping

Create organized files for your corporate/‌LLC records (print and electronic as suitable), including your organizational documentation, individual contract files, leases, employment and personnel (including as to
each employee and independent contractor), insurance policies, bank accounts, tax returns, regulatory filings, trademark and copyright registrations, and other items.

     b.  Insurance

General commercial liability insurance generally provides broad coverage for claims by third parties against the insured and his/‌her agents for bodily injury, property damage and personal injuries caused by a covered occurrence, subject to policy exclusions.

In order to have coverage for intellectual property based claims, a policy must have express language for advertising coverage and related intellectual property claim, or specific endorsement for "media perils."

These policies generally provide coverage and defense up to certain dollar limits for "media perils" such as copyright or trademark infringement, advertising claims, and defamation and invasion of privacy claims. Insureds are often publishers (including print and electronic), broadcasters and advertising firms.

In today's marketplace, media perils policies are most typically purchased as standalone policies as part of a publisher's overall insurance program. They should be evaluated carefully as to coverages, exclusions, deductibles, limits and other policy items, to determine what type of policy with its attendant premium is most appropriate for the particular insured; it is not one size fits all and it can be very beneficial for the publisher and a knowledgeable insurance agent, broker or attorney (or combination) to collaborate in advising as to what is most appropriate at what cost.

     c.  Professional Services

You may need to obtain initial and as-needed advice and services from competent, experienced professionals. The tangible and intangible benefits can exceed your out-of-pocket costs. Make sure you have a qualified accountant who can advise you on bookkeeping and tax matters. As necessary, get help from a good book keeper.

With regard to legal agreements, I confess to bias but "home grown" publishing and content acquisition agreements, if not prepared by a qualified professional, can create problems and more expense for parties down the road; determine what you need, find an affordable attorney who is experienced with that type of project or matter, and manage the expense through collaboration, parameters and clear communications.

The other comment about professional services is to read that which is done for you, so that you can be sure you understand the services and related documentation and that they reflect your financial, business and legal intentions.

4.  E-Publishing - Content Acquisition and Contract Considerations²

When determining what you intend to publish, when and in what trade channels, and your print, e-book and other e-publishing opportunities, it is important to consider how your plans will impact your content  acquisition program and your agreements with authors and other contributors.

Author publisher and contributor documentation should be prepared to reflect the publisher's specific editorial, marketing and distribution practices and plans. That should tie well with what publisher and author, or a contributor, can and should discuss when agreeing on titles, content, timing and the publisher's
practices and plans.

In particular, the publisher's content acquisition documentation should reflect its e-book and other electronic publishing plans and objectives, here also to reflect the parties' conversations and discussions.

Consider the following five areas which publishing and other content acquisition documentation (contributor agreements) could, as applicable to the particular publisher (you in this instance), address specific to the publisher's electronic publishing program.

     a.  Manuscript and Content Submission

Your agreements should be clear on whether, and if so by what deadline(s), you want to receive materials in installments for review; who bears responsibility for clearances (if any) and the timing thereof; whether the author or contributor will, given electronic media, be required to provide updates on a regular or systematic basis for web publishing; and other items to support the publisher's e-publishing and product release plans.

As an example, if you are publishing a how - to book about a new software release or product, your timing into the trade market place can be essential to the success of the title; also, to stay competitive you may need to publish updates or information on other technology - addressing the publisher's needs up front and how the author can respond to them with good and timely content is good for everyone.

If the author is writing to fit within a particular brand or layout scheme, the publisher should provide as necessary requirements and guidelines for author's submissions. Of course all technical specifications for the publisher's receipt of text, graphics and other content should be spelled out.

Publisher's have a vested interest in making sure that all clearances obtained for content are sufficient to enable the publisher to print and display (i) work in electronic media, and (ii) the necessary number of copies in print and e-book formats. At a minimum it can be very helpful for the publisher to provide the author with the necessary forms so as to ensure, here again, there are no problems down the road.

     b.  Grant of Rights

It is the norm today in well prepared publishing agreements to provide for broad grants of rights and subsidiary rights, subject to correlative royalty compensation provisions. The grant should enable the publisher to implement its realistic sales and licensing plans for the title, and enable the author to reserve those rights either at the outset or within some period which won't be or haven't been exercised by the publisher. This is specific to the publisher and the title; there is no reason for unexercised rights to lie fallow.

Under contract and publishing law principles, the publisher is authorized to exploit, on an exclusive or nonexclusive basis, the specific rights granted in the contract by the author or contributor. The publisher's use of a right that goes beyond the grant of rights could constitute the publisher's copyright infringement and/or breach of contract.

From an electronic publishing perspective, given the continuing changes and improvements in technology the contractual grant of rights clause should be clear and specific and include new technologies "whether now known or hereafter devised".

Also, given new technologies today and the ability for publishers to slice and dice work and combine content with other works of the author, works of other authors, and other content, the grant should enable the publisher to publish the work in whole or in part and to combine it with other content and matter.

     c.  Royalties from Electronic Publishing

Given the increasing necessity, and opportunity, to release and sell books in electronic formats today, a
publishing agreement's royalty provisions should be (i) reasonably proximate to what is "market" in the industry, (ii) economically fair to both publisher and author, and (iii) reasonably reflect the publisher's costs to publish such e-formatted books.

The traditional fixed or stepped royalty schemes for books sold in print (such as a 10%/12%/15% escalating royalty based on copies sold off of the publisher's "net revenues" may be appropriate. Note this is not the end user's/retail price of the title, but rather net revenues is intended to reflect the selling price between the publisher and its customer (actual cash revenues from sales).

Given that an e-book does not bear PP&B (paper, printing and binding) or other costs of manufacture or shipping, or insurances procured to cover loss or damage in transit, the industry trend is to pay authors higher e-book royalties - in the 20% or 25% range of publisher's net revenues. Industry trends may continue to push this upwards, in order to pay an author meaningful compensation given the pricing for front list e-books being lower than for front list print books (arguably because of such cost savings).

When one is working with stepped royalty provisions, the publishing agreement should be clear on whether e-book sales are combined with print sales to get to the higher steps and percentage, and if so how precisely the royalty computations are made.

If a publisher simply licenses others to publish a book or content from a book in e-book format, in the exercise of subsidiary rights clauses, the trend is to split the royalties received 50/50 with the author; at times an author might earn a higher split.

The other area to consider with e-books is when the publisher either directly or through licensing arrangements combines the author's work, either in whole or in part, with other titles or other content, to create a product which is a collective work or compilation; this could be the type of product that combines only a few works or an electronic database of information.

Methods of compensation can include (i) paying the author a proportional royalty based on how much of the author's content is used, compared to the rest of the content in the published unit (which may be appropriate if the publisher itself is creating and publishing the electronic or print product), or (ii) simply the 50%/50% split if licensing the author's content to a third party such as a database publisher.

You as the publisher should reserve the right to use snippets and small portions of the author's or contributor's content for promotional and informational purposes without compensation.

     d.  Revisions

Traditionally, contract provisions by which the publisher has the right to revise the work and offers the author the first opportunity to do so, come into play when the publisher determines that a substantial update (given advances or changes in the subject matter) is necessary and can be sold well in the market place. In this writer's experience, as compared to the original work a revision under this model or scenario would have not less than 20% new or substantially revised content.

With electronic publishing, purchasers of e-books, particularly trade or reference books, might pay for updates that would be obtained automatically with the purchase of an e-book or a related subscription. If a publisher desires to exploit this opportunity the author and publisher can agree in the publishing agreement that the author will prepare periodic updates to be published electronically, rather than wait until 20% or some other percentage of the book is to be revised.

     e.  Out of Print and Reversion Clauses

An updated out of print clause should recognize that the author's work will be considered "in print" (i) if the work is available (a) in print and in inventory through regular publishing methods, (b) by print-on-demand
technology, or (c) as an electronic book, and (ii) the publisher actively promotes the author's title in its regular trade catalog and on its web site, and (iii) possibly, the publisher provides a minimal annual non-recoupable advance or payment (against royalties or not).

This enables the publisher to keep minimal print inventory while being bound to some reasonable minimum level of promotion and still obtain revenue from the sale of the author's work; the author benefits in that his/her work will still be available for sale and distribution. Of course readers benefit too.

These types of clauses can be coupled with traditional provisions in the print realm which enable or require the author to request a print run within a certain period of time or the rights will otherwise revert.

From an author's perspective and particularly since book publishing agreements provide for exclusive rights, if a publisher is relying on electronic copies or p-o-d to sustain that the work is in print, an author can negotiate for some minimum royalties standard (a "keep well") which if not met the rights revert back to the author.

¹ 2010 Ryley Carlock & Applewhite. Jon is a shareholder of Ryley Carlock & Applewhite, Denver, Colorado, and Phoenix, Colorado. He specializes in business, publishing and software law. Jon can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it This paper was prepared as of May 1, 2010 and was delivered as part of a joint presentation with Thomas Woll of Cross River Publishing Consultants, Katohah, New York.

² This material is based in part on a joint presentation between Lloyd L. Rich, Esq. and the author on March 18, 2010 in Denver, Colorado, entitled Publishing 2010: Fair Use - Where Are We Today?/Electronic Book Publishing.