View Full Version : When the business entity really pays off?
08-03-2004, 10:24 PM
So my question is: what are the real advantages of forming a legal entity for an indie game shop? I'm about to try selling my most recent title (a first self-publishing/distributing experience), and had the following questions regarding common advice I've read.
First of all, do indie developers really nead any kind of liability or other structured legal protection? I've heard of very few legal cases against software developers that ever went anywhere, and am just not sure how helpful a coorporate shield would be in the few cases I have heard about. Is a good EULA enough protection, or are there other pressing concerns.
Secondly I was wondering about tax benefits. Are there really tax advantages in going from a DBA to a S-Corp, or LLC (I'm not going to be going around collecting outside capitol or anything, so I don't think there should be any reason for a C-Corp etc.). My understanding is that the primary advantage is that you can write off many business expenses, but I'm not clear on how that works exactly? Do you just claim those expenses and reduce your taxable income by that amount. If so, can't you just do that on your personal tax forms, or is there a difference?
I'll truly appreciate any insight that can be offered regarding these questions. Initially I was thinking that I'd just start trying to sell the game, and then worry about a establishing a business entity after selling a certain number. I'm not sure what kind of threshold I should set, nor if waiting just defeats the purpose of setting up the entity (ie if the main benefits are legal).
I know setting the thing up isn't too complicated, but just thought I'd fish for some advice before putting together the articles, forms, and check to the state.
Thanks in advance, Ashley Moore.
08-03-2004, 11:39 PM
Hrmm I'm sure some folks will pipe in here but here are some things to take into account:
If you are gonna just make games for a hobby, then you might not want to bother setting up a corporation. But you should concider it if you want to expand and make a real run at making money.
Here is a link that outlines the different types of legal structures and thier benifits and downsides( I just googled it really quick but it looked about right.)
On the issue of whether or not you need that sort of liablity protection, thats hard to say. A person can sue you for just about any reason. A corp affords you some protection, but whos to say if you will ever be challenged legally.
good agreements should always be done, corporation or not.
08-04-2004, 04:49 AM
Yes. If you gonna make any money, then you want an entity for a tax purpose and liability protection. Unless you make at least like 30K a year in my opinion an entity is useless in USA. Another thing is if you deal with publishers and do contracts and again they make enough money then you might want to think about forming an entity.
08-04-2004, 07:08 AM
I formed my company as a sole proprietorship. I just didn't see the sense of forming it as anything more structured. If the day comes where I start actually employing people part-time (instead of just contracting out) and dealing with serious sums of income, then I'll see about re-forming the entity under a different legal umbrella.
08-04-2004, 08:32 AM
I am a sole proprietor too. If you don't have employees, I see little need to go any further and spend a bazillion on an accountant every quarter to do corporate paperwork. And one thing to consider, from someone who's not a lawyer, is that the protection you get as a corporation (or at least an LLC at any rate, I don't know about other corporations) is pretty much a myth if you're the one actually dealing with customers/clients/publishers. I think it's more typical that the guy who sues you will sue both you AND the company.
08-04-2004, 09:31 AM
Here in Michigan, it costs $50 to form an LLC and then there's an annual $25 renewal fee. As Hamumu pointed out, you probably don't get much liability protection from an LLC if it's just you behind the company, but I do think it gives you a more professional look. For $25/year, I think that's a good deal, especially since an LLC requires little extra paperwork (i.e., no quarterly returns, income is passed through to individual members, etc.). Of course, the fees vary from state to state (Minnesota charges $135 to register an LLC there, and California apparently wants to discourage small businesses from starting out as an LLC because they charge hundreds of dollars every year), but it's also possible to register an LLC in another state with more favorable rates.
08-04-2004, 10:21 AM
Yeah, for LLCs' California has a minimum $800 tax fee that must be paid every year. In fact, $800 is due 90 days after you from the LLC. That can be a big deterrent, especially if your business doesn't generate any income yet.
08-05-2004, 01:27 PM
This is an extremely individual decision, and you need to take your own circumstances into account before deciding. I'd read through the book Tax Savvy For Small Businesses from Nolo Press (you can view it online at Netlibrary.com)
Here are some things that I have wrestled with (and this is not exhaustive):
Can have any calendar year end, and hence you can "transfer" money back and forth between you and it in order to keep money away from being taxed.
Can provide many fringe benefits which are 100% tax deductible that other entities cannot (retirement plan, medical plan, tuition reimbursement)
Are taxed at 15% for the first $50,000 net profit
Shelter personal assets from company related litigation.
Do not permit you to take losses on your personal tax return.
Are more complicated to setup, maintain, and have to file their own set of taxes.
Require you to be on the payroll, ie pay medicare, SS, state and federal unemployment taxes (junk taxes.)
I've heard that they are fairly unlikely to get audited by the IRS. (For our scale of operation.)
(The IRS doesn't recognize the LLC as an independent entity for taxation purposes -- they are treated as either a Corp or Sole Prop.)
Offers liability protection like the C Corp
All profit or losses are passed through to your personal income tax form.
Permits you to hire your children as employees and not have to pay junk taxes on their wages.
Usually simple to set up and operate.
Must pay full self employment taxes on all profits earned (~15% I think)
Tax year is the calendar year.
Right now I'm considering an LLC because of the liability protection it offers, and it permits me to hire my kids and avoid paying junk taxes on them.
This is one area I think is very important to be informed about before making a decision. Too often people (including CPA's and attorney's) will just say "Oh, do this." and not take YOUR situation and goals into account.
Granted, you can always change it later. However, just like coding without doing design work leads to problems and wasted effort later on, so does setting up a business entity without conducting due diligence and planning ahead of time.
08-05-2004, 04:08 PM
Thanks for all of your comments.
Incase anyone is interested: the responses above, along with my own continuing research have prompted me to go ahead and register as an LLC.
I haven't found any tax benefits in forming an LLC vs remaining a DBA individual. I don't plan on ever operating at a loss or in the hole, and will therefore not benefit from business expenses reducing my my non-indie taxable income. All of the other tax benefits that are so often alluded to seem to be in comparison to other business structures.
Legally the LLC should at least in theory offer some protection from being sued as an individual. The value of this protection seems dubious at best. The odds of actually being seud seem (at least to me) to be pretty astronomical considering the power of EULAs, the amount of business I am expecting on my first title, and the amount of money a person could actually hope to get out of me. This is fortunate either way, since it seems like the "corporate veil" will generally be pretty easy for anyone serious about sueing an indie to pierce.
It turns out that MN does not have an annual fee (as I previously thought), but just a one time $135 registration. For that I am buying a lifetime of legal recognition of the company's name, a more professional (and hopefully reputable) apearance, and come hell or high water... a chance of some personal protection.
Thanks again everyone, Ash.
And don't stop the responses, if anything here is lacking or misleading.
08-05-2004, 04:52 PM
Yeah, for LLCs' California has a minimum $800 tax fee that must be paid every year. In fact, $800 is due 90 days after you from the LLC. That can be a big deterrent, especially if your business doesn't generate any income yet.The law for CA corporate taxes changed. As of 2000/1/1, CA corporations don't pay any fee for their first year of operation.
Also, re: Mithril Studios's posting, there's a third option which in my opinion is better than the two you listed: an S Corporation. It doesn't have the tax downside of a C Corporation, but it has more liability protection than an LLC. That's what I incorporated.
Oh, and, you don't need an accountant or a lawyer to incorporate. I used "Nolo's California Quick Corp" book, which was $30 and went through everything. (Though I retain an accountant anyway. He does my taxes, on general "I don't want to clutter my mind with this nonsense" principles.)
Best of luck to you, no matter how you decide to structure your company.
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