Hi all, wanted to see what sort of advice there might be out there regarding business structure for developer studios. I’m in the United States for reference.
While I’ve had some experience with local business, our game will (hopefully) be worldwide. Since our target is mobile, there are plenty of patent troll stories to be found in this area. Not to mention a few stories of hostile companies stealing game designs and suing the pants off Indy devs.
For a studio with fewer than 5 people, who have some realistic sense of actually making money (longshot), I’m thinking an LLC structure to start for ease of taxes, a formal contract and personal protection. Anyone who has gone through this before willing to offer any advice? Perhaps any pitfalls to avoid particular to this industry?
There is something called copyrights it only cost $35 and last 70 years after the creator’s death or unless you surrender your rights. Not going to write an entire passage here I suggest you do a bit more research on your own. http://www.copyright.gov/help/faq/faq-register.html
I have started, been involved with and run the entire gamut:
LLC taxed as a disregarded entity - Schedule C
LLC taxed as a partnership - 1065
LLC taxed as an S-Corp - 1120S
LLC taxed as a C-Corp - 1120
S-Corp
C-Corp
Will the number of people you specified be founders of the company or are we talking two people coming together with the other three being employees? How much in terms of capital or assets (can be intellectual) is each person contributing to business upon formation?
There are benefits and detriments to each type of incorporation.
LLC as a disregarded entity:
1.) Can only have one person as an owner (Member in LLC legalese)
2.) You will have to choose if you will run the day to day operations of the business (Member managed), you will hire managers to run the business day to day (Manager Managed), or if it will be a mixture of both (Co-Managed).
3.) Extremely simple tax filings
4.) No mandatory meetings and no record of minutes required to remain legally compliant
5.) Tough time getting a loan from a bank or a line of credit
6.) No ownership stake possible so Angel Investors won’t even look at you
7.) Some States require you file an Operating Agreement and some do not - but you really should write one and get it checked over by a lawyer as you may have to prove in a lawsuit you didn’t form a company simply to hide behind a corporate veil.
8.) Running the business in a sloppy manner in terms of debt can be devastating as your liability protection could be stripped and the company’s debts become your own. This usually comes from being sued for back debt from a creditor. John Smith has been mixing personal and business expenses in his LLC’s checking account instead of having a clear separation of personal and business assets and the judge rules that the LLC has pierced the corporate veil thus negating his business liability protection.
9.) Much harder to let die on the vine.
LLC as a partnership:
1.) Multiple members each has a percentage ownership stake
2.) You will have to choose if you will run the day to day operations of the business (Member managed), you will hire managers to run the business day to day (Manager Managed), or if it will be a mixture of both (Co-Managed).
3.) More complex filings as each member will receive a schedule K-1 at the end of the year for tax purposes listing the amount of their distributions and the LLC as an entity will be required to file a 1065 return.
4.) You will have to manage your books as a real business not simply income vs. expenses, but double entry bookkeeping. Get an accountant if the thought of managing a QuickBooks company file has no appeal to you or your co-members.
5.) No meetings and minutes are required, but you would be stupid not to have meetings and minutes when you are forming a company with multiple people for all of your protections.
6.) Getting a loan will be easier with a combined asset pool, but the bank will still want one of the members to personally guarantee the debt if your assets are nil.
7.) Angel investors will still walk away as they are not interested in owning a percentage of an LLC.
8.) Same as number 7 above, but much more important as you will need an operating agreement to deal with multiple people. Get a lawyer for sure.
9.) Same as 8 above but multiplied.
10.) Same as 9 above
11.) Can have foreign owners
LLC as an S-Corp:
1.) Everything is the same as the partnership, but instead of filing a 1065 you are filing a 1120S
2.) Cannot have more than 100 members
3.) Benefits of no double taxation on dividends (in the case of an LLC distribution pass-through)
4.) Meetings and Minutes required. **There is zero clear answer as to it being the election status of an LLC negating this requirement. One lawyer will tell you one thing one lawyer will tell you another. **
LLC taxed as a C-Corp:
1.) Same as S-Corp, but filing 1120 and can have foreign owners.
2.) Double Taxation on dividends (in the case of an LLC distribution pass-through)
3.) Meetings and Minutes required. **There is zero clear answer as to it being the election status of an LLC negating this requirement. One lawyer will tell you one thing one lawyer will tell you another. **
4.) Totally not worth it. If you want to be taxed as a C-Corp. Be a C-Corp.
I am not going to get into the differences between a C-Corp and an S-Corp, but I will say that while I would personally choose and LLC electing for your LLC to be classified as an S-Corp or a C-Corp, to me after having run the gamut, is a complete waste of time no matter what any lawyer or accountant tells you.
The reason being is that the notion of the S-Corp/C-Corp election is contradictory to the laws governing those of corporations and there simply has not been enough case law at the higher level to be confident that you are remaining compliant. If you and your partners are successful and are looking for investment capital then you would all elect to form a corporation and have that corporation buyout the LLC, but at the present time forming as an LLC taxed as a partnership would be the way I would go. That is unless one of your founders/partners is bringing a significant amount of capital to the table and by that I mean over a million dollars.
Regarding patents and patent trolls - it makes very little difference. If you are going to be sued by a patent troll and there is $1,000 dollars in your business bank account you have the choice to find a lawyer who will fight for you pro-bono or you settle up with the troll. Being a corporation vs. being an LLC will afford you zero protection under the same circumstances.
Badsensation, that was brilliant and perfect. Cannot express how much I appreciate your response. I think this is the way for us, LLC then a buyout at a latter date if things go well. Thank you a thousand times over!
@anonymous_user_cb3115f3 - very thorough and clear post. I never could decipher the differences between those types of LLC myself, so this is quite handy. Thank you!
