If you’ve been developing games alone or with a few other people for any significant amount of time, you’ve probably considered forming a limited liability corporation or other small business entity. There are many reasons why someone would consider forming a company at some point in their game development journey.
Maybe you’re starting to work with other people and are thinking of setting up some sort of business for your group. Maybe you’ve heard about limited liability and want to protect yourself if anything goes wrong. Maybe you’re publishing your first game on Steam or another major platform and would rather publish under a studio name rather than your real name. Maybe you haven’t even considered this at all, and you’re just wondering what the next step is to turning game development into a business!
In any case, we are going to go over what an LLC is and why you might consider forming one.
Let me start off with a bit of a disclaimer. If you are considering setting up any sort of entity for tax reasons, consult with a tax expert like an accountant. They are the most experienced in managing taxes and keeping you out of trouble with the law. Setting up a business entity has a lot of potential benefits, but it can make your taxes far more complicated in the process. The process and the specifics will also vary from state to state, as well as may be different in other countries.
Sole Proprietorships and Partnerships, the Default Way of Doing Business
A sole proprietorship is the simplest business entity to set up and is the default if you don’t do anything else. In fact, if you’re in business doing anything, you are a sole proprietorship already. Freelancers are often sole proprietorships.
A sole proprietorship is easy to start and has no paperwork requirements, but still allows you to deduct business losses and expenses as part of your personal expenses.
On the other hand, you’re personally responsible for all of your business’s debts and liabilities, so if something goes wrong and you are sued, your personal property can be taken. There is little to no separation between you and the business, so a sole proprietorship offers very little legal protection.
A partnership is the other type of default business entity. A general partnership is formed as soon as two or more people agree to carry on as co-owners of a business. No legal steps have to be taken, a partnership is formed automatically without needing to fill out any paperwork.
Absent an agreement modifying this, the partnership is managed by all partners equally, and all profits and losses are shared equally, even if one partner put more money or work in than another. This could be the case if two or more people make and then start selling a game together with the intent of sharing the revenue but don’t have any sort of contract laying out the terms. Note that there would also be some copyright issues to resolve in this situation, but that’s another article.
Partnerships are similar to a sole proprietorship in terms of liability, there is little separation between the entity and you. However, with a partnership, each partner is liable for the debts and liabilities of the others. As such, it becomes all the more important to create a formal entity (like a limited partnership) when forming a partnership and to ensure that the terms of the partnership are understood by all and memorialized in a written contract.
What is a Limited Liability Corporation?
Limited Liability Companies or Limited Liability Corporations (LLC) are a great choice for many small businesses including independent game developers. They are a little bit more work to set up, but provide the limited liability that a corporation would while having a greater degree of flexibility in operations.
“Limited Liability” means exactly what it sounds like, your liability can be limited. When you have an LLC, you limit your personal liability by working through a separate legal entity, called a corporation. The LLC is treated as a separate entity from you personally as a member of the LLC.
That means that any debts and liabilities that are incurred through the LLC are limited to the LLC since it is a separate entity from you legally. If someone sues you over your game or some other aspect of the business like a breach of contract, then they’ll sue your company. Your liability is limited to the money in the company and your personal assets are safer from legal judgment.
Although there are situations where liability can still pass to you – such as where the member personally injures somebody, or where the “veil is pierced” due to improper use of the corporate structure to shield from personal liability – in general it can offer some degree of protection from things going wrong. LLCs can also be taxed as a passthrough entity, meaning the income of the LLC is taxed at the individual level rather than at the corporate level, which tends to keep things pretty simple when calculating taxes.
The Benefits of an LLC for a Small Game Developer
A small developer may want to incorporate as an LLC for a variety of reasons. The limited liability is the obvious one. Nobody wants things to go wrong when making a game or running a business, either through a contract being breached, infringement of intellectual property rights, or something else causing legal liability, but an LLC can help limit that liability to the assets held by the LLC.
An LLC also grants a greater level of credibility to potential customers than an individual. While many people use a studio or pseudonym when making games, in order to use such a name in a legal capacity you need to have a legal entity. If you open a bank account in the LLC’s name then the publisher and developer name on Steam can be your studio’s name rather than your real name, lending a bit more legitimacy to your game’s page.
My own game’s Steam page has the listed developer name as “Studio Vela LLC,” which is an LLC I formed for that reason. It feels a little bit more credible than a game made by Jacob Vela, even if they’re functionally the same thing as a solo developer.
When a bank account is opened in the name of your LLC, it can also make it easier to keep your personal and business finances separate from one another, which is just a good practice in general.
Finally, an LLC can increase your potential for growth, allowing you to bring on additional partners and employees. You and other founders can own the LLC together, without being liable personally for the actions of other partners like in a general partnership. With an LLC you can also make agreements about how profits and losses will be split up beside the default of spreading them equally, and the company can hold assets like the intellectual property that makes up the game.
Of course, there are some reasons why you would not want to incorporate as an LLC as a small game developer. If you are still starting off, the additional paperwork, cost, and regulatory compliance may not be worth it, particularly if you are not yet earning any income. While the cost of forming and maintaining an LLC is far less than other entity types, it’s still something, and may not be worth it for your typical hobbyist making games for fun.
That said, while you don’t need to form a company to sell a game it’s a good idea to do so once you’re at that stage.
Should you Incorporate as a Small Game Developer?
Whether you’re getting ready for your first major release or you’ve got a few under your belt already, LLC or other entity formation can help you to grow your studio and take the next steps. While a business entity can help limit liability and keep your personal assets protected and can be a great step forward as you start working with other people, it can also increase costs and paperwork. Every situation is unique, so consider consulting with an attorney (and maybe even a tax expert like an accountant) as you look at your path forward.
Looking to take the next step in your game development journey? Contact me for a free consultation today.