— The following article was contributed by Zachary Strebeck, Attorney at Law–
“Making games is fun!”
That’s probably what you thought when you started your journey as a first-time indie game developer. However, when developing games to sell to the public, game devs need to realize that they are a business, first and foremost. That’s not to say that developing indie games can’t be fun; it’s just important to keep in mind that business issues are often key to launching and sustaining a successful new company.
As a game lawyer, I work with a lot of first-time developers on a number of legal and business issues. Many of these issues are those commonly faced by new indie devs. I hope to cover a lot of these in my guest posts on this blog.
Of course, since this is a guest post, these are solely my opinions and not the opinions of Black Shell Media. I should also point out that while I am a lawyer, I’m not your lawyer. Consult a professional before implementing any information in my posts. Lastly, these concepts are generally applicable in the United States, but may vary state-by-state and may be totally different outside of the US.
In my first post, I’ll look at why you need to form a separate business entity for your indie game studio.
Why should you form a business entity?
Forming a legal entity separate from yourself is one of the most important things you can do as a new indie studio. There are a number of reasons for this, including:
- Limiting your personal liability and shielding your personal assets from the company’s debts
- Creating a transferable business that you can potentially sell for a profit in the future
- Allowing investors to easily invest capital in exchange for equity in the business
- Giving a professional appearance to customers, investors and potential partners
- Having a legal entity is necessary in order to get your game on some publishing platforms (Xbox One, for example)
These are all great things for your new game development business. In some cases, like getting your game on certain platforms, they are required.
Let’s dig down into some of the details.
What kind of entity should you form?
There are four main types of legal entities:
- Sole proprietorships
- Limited Liability Companies (LLCs)
The first two are the default entity types that kick in as soon as you go into business for profit. If you’re by yourself, you’re a sole proprietor. If you’re with others, you’re a partnership. These entities don’t offer any limited liability for your personal assets. That means that you are personally liable (or liable for your ownership percentage, in the case of a partnership) for any business debts. If you own anything of value in your name, this can turn out to be a real problem.
The better way to go about it is to use a limited-liability entity. This is usually either a corporation or an LLC. These provide a shield against creditors and other debt holders (for example, if your company gets sued and loses). Those creditors will try to reach through to your personal assets.
These limited liability entities create a structure that allows others to invest money in exchange for equity and other rights. This separate existence also lets the company to continue on, even after the owners have left the business or sold it to others.
Choosing between a Corporation and an LLC
The choice between Corporation and LLC usually has to do with what your plans for the company’s future. If you and your partners wish to just keep making games and earning money from them, then an LLC is often the best choice. It is much simpler to run and you have a lot of flexibility in how it is structured.
On the other hand, if your goal is to have your game dev startup receive angel, venture capital and “friends and family” investment, a corporation is your best bet. A Delaware corporation, in particular, is what most investors will be looking for. This is for a few reasons:
- Delaware’s corporate law is generally familiar to most serious investors and their corporate lawyers, so there aren’t many questions about how an issue will be settled
- Most of the contracts and forms involved in creating and investing in a Delaware corporation are pretty standardized by this point, so investors don’t have to spend too much time and money assessing them
- Delaware is a very corporate and investor-friendly state in which to incorporate
If your goals involve investment or some kind of exit from running the company at some point, the corporation is generally the best way to go. It is possible, however, to start life as an LLC for simplicity’s sake and later “convert” to a corporation. For those who don’t know where they may be headed, this can be the best way to go.
There are other entity types, like Limited Liability Partnerships and Professional Corporations, but most game developers don’t need to be concerned with those.
How do you actually form the entity?
Many first-time businesspersons try to take the cheap and easy way out by using LegalZoom or another self-help business entity site. You can even file the forms yourself on the state Secretary of State’s website or by mailing them into the state government. I would never recommend either of those methods, though.
Personally, I recommend working with both an attorney and a tax advisor through the whole process. The attorney can do a number of things that a self-help site like LegalZoom can’t:
- Discuss your particular situation and goals for the company
- Decide on the appropriate type of company, place of formation, and equity structure among the various owners
- File the correct forms, making sure that they are both correctly filled out and tailored to your company’s specific needs (LegalZoom uses boilerplate documents with little to no customization)
- Create the various documents that the company needs to get the business off the ground, from corporate bylaws to intellectual property assignment agreements
Your tax advisor can help you understand the tax implications of forming a company and assist in important decisions, like whether to form a C-Corp or an S-Corp. Getting a team of professionals working with you from the beginning can help you to avoid huge problems down the line.
I’ve worked with many clients on fixing the mistakes that were made in trying to do this kind of thing by themselves. Often, they formed the wrong type of business entity for their particular goals, or they simply made egregious mistakes during the process. If you’re going to be spending time and money on starting your business, it pays to do it right.
What about contracts, copyrights and trademarks?
In future articles, I’ll discuss other important legal issues for indie game startups. These include what kind of contracts you need and why you need to register your trademarks and copyrights.
If you’d like to learn more about launching an indie game startup, sign up to get info on my full online course. I expect to release the course in the next few months, covering everything from the legal aspects of game development to marketing and sustaining your business. The course will even come with a contract generator to help you avoid hefty legal fees in the early stages of your game development. Click here for more information.
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