If you’re starting a video game design business, you’ve probably at least considered forming an LLC. The LLC is a popular option for all sorts of businesses looking for asset protection, and it has a handful of other major advantages as well. Read on to learn more.
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The top reason to form an LLC as a video game designer is to gain access to the personal asset protection provided by this business structure. Whether you’re a small independent designer who makes mobile games or an in-demand designer working on console and PC games, you need the limited liability protections that an LLC can provide.
As an example, let’s say that you fail to deliver a completed program in time, and you force a publisher to miss a deadline. If you operate your business as a sole proprietorship or general partnership, your personal assets — like your house, car, personal bank accounts, etc. — would be at risk if that publisher decides to sue your business.
On the other hand, if you form an LLC for your video game design business, and you operate and maintain that LLC in a compliant fashion, the scope of the publisher’s lawsuit will be limited to your business assets. In other words, your personal assets will be protected by the business structure you’ve chosen.
However, this is just the tip of the iceberg when it comes to the advantages of the LLC for a video game designer. Another important aspect is taxation. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which can save you a considerable amount of money compared to simply operating as an informal business entity.
Your video game design LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option. With this tax structure, your design business itself does not pay taxes, but rather the profits are passed through the business entity and you pay taxes on that money when you file your own personal taxes.
You can also choose for your game design business to be taxed as a C corporation, although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to you as an owner.
The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most U.S.-based video game designers have no trouble meeting these requirements — your business cannot have more than 100 owners, they all must be either residents or citizens of the United States, etc.
S corp taxation can help your design business save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself a reasonable salary for your role and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.
Compared to operating a sole proprietorship or general partnership game design business, the S corp taxation model can save you quite a bit of cash that you can use to buy upgrades for your computer and improvements for your office space, rather than writing a big check to Uncle Sam.
Finally, an LLC structure can enhance the credibility of your video game design business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you’re a game designer, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for a design business.
In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights in many states. This means that if another video game designer wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.
With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name. This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.
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First off, let’s quickly outline what an LLC is. LLCs are formal legal entities that are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes.
An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in. If you want a comprehensive overview of all the steps required to form an LLC, check out our complete guide on the topic. The basic steps in the LLC formation process in any state are as follows:
Coming up with the perfect name for your new LLC is an important step. You’ll need to choose a name that represents your company and describes what you do, and you’ll also have to make sure it isn’t already in use by checking your state’s business database.
Your LLC’s registered agent (which can be an individual or a professional service) is responsible for receiving important document deliveries from the state — like service of process, annual report reminders, etc. — and forwarding them to you. The registered agent ensures that the state always has a reliable point of contact for your business.
The form used to create an LLC is usually called the Articles of Organization, although the name can vary (some states call it the Certificate of Formation or something similar). You’ll need to provide the state with some basic information about your business and its owners. In exchange, the state will formally create your LLC.
The Employer Identification Number (EIN) is a federal tax ID number that essentially functions as a Social Security number for a business. The EIN allows your business to hire employees, pay taxes, apply for bank loans, and more. You can easily obtain an EIN from the Internal Revenue Service free of charge.
Most states don’t require operating agreements but every LLC should have one regardless. This is an internal document that outlines several key operational aspects of your LLC. The value of the operating agreement is how it can help prevent ownership disputes down the line by clearly explaining how the LLC will be run.
You will need a business bank account for your LLC, and you’ll probably want a business credit card for work-related expenses as well. It’s also a good idea to use accounting software like QuickBooks or even hire an accountant to handle your bookkeeping for you.
Depending on your state, you may need a general business license to operate your LLC in compliance with state requirements. There are no industry-specific licenses required for video game developers, but that doesn’t mean you won’t need any permits at all. Don’t forget to check with your state to see if there are franchise or privilege taxes assessed on LLCs, and also see if your municipal and/or county government entities have any further licensing requirements.
Again, these requirements can vary by state, but most states require some sort of regular report to ensure that your LLC’s info is up-to-date in the state’s business database. Some states require reports each year, while others only require them biannually or not at all. No matter what your state requires, you’ll need to stay on top of it to keep your LLC in good standing.
All About Games certainly lives up to its name, as the site was launched in 2020 by three lifelong gamers. The website includes plenty of info for gamers seeking the best hardware and games, and it also features news about competitive gaming and an informative blog. All About Games doesn’t have as much specific resources for video game designers, but it’s a fantastic place to find out about the latest trends in gaming.
The GDC is the largest industry event for video game designers, and their website features plenty of valuable information. They have tons of news items on their website, along with technical guides, design tips, seminars, and more. The GDC even has thousands of audio and video files in their GDC Vault.
The IDGA is “the world’s largest nonprofit membership organization serving all individuals who create games.” As a member of the IDGA, you’ll receive exclusive discounts on events, conferences, and software tools. In addition, you’ll become part of their global network of game designers, which provides you with invaluable connections and networking opportunities.
Game Designing may not have the world’s cleanest website, but never fear — they certainly put far more effort into their actual tutorials than they do their own web design. Their site provides links to game design schools, presents a wealth of information for game design careers, and presents designers with an incredible series of “Tools Tutorials” to teach you everything you need to know to design your own games.
Game Analytics offers “a feature-rich and universal analytics tool for studios and publishers everywhere.” They collect and interpret game player data to help you figure out who exactly you want to design games for, and they have a broad selection of other tools and insights as well. For instance, their “21 Free Learning Resources for Game Developers” page is a great resource.
Pixel Prospector’s incredibly valuable website is split up into several different categories: game development, graphics, sound and music, distribution, business, and marketing. Under each of these various headers, you’ll find a deep pool of information that can help you design the video game of your dreams.
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Video game developers may not have extensive liability risks, but there are still some things to look out for. If you miss a deadline and force a developer to push back a release date, they could sue you for failing to live up to your end of the contract.
In addition, if you (knowingly or unknowingly) steal intellectual property in your game design (such as including a video or audio clip you don’t own the rights to), this could also lead to a lawsuit. In short, you should not operate a video game design company as an informal business entity — you need personal asset protection.
The issue of intellectual property can be a complex one for video game designers. If you want more information about how copyrights can affect your design process, how the matter of infringement works in the video game world, the usage of real people’s likenesses in your games, and more, check out this helpful resource from New Media Rights.
Everyone’s situation is different, and we are not here to provide legal advice. That said, the limited liability company has some concrete advantages over the corporation that makes it the preferred option for most small businesses.
Corporations tend to have more complex formation and maintenance requirements, and they don’t have the taxation advantages of an LLC. The corporation has some advantages of its own (for example, it’s easier to attract investors to a corporation) that make it worth a look but the LLC is a simpler and more flexible business structure.
You certainly can! Every state allows entrepreneurs to serve as their own registered agents. However, while the role of the registered agent can seem like that of an unnecessary middleman, there is more complexity to this position than some people realize.
For instance, you would need to be present and available at your business location during all standard business hours. In addition, if you serve as your LLC’s registered agent, you may need to make your home address a matter of public record. Not only does this have privacy concerns, but there’s also the matter of unwanted junk mail as well.
The DIY route is always an option for LLC formation. However, LLC services are so affordable that there’s really no good reason not to use one these days. In addition, some of these companies often throw in free bonus features that make them an even better bargain.
Some people like to form their LLCs in states with favorable legal settings. For instance, Delaware is often seen as the most business-friendly state, as it has an entire court system that’s dedicated solely to business matters. As for Wyoming, this state has some of the most generous anonymity laws for LLC ownership.
However, for most people, your best option is to simply form your business in your home state. Forming in a different state can be a tremendous hassle, and it can add some unnecessary complexity to tax issues as well.
The costs of LLC formation can vary quite a bit depending on which state you’re forming one in. For in-depth information about LLC formation costs in your specific state, take a look at our comprehensive guide to state-by-state expenses.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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