This will be the Kung Fu Kingdom team’s second weekly article published on our site. Make sure to sign up for the RSS feed or check the website weekly so you don’t miss anything. In this article I will be briefly discussing the reasons we set up a company, why we made the choices we did, and then what you will need to do to set one up yourself. In total, it cost me $120 to register the company, and an additional $340 per year to keep it running. This amount is quite cheap considering the benefits.
Disclaimer: I am not a lawyer, nor am I qualified or intend to give legal advice. All statements in this article are personal statements I am giving based on my experience setting up a small LLC in Delaware. I just want to share my knowledge so that future generations will have an easier time. I’m not sure why I bother; young whippersnappers do nothing but cause me trouble.
Be aware that this article is no substitute for doing your own research. Laws and regulations vary by state, city, and county, so make sure to double check your specific situation before forming a company. Sometimes if you work for a company (you have set up) that is formed in a state other than the one you reside in, you will need to pay additional taxes to your state, city, or county. If you are ever unclear about your situation, consulting a lawyer is typically a good idea.
Why Set Up a Company?
By set up a company I mean filing the required legal paperwork in order to make the company a legal entity. Why should you do this you ask? Well gosh Joe-Game Developer, that is a great question!
To ensure proper distribution of credit and profit.
If you do not set up an official and legal company, then whenever you do work with someone you are, typically, defaulted into a partnership. That means that no matter how little work they did, and how much spine crushing, bone shattering work you did, each person who worked on the project is entitled to an equal share of the profits. That is no good. Instead you should set up an official company with an operating agreement signed by all members. This way you can outline exactly how profits will be split. This is the way to go.
Sole proprietorships and partnerships do not offer personal liability protection. That is, if you default on a contract with a game publishing company by failing to meet a deliverable, or do something else that puts you in someone else’s debt, the courts can come take your house, car, and girlfriend in order to pay off the debts you made with your little game company. By setting up a company, the company itself shoulders the legal liability incurred through company actions. You can lose all the money and assets you have invested into the company, but they cannot come after your personal property.
For me, the first two reasons are important, but this last point is the most important. If you want to work with other people on any sort of profit making enterprise, miscommunication and misinterpretations will occur. By setting up an official company with clearly laid out rules for operation, profit sharing, and the process by which someone leaves the group, and what happens when they do, everyone will clearly understand what to expect while working together with this group of people. When people know what to expect, they are happier and trust each other more, even when things go wrong.
Just Do It
Ok, the laws on this point vary by state, but the bottom line is that if you intend to make money with your product you are better off setting up a company. It took me a few hours and was well worth the effort. Let’s take a few minutes to go over the big decisions you will need to make.
There is a lot of business theory out there on what makes good company names. You can do the research yourself, as the material is too in-depth for this article, but in general you want to pick a name that is:
- Easy to say and remember (Short, few syllables)
- Is catchy
- Is not a description of what your company does.
- It does not imply that your products are for a specific genre or demographic (if they are not).
Type of Company
There are actually several types of companies out there. The most popular for small businesses are Limited Liability Companies (LLC) and S Corporations. For tax purposes, both these entities act as a pass through. This means that your company itself will not be taxed; instead, all profits (and losses) will simply pass through your company to the owners who will pay their income taxes as normal. I chose to set up our company as an LLC as they are more flexible and suited our needs, but you can check out the differences between the two in this useful article (http://www.powerhomebiz.com/vol136/structure.htm).
Since its conception the idea behind Kung Fu Kingdom was that it would be a distributed project, with the various people working and volunteering for the project living in different countries and states throughout the world. I also plan to move around quite a bit over the next year, so picking a state that would easily allow me to register and run my company while out of state was a must.
A second consideration is that if we ever make a significant amount of money, like eight gabillion dollars, and want to turn our small LLC into a large mega game making mega corporation (C Corporation, instead of S Corporation or LLC), it will be easier to do so in a state with both well established history of business law and no business taxes.
It turns out that Delaware meets all of these requirements. In fact, the majority of large corporations, and many small businesses, set their company up in Delaware. Just to be clear, you do not actually have to live in Delaware in order to set up a company there. There is a small additional yearly cost to do so, but I considered this to be well worth the benefits.
Also, setting up a LLC in Delaware was incredibly easy. It is a single page form that I easily filled out myself. This saved me the $100 – $200 it would have cost to have a professional set it up for me.
So, if you are going to be running a distributed project, or are going to be moving around a bit while you run your company, I suggest setting it up in Delaware. If you are settled down in a single state, it may be in your interest to look into setting up an LLC or S Corp in your own state. Regardless, I would say that the only downside to choosing Delaware as a home for your company, even if you are settled into a single state, is the fee you will pay for hiring a registered agent.
Picking a Registered Agent
Most states, including Delaware, require your company to have an official presence within the state that is able to receive official documents during business hours. This is necessary in case you are being served papers (I.E., getting sued) or what not. It is highly unlikely that you will need to deal with a situation like this, but the law requires a presence in state anyways. So, what if you live out of state and don’t have an office in-state where you can receive official mail? This is where Registered Agents step in.
A Registered Agent is a person or company who has an official presence within the state which will alert you to the fact that you have been served/etc., as well as forward the appropriate documents to you as necessary. Many of them provide additional services, but these are beyond the scope of this article.
There are four big and reputable Registered Agent companies, http://www.registeredagentinfo.com/big-four.html . I chose InCorp Services Inc. because they have a suite of automated functions on their website that I will find useful when running my company, and they are the cheapest out of all the others. While the other big companies offered their services at roughly $300 a year, InCorp offers theirs for $99. This price gap is, in my opinion, due to the relative age of the other companies versus InCorp, in an industry where many people find that the age of a company equates to reliable service. I don’t buy that argument.
InCorp is a relatively new challenger in the business, and leverages technology to automate many of their services. This reduces cost, and makes it more user-friendly in my opinion as I can access most of their services via a web interface. You can sign up for their services at http://www.incorp.com/. In addition, there are coupons on the web which you can use to get a lower rate to $89 a year.
The Operational Agreement
The Operational Agreement is a document which outlines how your company will go about doing business. It pays particular attention to how profits are split up, and what will happen in case someone leaves the company (willingly or unwillingly), as well as who is in control of the company. Operating Agreements will be the topic of a separate article, so I will simply say that having an Operating Agreement is necessary. Without it, I would say that there is almost no point in registering the company in the first place. In fact, without an operational agreement, some courts will still consider you a Sole Proprietor or Partnership even if you have registered your company with the state.
Choose a Bank
Similar to how some courts will treat your company as a sole proprietorship or partnership if you do not have an operational agreement, they may also do so if you do not have a bank account in your company’s name.
Having a bank account in your company’s name is important because it provides a place for you to keep company funds separate from your personal funds. This separation is necessary.
Some research is necessary here. I tend to prefer smaller, local banks, because I believe such institutions are more directly accountable for the well being of their customers’ accounts. Big companies can afford to lose a few people here or there due to mismanagement or errors. However, you also need to make sure that the bank you choose meets the needs of the company you are making, in terms of the kinds and sources of its revenue streams and anything else that you might specifically need. I tend to prefer banks with strong online account tools, so I can interact with my bank easily no matter where my physical location is.
When signing up a bank account in your company’s name, you will need your state ID number, which you will receive after registered your company with the state.
Additional Note - Franchise Taxes
Be aware that if you start a company in the state of Delaware, you will be required to pay a $250 franchise tax every year by June 1st. This is pretty decent price.
Reality check: If you think $250 a year is a lot of money to pay to have a for profit company, you probably are not ready to make commercial products.
Ok, we have broadly covered what is involved in setting up a company, how we did it, and why. Now I’m going to sum it up in a checklist of steps you will need to take in order to register your very own video game development studio (or whatever else fancy title you want). The process for starting a company will vary by state and country. This checklist will only work for setting up a LLC in Delaware.
Here is the primary website we will be using to get all of our information. http://corp.delaware.gov/
- Pick a company name and making sure it is unique (enough).
- You will need to put LLC, or Limited Liability Company, somewhere in your company’s name. Don’t worry; you won’t necessarily need to splash LLC all over your website.
- Google the name to see if there are any companies in the same business with identical or similar names. Avoid these.
- Run a Delaware entity search on the name (available during business hours). https://sos-res.state.de.us/tin/GINameSearch.jsp
- Run a search on the Securities and Exchange Commission website to see if there are any public corporations with names similar to yours. http://www.sec.gov/idea/searchidea/companysearch_idea.html
- Find a Registered Agent and sign up with them. I suggest InCorp Services, Inc. http://www.incorp.com//
- Fill out a “Certificate of Formation of a Limited Liability Company”, located here. http://corp.delaware.gov/llcform.pdf
- Make sure to include the $120 registration fee ($90 to register, $30 to get a copy for your files). You will need a copy of your files in order to find out your Delaware ID Number, and for good record keeping practices. If you want the registration to occur faster, you can throw more money at them. Specific amounts are listed on the cover letter.
- Fill as much of this form out with the computer as possible, especially the name of the company. Case matters; if you leave the first letter of your company name lowercase that is how it will be officially. Forever.
- Complete a cover letter for the Certificate of Formation, located here: http://corp.delaware.gov/filingmemo.pdf
- Create an Operating Agreement with the people you will be working with and have everyone physically review and sign it. Make sure everyone has a copy.
- Once your company is registered, you will receive a copy of your files from the state. These documents will include your company’s new state ID number which you will need for the following bullets.
- Register your companies ID with your Registered Agent. They need to know. If you used InCorp Services, Inc. you will have received an e-mail requesting this information when you created your account.
- Open a bank account in your company’s name.
- Make sure to pay your yearly Franchise tax of $250 before June 1st of every year.
Now all that is left to do is to celebrate your new company! As a warning, I have not owned a company for a full year yet, so there may be maintenance tasks or other issues that crop up which I am not aware of yet. This article simply address how to start a company, not how to run one.
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