Do you need to form a business just to sell your game? What are all these different business types? Did you forget some simple but super-important detail? What if you don't have any up-front funding? This guide aims to give you a good starting point in understanding what goes into forming a business, why you'd want to form one, and ultimately what just needs to get done and out of the way so you can get to work on your game.
You should always seek independent financial advice and thoroughly read terms and conditions relating to any insurance, tax, legal, or financial issue, service, or product. This article is intended as a guide only.
- Roundups6 Incredibly In-Depth Guides to Game Development and Design for BeginnersMichael James Williams
First Things First...
Do your research. Laws vary from state to state and country to country. Though this article will give you a high-level overview, it is not possible to cover everything. Hopefully, though, this guide will give you a good head start!
This guide is largely US-focused. In particular, I have primarily researched forming a business in New York state. Other states and countries should be similar, though the details will vary. Also, although this guide is focused on forming a business for the purpose of game development, most of it should still apply to making other creative works.
Why Legally Form a Business?
It may seem like a lot of extra hassle to fill out paperwork and pay fees to form a business. After all, you are able to do business as an individual. However, there are a number of advantages to it, even if you are working alone:
- A business gives you an entity you can assign ownership to. Copyright law is rather complex, but in a nutshell, anything someone creates is owned by them unless they explicitly assign ownership to another person or business. Having a business gives you a common owner for all of the work done on your project.
- Businesses are assigned an Employer Identification Number, or EIN. Essentially, it's an ID number you're going to need for a lot of different paperwork. Many businesses are legally required to have one. Even if the IRS doesn't mandate that you have one, you'll still need it to open a business bank account, file your business' taxes, apply for business licenses (if necessary), etc.
- Depending on your business type, you might be better protected from the business's debts and legal issues (known as "liabilities"). It's a bit more nuanced than that, but essentially it means this: if your game studio goes bankrupt, or gets sued, or something catastrophic happens, they can take your company but not your house or car. The degree of protection and what is protected will depend on the type of business you form and your local laws.
The Different Types of Businesses
Trying to get your head around the sheer number of business types can be overwhelming. There are sole proprietorships, general partnerships, LPs, LLPs, LLLPs, LLCs, PLLCs, corporations... and to make it more complicated, every state (and, of course, every country) is different. Wikipedia has a pretty lengthy list that covers most business types and countries, but you'll have to research how things work wherever you want to form your business.
Generally speaking, businesses in the US tend to fall under a few different categories:
- Sole proprietorship: Essentially, this just allows you to do business under a different name, and gets you an EIN. There is no legal distinction between the owner of the business and the business itself, and it does not protect you from any of your business's liabilities (debts and the like) as mentioned above.
- Partnership: A partnership is a business mutually owned by multiple people. Partnerships may or may not be a separate legal entity depending on where they are formed. Like a sole proprietorship, the owners are not protected from any debts or other liabilities. (Note: Some areas also have limited liability partnerships; the details vary a lot by region.)
- Corporation: This is a "traditional" business with shareholders, a board of directors, and so on. Corporations' liabilities are separate from their employees and shareholders; in layman's terms, they offer you the protection from debts and legal issues mentioned above. Corporations generally have a specific structure required, and can feel like they have a lot of "red tape" to get through, but they are fairly standard and offer a lot of compensation options beyond just salary (such as stocks, and board seats for big investors). In particular, if you're looking to raise a lot of capital or to sell your company in the future, having a corporation will work in your favor.
- Limited Liability Company (LLC): If you would like the liability protection offered by a corporation, while having the flexibility to structure your business and management however you would like, an LLC is probably the right choice. Instead of having the traditional structure of a corporation (with shareholders and such), the members of an LLC write up an Operating Agreement that lays out the organization's structure. "The Operating Agreement is the primary document that establishes the rights, powers, duties, liabilities and obligations of the members between themselves and with respect to the LLC." (Quote from this page.) The downside is that this gives you yet another legal issue to figure out—in this case, figuring out organizational structure and writing up the relevant legal documents for it.
Though it largely shouldn't affect game developers, you should be aware that certain professions (like law, medicine, and banking) tend to operate differently from other businesses, and might have their own separate categories and laws.
If I had to pick a generic recommendation with no context, an LLC will offer you both organizational flexibility and some legal protection from liabilities. However, as every situation is different, you should research your options, pick what you think is best, and get professional legal advice if you can afford it.
Special Concerns: Forming a Business With Partners
Forming a business with multiple owners is a pretty common scenario, but it comes with its own set of issues you'll need to resolve. How much of the company does each person own? What happens if there is a dispute among the owners? Surely not everyone will want to be a part of the business until the day they die, so what if someone wants to walk away from the business? What happens if someone dies unexpectedly?
It's important to figure out these details ahead of time. An attorney named Jonathan Sparks has written a good series of blog posts titled When "We'll be Together Forever" Goes Sour; How to Protect Yourself When Partners Part Ways, with Part 1, Part 2, and Part 3 currently posted.
Handling Payment and Compensation
If you can afford to pay people a set wage in exchange for work, things are a bit simpler; however, not every team has that luxury. Also, a potential downside of being paid a flat wage is that you might feel like you don't have any skin in the game.
If you do not have any up-front funding, a common alternative is a revenue share model, where each member gets an agreed portion of whatever money the company makes. Revenue share does get a bit complicated, doesn't scale well to larger teams, requires you to re-calculate payment every pay period, makes crowdfunding a lot more complicated, and makes recruiting more difficult as most people can't work without up-front pay; however, if you're a small indie team without any funding, it's a valid option. If you have limited funds, you could also combine regular pay with a share of profits: offer stock options alongside wages, offer an advance on revenue share pay, and so on.
Though revenue share can be as simple as "let's do a 50/50 split of the profits," that is not flexible enough to be practical: what if you need to bring on another team member? What if someone can't continue work on the project for some reason? How do you handle costs of advertising? What if someone isn't pulling their weight?
As an alternative, consider splitting up revenue based on hours worked. Though hours worked is not the best heuristic for productivity, it is at least objective (hopefully giving less room for legal problems if issues come up later) and will allow team members to be compensated based on how much effort they are putting in. Note that it does not account for more experienced team members being more productive overall, so unless your team is all around the same skill and experience level you will need to compensate for that in some way. Also, don't forget that the business itself will need some share of the revenue to pay for things like advertising, web hosting, and legal consultation.
Regardless of what you pick, make sure you figure out compensation ahead of time. This may sound obvious, but it's very easy to start making a game "just for fun" with some friends, and then later realize that you want to sell it. Things are much, much simpler if you deal with those logistics ahead of time. If you didn't, then go get professional legal advice; copyright law is absurdly complex.
Ownership and Copyright
When bringing on team members, you will need to write work-for-hire contracts. By default, any work someone creates is owned by them, so without ownership being transferred in writing, your business cannot legally use anything created by a team member. Get these done right away, and do not let someone start work without them.
The contracts your team members sign should lay out the relationship between the team member and the business. How will the team member be compensated? Can they show any of their work in their portfolio? Can they work on other projects while working on yours? What happens if the team member ceases work on the project? Also, bear in mind that "employee" has a specific legal meaning versus "contractor," and if you screw things up, you could get into a lot of legal trouble.
If you had to pick one thing to actually pay for legal consultation over, double-checking your contracts is pretty high up there. That said, if you really have no funding, you could write the contract yourself. Try and find some examples online to figure out what, exactly, goes into a work-for-hire contract. Understand that this is not going to result in an airtight, loophole-free contract, and definitely do not go in on this with anyone you do not trust completely.
Special Concerns: Students
If you are currently a student, your school might prevent any coursework from being used commercially. This varies from school to school, so check ahead of time. If you are curious why some schools may retain IP ownership, this article goes into a bit more detail.
Even if your school allows you to retain ownership of your work, bear in mind that the software available on your school's computers will likely have non-commercial educational licenses. Furthermore, make it clear upfront that you plan to make a commercial product whenever asking faculty at your school for advice or help, as the line gets a bit blurry between what counts as just help and what starts to count as actual work done on your project.
Make sure the software you are using allows you to use it for commercial work, especially anything offered free or discounted for students and teachers. When in doubt, check the EULA. Sometimes commercial use is actually allowed with these products, but it varies:
- From the Microsoft Dreamspark EULA, section 3c: "Except as provided below, you may not use the DreamSpark Subscription software for commercial purposes or commercial software application development...". Although you cannot use the software commercially in general, an exception is made for any Windows Store apps, Windows Phone Store apps, and Xbox Live Indie Games apps.
- From the Adobe Education FAQ: "Can I use Student and Teacher Edition products commercially? Yes, Student and Teacher Edition products can be used commercially." This is why Adobe charges so much for Student and Teacher Editions: it's still a few hundred dollars, but you can use it commercially even with the huge discount.
- From the Autodesk Student home page: "Software licenses and/or cloud-based services provided without charge to Education Community members may be used solely for learning, teaching, and training in relation to the instructional functions performed by a primary or secondary educational institution or other degree- or certificate-granting institution. Such software and cloud-based services shall not be used for commercial, professional or for-profit instructional purposes." Unfortunately, you're going to have to fork over a few thousand dollars for Maya to use it on your game; however, they'll let you use it for free for educational purposes!
Special Concerns: You're Currently Employed
If you are currently working for a company, you will need to check your contract. In addition to assigning ownership of your work, there may or may not be a non-compete clause. Contact your company's legal team to ask if there is a policy on side projects outside of work. Sometimes, even if your contract normally forbids side projects, there is an approval process you can go through.
Some states have laws in place to help protect your rights to your work. For example, California Labor Code section 2870-2872 essentially states that any work done on your own time, with your own materials, that is not related to work done "at work", is still owned by you, and that right cannot be signed away in a contract. Some other states have similar laws.
In any case, even if you are in a state like California, you should get professional legal advice. Again, copyright law is complicated, and this is a scenario where you're at a high risk for getting in trouble. Absolutely do not use your work computer, software provided by your employer, etc. I know, sometimes software costs thousands of dollars, but you really can't use your work copy. Buy it yourself, or find a free or cheap alternative.
Also, if you are currently employed but want to work on a game after you leave, just hold off on starting until you leave. It will make your life much simpler. Go ahead and start doing some research, but do not start doing actual work on the game yet.
On the Shoulders of Giants
Experience is often the best teacher. Countless entrepreneurs have started companies, and many of them have shared their experiences online, at conferences, and elsewhere.
A great conference talk is Bootstrapping 101: How College Kids Built a Thriving Game Company in Under Three Years. Justin Beck from PerBlue discusses the challenges of building up a company, having to decide between going all-in on the business versus taking full-time job offers out of college, whether or not he should take investment offers, and more.
If you don't have a GDC Vault subscription, here's the same talk given at a different conference:
For an excellent example of bootstrapping an indie company with no funding, Randy Smith from Tiger Style Games gave an extremely detailed talk at GDC 2013. You can view the talk on the GDC Vault (requires a subscription), or buy a copy of the audio recording from an older talk for a few bucks. He wanted to start up a game studio, but did not want to go the traditional route of forming a corporation, finding funding, and so on. He formed an LLC, and the company started work on their game using a revenue share model based on hours worked. The goal was to minimize overhead and get the business stuff out of the way to focus on game development. They've been successful thus far after launching multiple games, and in the talk he goes into their business type, compensation model, things they've changed over time, numbers from sales and different store fronts, and just about every other detail you can think of.
If you're looking to get funding for your company, there are plenty of examples to learn from. Zynga was actually self-funded by Mark Pincus (the founder), but the money he used to found Zynga came from starting other businesses; he then leveraged Zynga's early successes to raise money from investors. Curt Schilling's 38 Studios followed a similar path of being self-funded to start then raising money once it got off the ground. Double Fine started developing big budget AAA games funded by publishers, switched to smaller games they got funding for, and more recently funded their latest project with a gigantic Kickstarter.
Don't forget to look outside of the games industry for examples; James Altucher once bought a company for $20 million which he then used as leverage to raise the money to pay for it. (Granted, that would be difficult to replicate, but it's an entertaining story that proves you can find a way to get past anything that blocks your path.)
Finally, remember that there are resources beyond just websites. Grab the book Masters of Doom and read about how the guys from id Software built up their company making games through the late night after their day jobs. Sit on the couch and throw on Indie Game: The Movie when you have some free time. Read up as much as possible to learn from those who have been there before; just don't get so caught up in research that you never get around to working on your own projects!
What I've Done
I've worked on a few different independent projects, and in this I'll go into some of what we did and what some of the pros and cons of each approach were.
One project was a game being developed by students and recent graduates at my college. Since we had no money but a lot of time, we opted for a revenue share model where 30% of revenues would go to the business to pay for things like marketing and legal fees, with the remaining 70% split between team members.
As everyone was around the same experience level, we decided to all just track our hours and split up that 70% based on hours worked, with 40 hours equalling one "share" of revenues. Everyone's time was treated equally, whether they were programmers or artists or designers. One big advantage of this system is that it works well with students' erratic schedules, but it was also a challenge to keep people on-task when everyone was working different hours. In terms of contracts, we simply wrote up something ourselves and talked it over as a group; it handled transferring ownership to the business, allowing showing work in portfolios, how compensation would be dealt with, and so on. We didn't run into any legal issues, but that came more from being explicit in expectations and working with people we trusted than from having a bullet-proof legal document.
This system worked really well in handling people joining and leaving the project. If someone could not continue work for whatever reason, they simply stopped accumulating shares of the revenue split (which happened with one of our artists, and ultimately myself later on). If anyone really wasn't motivated, they'd probably drop the project quickly on their own by virtue of not getting any up-front pay, and since 40 hours are needed to earn a share, someone who worked for three or four hours and decided it wasn't for them didn't add to the later overhead of splitting up revenue. The downside is that it made seeking funding suddenly extremely complicated: if we're able to raise money from somewhere, how does that get factored into our model? If we ran a Kickstarter and "pre-sold" our game along with tons of other backer options, how would the funding from that work with respect to a revenue split that isn't even finalized until after the game is completed? Unfortunately, there were no simple answers to these questions.
Small Indie Game
One of my former colleagues wanted to develop a small game while having the flexibility to bring on team members as needed, but without a lot of funding. We discussed a bunch of different ideas, including revenue splits like the above example. Ultimately, though, he decided there were too many logistical complexities with a non-traditional model. He opted to self-fund the project by directly paying an artist, along with myself for some help with porting.
The biggest downside for him is that it means he carries all of the financial risk of the project, whereas with other models it might be split more evenly between team members. In exchange, things are a lot more straightforward. Additionally, if the project is not successful, it is a lot easier to keep the same team together for a new project when you don't have to say "so I know the last project didn't work out well..." to everyone.
Though I haven't personally raised funding for a game project, I've talked to a number of people at conferences about their experiences with it. A recurring theme is that you need some sort of credibility: even if you have an awesome team put together, if you don't have any past projects and nobody on your team is well-known, why would investors trust you with their money? You'll at a minimum need a playable prototype or a solid portfolio, but even then it's tough.
Another option is to bootstrap the project: work for a few months on it, get something out there, prove you can bring in a decent user base, and then you can go to investors and say, for instance, "we've got ten thousand people per day who play our game" as a hook. Finally, don't underestimate the time investment required: whether you're looking for crowdfunding or traditional investment, you're going to spend all of your time doing nothing but that until your funding is secured.
As I said at the beginning of this article, you must do your research! Every situation is different. This article is littered with links that can get you off to a good start. Try searching the web, watching videos of conference talks, reading whatever books you can get your hands on, asking friends who have gone through this before, and really just finding information wherever you can. Also, bear in mind that this article hasn't even touched on issues like taxes, which will vary wildly between business types and locations. Good luck!