This article documents our experience in setting up a small Limited Liability Company in Delaware, and includes how-to advice for doing it yourself. Targeted towards independent game studios, but useful for anyone interested in starting their own company.

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. If you are ever unclear about your situation, consulting a lawyer is typically a good idea.

http://kungfu-kingdom.com/?p=281

-Jesse

Note that if you have a "place of business" in another state (like California), you may need to file paperwork with that state as well, and may need to pay business license and tax payments in that state, no matter where you are incorporated. You working at your home for your company may count as a "place of business." You really should see a legal professional for your particular state if you think of starting a business. Or, at the very minimum, get a good book on starting a business in your particular state at the library or bookstore, and read through it.

Don't forget to check with your county AND city too... I needed state (WA) and city licenses! And guess what - you get to pay taxes to both of them as well as federal taxes (US of course). Technically the state ones are taxes and the city one is a license... but it amounts to the same thing.

Rules in the rest of the world are likely to be as annoying and confusing.

If you are in the USA I recommend you look at the advice and books on NOLO.COM http://nolo.com/resource.cfm/catID/9FA25870-14F1-4657-9778F19FB41FB93D/111/228/ - they cover everything you need and have advice on where to look for most states too. They also cover in great detail the things you need to do with your money to ensure that your LLC stays LL. Make sure you keep your accounts separate. On the positive side you can buy a new xbox and call it business expenses ;-)

Those are all good references.

If you are using your LLC as a pass-through entity you will be taxed simply as an individual in state, city, and county of your residence, in addition to paying a franchise tax on the LLC set up in Delaware. The states you are working with may have differing laws.

If you live in Mass or California, you should be aware those states have some wonky laws when it comes to taxation on businesses. In any situation, always check your local laws and regulations as they will differ from state to state. I will add some text to the article emphasizing this.

So for those who just found this post, the above article is a good place to start, but as the gentlemen above mentioned, don't stop there; do your own research on your specific situation as well.

-Jesse

Don't forget other things too.

• Some cities will have rules about running businesses from your home. Mine has restrictions on number of deliveries an visitors for example - thankfully something that won't affect the average game business.
• Does your home insurance cover business acivities - hard to claim if they find out after the fact you were. Consider business liability insurance or check your policy to see what is covered.
• Does your mortgage allow business activities - when I lived in the UK they had the option to increase your rate to a business rate if they felt you were using your home more for business than living

Its not all tax deductions and business lunches!

These are all things that could affect a person while starting a small business. However, at this point we are moving a bit beyond the scope of the article.

We have been mentioning a lot of "What ifs" and "Don't forgets", which can seem pretty intimidating to anyone who wants to start a small business. We could probably go on forever about the different laws involved. Don't let it get to you. Most states have some form of office that was created to help small businesses with these issues, and you can normally schedule an informational session with them to gather all the information you will need to start up your own business. You can also set up an appointment with your local SCORE branch (Counselors to America's Small Business) at http://www.score.org/index.html. Both of these resources are invaluable, as the experts who work with these different groups will be able to give you advice tailored to your specific business needs. 

Disclaimer: As always, I am not a lawyer, and not allowed to give legal advice. All of my comments are simply my personal opinion I have formed during the research I've done in starting my own company.

P.S. I wish I could afford to buy enough games and systems that my tax deductions for doing so would be greater than the standard federal deduction. Someday! I'm curious. How many people here write off video game related purchases?

While its beyond the scope of your article its all worth pointing out becuase running your own business isn't always easy. I meet too many people who think that all you have to do is print some business cards and then write off eveything you can think of on your taxes. I have a friend who's father ended up owing the tax people a lot of money when they audited him and discovered he was paying for dogfood for 'the guard dog' amongst other things!

Yes Score is excellent.... my local library also has similar groups of accountants that will help with taxes too - usually for free.

Remember that writing off taxes still means you have to spend money - its only positive cashflow if you were going to buy that thing anyway. I write off some of my purchases. e.g. new controllers - I can tie those to XNA testing. But Rock Band songs I don't. I always imagine I would have to stand in front of an auditor and say "{XXXXXX} was essential for my business" and if it makes me laugh I don't try it. For example unless Ihad a job working on PS3 or Wii I wouldn't expense those. I tend to run on the cautious side for deductions.

What about setting up a non-profit company, and companies without offices/studios (online)? I'd like to make FulForge (my group/future company) official, but it's only money comes from me and donations... HALP

Donations == income... in most places you are required to pay tax on that.

Non-profit company is a very special entity. It doesn't mean you make no profit - its usually reerved for charitable type enterprises.

Offices are irrelevant.

Look on the web for your states rules about being an official company - its going to vary by country, state, county, city. Or talk to a local accountant.

In general though - ask WHY you want to be official. What do you think you will gain?

The ZMan:

Donations == income... in most places you are required to pay tax on that.

Oh.

Non-profit company is a very special entity. It doesn't mean you make no profit - its usually reserved for charitable type enterprises.

Hmm, I'm a bit confused by that. The idea behind FulForge is that we bring different content from different technologies, fan-made or sponsored, to our users for free (usually, we've charged for a couple). We're not out to make money, and it's a hobby, not a job. So it's not charitable but not for profit... ???

Offices are irrelevant.

Good.

Look on the web for your states rules about being an official company - its going to vary by country, state, county, city. Or talk to a local accountant.

'kay. I might just ask my Dad, he set up his own company and I think he could help me out.

In general though - ask WHY you want to be official. What do you think you will gain?

Essentially FulForge IS me - I do just about everything FulForge is. But at the same time, co-operation projects like Project Network (a game in progress) should not be written down under me, because I direct and write them. I don't animate them, I don't program them, I don't do sound, etc. So I want to have the benefits of a company while still not be forced to charge for everything - FulForge is not for money, and if popularity drops and it runs dry I need to be able to bring it back without running myself into debt or closing FulForge.

Did I make sense, or am I just rambling? Let me know if I'm being confusing, I'm trying to be as precise yet to-the-point as possible here.

Thanks,
Less than three Mawnisefenur

A 'non profit company' is one of these http://nonprofit.about.com/od/nonprofitbasics/a/classifications.htm (if you are in the USA)

A company that 'makes no profit' has other names - bankrupt is probably the the most polite name ;-) The IRS has special rules for how many years you can make 'a loss' before they assume your company is a sham. e.g. if you make no money buy you continually write off things they will probably audit you at some point.

Moni7or:

So I want to have the benefits of a company while still not be forced to charge for everything - FulForge is not for money, and if popularity drops and it runs dry I need to be able to bring it back without running myself into debt or closing FulForge.

What are those benefits? Or what do you think the benefits are.