The Finer Points of Starting your Development Company [Part III]: Formation

Before You Get Started:

Before you start sending out applications and visiting city hall, you need to determine what kind of business you want to set up. To do this, you will want to take your business plan, including your financials, to both your attorney and your accountant. You may also want to consult the helpful volunteers at SCORE and SBA, as they work with quite a few start-ups. Your attorney will want to insulate you from as much personal risk (to the extent that you are exposing your personal finances to personal risk) as possible, while your accountant will want to ensure that whatever entity you elect will get the best tax treatment possible. They may recommend that you fully incorporate (if you require investors and shareholders, and you require substantial start-up capital), or they may suggest one of the other "limited liability" entities at the beginning stages of your company. The checklist below is for the formation of an LLC. While the formation of business entities is on a whole fairly uniform, if you elect to organize as another entity you must a) first make sure that your state recognizes such entity as a valid business form, and b) comply with all local, state, and federal rules and regulations with regard to business formation. Therefore it is always helpful to have a lawyer at this stage in your business planning. Another question you want to ask yourself is where you want to register your entity—while it is typically problematic to organize your small business in a state other than your principal place of business, some states such as Delaware offer tax incentives for entities who register there. Many states do not require that the business members or board live in the state where the entity is registered. A post office box under your business’s name may be sufficient. Keep in mind that your business entity is distinct from you (depending on the entity), and your entity can legally exist in two places at once (where it is incorporated and where its principal place of business is).

LLC Checklist (note: the following applies to business entity creation in the US. Businesses that wish to operate in foreign countries should consult legal professionals in your region):

DBA (Doing Business As): Any business that uses a trade name or name that differs from the name that appears on the Articles of Organization must obtain a DBA. This is the name you want your company referred to in contracts, bank statements, and other transactions and investments. Many banks require that you provide your DBA prior to opening a business account. DBA’s have an added benefit for LLCs in that they allow game developers to use a different DBA for each game or website they create without forming an entirely new entity (there may be other reasons to organize each game in development as a separate business entity, however—this is something that will be discussed in later entries). You can have one LLC and multiple DBAs.

Obtaining your DBA varies from state to state, county to county, and country to country. If you are located in the US, you may want to the contact the office of your Secretary of State or the County Seat to determine how to obtain a DBA. If you are in another country, contact your local authorities (starting at the city level—i.e., city hall, mayor’s office– and working your way up) to determine how to obtain the proper registrations.

Articles of Organization: Your Articles of Organization have serious legal consequences, and should therefore be drafted by or with the assistance of an attorney. Similarly, you must be very careful that your Articles of Organization and your business’s Operating Agreement do not contradict one another. Your Articles of Organization may include:

a) Your business’s name and principal location,

b) The duration (or how long you expect to be in business to operate),

c) The business’s purpose,

d) The name and address of the Agent of the company (individual assigned to receive service of process and other legal documents),

e) The initial Capital invested by the company and its members,

f) Division of Ownership of the company,

g) Winding up/Termination of the Company,

h) Management of the company—i.e., who is in charge of what,

i) Indemnification clause, stating that the entity indemnifies its individual members as to all claims arising from doing business.

The requirements for the Articles of Organization may vary from state to state, country to country. It is in your best interest to consult a lawyer familiar with setting up small businesses.

Operating Agreement: Your operating agreement will set out the finer points of your company’s management, finances, organization, and ownership structure. This is an agreement between the members of the company that sets out how the company is to operate. As a result, it will vary drastically from company to company. As noted above, it is very important that your operating agreement does not contradict the Articles of Organization—a contradiction may cause your operating agreement to be voided unless the particular contradiction is severable from the rest of the agreement. Once again, a lawyer is very valuable at this stage.

Federal Registration: As a business with salaried employees, you will need to obtain Federal Tax ID number and an EIN (Employer Identification Number). You can obtain the forms for these ID numbers at the IRS business portal.

State Registration: You will also need to register with the state where you plan on organizing. Note: This can get tricky if you are registering in a state other than your principal place of business. Before making that decision, consult an attorney and make sure it is in the best interest of your company. Also, read the "miscellaneous issues" section of this IGDA article. To register with a state, you typically need to provide a registration form, a registration fee, and a copy of your Articles of Organization.

County Registration: In many states, you may be required to register your business in the county where you plan on operating. To do this, you need to visit your county seat/satellite office or go online to fill out the registration form. As this may also be the place where you register for your DBA, you may be able to accomplish these tasks at the same time. Different counties have different rules—some may require your Articles of Organization while others do not.

Municipal Registration: You must register as a business within the city where you plan on doing business. This usually means a trip to city hall/town hall or your local court house to fill out the requisite application forms.

Keep in mind that you are accountable for Federal, State, County, and local/city taxes. All of these registrations are almost entirely for that purpose only. However, some locations have specific regulations. Most of the offices where you register will provide you documentation of those specific rules and regulations. If they do not, it is your responsibility to educate yourself about the rules and regulations that apply to your business. As an LLC, you can elect how you want to be taxed– whether as a sole proprietorship/partnership, a C Corp, or an S Corp. How you want to be taxed depends entirely on your business’s needs, and you should always consult an accountant when making this determination.