Corp?? Sole Prop?? What should I do?
by Donald "Yadot" Harris · in General Discussion · 09/14/2006 (5:10 pm) · 13 replies
So I am to a point where someone may look to me for developing a game for a movie they are making. I was wondering in dev studio what challenges would one face when actually running a business. I currently have a Sole Prop that I am not using. I can easily go in and change the name to that of the game studio. Would you advise me to look at another type of business or would a Sole Prop be ok? I am not looking to have more than a couple of employess for quite some time. I don't think any money will be involed for a while, but I still want to be protected and have my friends who work with me protected as well. So let me have it tell me if I am thinking to small or would it be ok to run as an Sole Prop and then change into a Corp later on....
#2
The issues for me were: Tax, Liability, Intelectual Property rights. I'm in NC, but Here's what I learned:
SP:
*Taxes go on your 1040
*No coporate vail, so you can be sued directly, including your wife.
*IP rights are yours
Partnership:
*Taxes go on your 1040
*No coporate vail, so a partner can screw up and your are liable
*IP rights should belong to the partnership
LLC: (If your state allows them)
*Taxes go on your 1040
*Corporate Vail protection, only the company can be sued.
*IP rights belong to the company and can be sold with the company.
Single member LLC (If your state allows them)
*Since a LLC is intended to protect the partnership from personal litigation, some states allow for a single member LLC (thus, gaining the corporate vail with out a partners). However, if you screw up, a judge can allow the corporate vail to be pieced because there's no partnership to protect.
Corporations:
S-corps:
*has to be based in the domestic US.
*can not have more than 50 US citizens shareholders
*can have 1 shareholder
*taxes go on your 1040, but you'll have to pay a franchise tax (possible different per state)
*full corpoarte vail
*IP rights belong to the business
C-Corp.
*you'd be like IBM or Microsoft.
I'd also check out [ur]www.igda.org[/url]
Their forums are full of this stuff.
Hope this helps.
09/14/2006 (6:08 pm)
I thought a sole-proprietorship could have employees? The issues for me were: Tax, Liability, Intelectual Property rights. I'm in NC, but Here's what I learned:
SP:
*Taxes go on your 1040
*No coporate vail, so you can be sued directly, including your wife.
*IP rights are yours
Partnership:
*Taxes go on your 1040
*No coporate vail, so a partner can screw up and your are liable
*IP rights should belong to the partnership
LLC: (If your state allows them)
*Taxes go on your 1040
*Corporate Vail protection, only the company can be sued.
*IP rights belong to the company and can be sold with the company.
Single member LLC (If your state allows them)
*Since a LLC is intended to protect the partnership from personal litigation, some states allow for a single member LLC (thus, gaining the corporate vail with out a partners). However, if you screw up, a judge can allow the corporate vail to be pieced because there's no partnership to protect.
Corporations:
S-corps:
*has to be based in the domestic US.
*can not have more than 50 US citizens shareholders
*can have 1 shareholder
*taxes go on your 1040, but you'll have to pay a franchise tax (possible different per state)
*full corpoarte vail
*IP rights belong to the business
C-Corp.
*you'd be like IBM or Microsoft.
I'd also check out [ur]www.igda.org[/url]
Their forums are full of this stuff.
Hope this helps.
#3
You're absolutely right - I was wrong. SPs may have employees...
@Donald
You mention 'protection' for you and any employees. Here's the part that would make me wary in terms of using an SP: sole proprietorships carry "unlimited liability" for the owner. This means all your personal assets are 'on the table' if you get sued by anyone. [And given the way things are going, everyone is going to be sued at some time or another for something... but that's a rant for another day.]
If I were you I would talk to an accountant to see what structure would suit your situation. The few hundred bucks now might save you a hell of a headache later on.
09/14/2006 (6:27 pm)
@JodyYou're absolutely right - I was wrong. SPs may have employees...
@Donald
You mention 'protection' for you and any employees. Here's the part that would make me wary in terms of using an SP: sole proprietorships carry "unlimited liability" for the owner. This means all your personal assets are 'on the table' if you get sued by anyone. [And given the way things are going, everyone is going to be sued at some time or another for something... but that's a rant for another day.]
If I were you I would talk to an accountant to see what structure would suit your situation. The few hundred bucks now might save you a hell of a headache later on.
#4
My state, California, imposes an extra LLC tax so I've been holding off after letting my SP lapse from the old days but it is seriously worth looking into. It's probably $1K-$2K to have a lawyer do it but some on-line places will walk you through doing yourself for a couple hundred bucks.
Good luck!
=Tod
09/14/2006 (6:55 pm)
I'd look hard at the LLC - I'd recommend looking at it if all you're going to do is release shareware but if you're dealing with IP then the protection of an LLC can be huge. Most of the good of an S-Corp but way less hassles and special tax and legal obligations.My state, California, imposes an extra LLC tax so I've been holding off after letting my SP lapse from the old days but it is seriously worth looking into. It's probably $1K-$2K to have a lawyer do it but some on-line places will walk you through doing yourself for a couple hundred bucks.
Good luck!
=Tod
#5
09/14/2006 (7:28 pm)
Thanks for all the good info. One thing though do you think it would be a bad idea to change into an LLC later on? As an indie with a family I don't have any money at all. So taking advantage of the existing SP would save me money. I am not going to release until a couple of month from now. And by then I should be able to have some demos to show some people for a base investment. More than likley I will hit up family members in order to get it going. And not to be to cavelier about this but there arent a ton of game companies being sued...
#6
Another thing would be to find out how other people went about it and there experiences with it...at least this would be what I would do before making my final decision, if I where you...
Then again I heard it's a pain to do taxes for a Sole Proprietorship (but then again that was maybe 5-7 years ago, when that person had their business), whereas there a usually a lot of benefits to become a LLC, S-Corp, or C-Corp.
09/14/2006 (7:30 pm)
Just wondering, but does anyone have experience using the online websites? The reason I ask is because everyone I know has went and paid for a lawyer to do it, so I'm wondering if the online sites can provide everything a lawyer can for less and still be as good...Another thing would be to find out how other people went about it and there experiences with it...at least this would be what I would do before making my final decision, if I where you...
Then again I heard it's a pain to do taxes for a Sole Proprietorship (but then again that was maybe 5-7 years ago, when that person had their business), whereas there a usually a lot of benefits to become a LLC, S-Corp, or C-Corp.
#7
09/14/2006 (7:46 pm)
First off my wife really worked wonders on my taxes so I was up to date and paid. But the thing is I do hate doing taxes. I can only imagine that the in the beginning there wont be much money flowing so I wont have to worry about it. As far as the online sites I personally would like someone to talk to so I can ask every dumb question I can think of.
#8
In NC, an LLC is $200 filing fee per year, a Corp is $25. The franchise fee is $1.5 per $1000. So it sometimes is cheaper to run a S-Corp. Like that helps anybody outside NC :)
@Donald
I'd look into the corp protection before you release something to the public. Just gives your family the extra protection just in case you are sued.
09/14/2006 (9:22 pm)
@TodIn NC, an LLC is $200 filing fee per year, a Corp is $25. The franchise fee is $1.5 per $1000. So it sometimes is cheaper to run a S-Corp. Like that helps anybody outside NC :)
@Donald
I'd look into the corp protection before you release something to the public. Just gives your family the extra protection just in case you are sued.
#9
I used bizfiling.com 3 years ago to setup a LLC. It cost about $500 on a credit card all together, and took about 2 weeks to get the paperwork. They wanted more than the $200 filing fee each year. So, we ended up being our own registrant just to save the money the following years.
My personal S-Corp company, which I setup in April, only cost me $200 in lawyers fees. He gets the kits cheaper, and my state (NC) cashes lawyers checks faster than anybody elses. So the whole ordeal took 4 days.
09/14/2006 (9:34 pm)
@bryanI used bizfiling.com 3 years ago to setup a LLC. It cost about $500 on a credit card all together, and took about 2 weeks to get the paperwork. They wanted more than the $200 filing fee each year. So, we ended up being our own registrant just to save the money the following years.
My personal S-Corp company, which I setup in April, only cost me $200 in lawyers fees. He gets the kits cheaper, and my state (NC) cashes lawyers checks faster than anybody elses. So the whole ordeal took 4 days.
#10
Withholding is a bitch too, since you have to mail the check in every quarter (if you want to). Otherwise you better be saving some for tax time.
09/14/2006 (9:43 pm)
Yeah, you'll a cpa to do the business taxes. They'll give you the K-1's , which turbotax and the others can input for you. I think it all goes on the self-employment line anyway on the fed. Our state has some appendix its attached to, since the tax is based off our federal 1040.Withholding is a bitch too, since you have to mail the check in every quarter (if you want to). Otherwise you better be saving some for tax time.
#12
I looked into it but I live in CA and they will get theirs so it didn't even seem worth the bother trying. CA charges a flat tax - it was $800 - up to $250K in revenue and then it scales after that. It's not bad if you're doing business - a ton of real estate groups in CA are LLCs - but if you're just thinking about it $800/year is a hefty fee. Also if you register out of state then you have to pay a "doing business in CA" fee anyway so it really isn't worth trying to dodge it.
The site: www.legalzoom.com always impressed me with the information they gave out for free and they have been around a long time. I have not used them and this is not an endorsement. Just a mention.
If it is at all possible I would second registering the LLC as early as possible to shield your assets. You can (IANAL) transfer whatever you want into the LLC as your "investment" when you set it up but you're exposing your personal assets before that.
=Tod
09/15/2006 (12:42 am)
Another thing about LLCs - you have to register someone as the responsible party and it has to be a real reachable person which means filing your address and phone number unless you have someone to hide behind. People will do this for a fee and be your person of record but you will pay year after year. You will also have to do this if you do the crafty register in one of the states that have liberal incorporation laws if you don't live there - Delaware and Nevada are the top two I believe - because it has to be someone in that state. I looked into it but I live in CA and they will get theirs so it didn't even seem worth the bother trying. CA charges a flat tax - it was $800 - up to $250K in revenue and then it scales after that. It's not bad if you're doing business - a ton of real estate groups in CA are LLCs - but if you're just thinking about it $800/year is a hefty fee. Also if you register out of state then you have to pay a "doing business in CA" fee anyway so it really isn't worth trying to dodge it.
The site: www.legalzoom.com always impressed me with the information they gave out for free and they have been around a long time. I have not used them and this is not an endorsement. Just a mention.
If it is at all possible I would second registering the LLC as early as possible to shield your assets. You can (IANAL) transfer whatever you want into the LLC as your "investment" when you set it up but you're exposing your personal assets before that.
=Tod
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