Choosing the right legal entity is one of the earliest and most important decisions for a new game studio. The choice often comes down to two common structures: the limited liability company (LLC) or the corporation. Each offers benefits and drawbacks that can shape how a studio grows, raises money, and protects its founders.

LLC: Flexibility and simplicity

An LLC can be attractive for smaller or newer game studios. It generally has fewer formal requirements than a corporation, allowing developers to focus on making games instead of holding shareholder meetings or keeping detailed minutes. LLCs also offer pass-through taxation, which means profits and losses flow directly to members without a separate corporate tax. For many indie teams, this flexibility can keep costs low and operations straightforward.

That said, issuing equity in an LLC can be complicated. While corporations can easily grant stock or stock options, LLCs use “membership interests,” which often require more complex agreements and tax considerations. This can make it harder to offer meaningful ownership incentives to employees or contractors.

Corporation: Growth and investment readiness

A corporation, especially a C-corporation, is often the preferred structure for larger studios or those planning to raise outside investment. Investors and publishers tend to be more comfortable with corporations because of the standardized governance rules and the ability to issue stock. A corporation also makes it easier to create employee equity incentive plans, which are common in the game industry to attract and retain talent.

There are potential long-term tax benefits as well. Stock in a qualified small business (QSBS) may, under certain conditions, allow shareholders to exclude significant capital gains from taxation after a required holding period. In other words: founders may be able to sell the company without paying any tax on a big part of that sale. For studios aiming at eventual acquisition, QSBS treatment can be a powerful advantage. The tradeoff is some additional administrative complexity (e.g. annual meetings) and potential double taxation on profits.

Which structure makes sense for a game studio?

There is no one answer. An LLC may be ideal for a small team focused on creative projects without immediate plans for venture capital. A corporation may be the right fit for a studio seeking outside funding, planning rapid growth, or envisioning a future exit. In either case, the choice should be made with an understanding of the studio’s goals, the legal obligations that come with each structure, and the expectations of potential partners.

The role of a video game lawyer

A lawyer for game developers can help navigate the decision by aligning the legal structure with the studio’s business strategy. Beyond entity formation, legal counsel can ensure ownership of intellectual property is properly assigned, co-founder relationships are formalized, and publishing or investor negotiations are handled with the studio’s best interests in mind.

Forming the right entity at the outset can set the foundation for both creative freedom and long-term success.