Why should I create a corporation or LLC for my video game studio?
If you’re starting your own video game studio, you might be inclined to just hit the ground running without extra thoughts to the legal structure and framework of your business.
Naturally, I’m biased against this approach. Here’s a short overview of why you should consider forming a corporation or a limited liability company (LLC) before you ever even consider announcing your brand new studio.
The biggest thing to consider here is liability. We have created an overview of the 10 steps you need to take to guide your new business, including an in-depth review of the different entity types.
Different businesses are going to have different needs. Per that post, several key considerations include taxes, costs, administrative burdens, the flexibility of the legal structure and what your future plans might be. The primary thing to consider here first and foremost, however, is liability.
Liability refers to the state of being responsible for something, like a company’s debt or obligations that come up in business operations.
Why liability matters
Liability matters because if you don’t form some sort of legal entity, you as an owner may be liable for the business’ obligations. Some things can never be limited in terms of liability, like professional malpractice. These forms of liability can be guarded against with insurance, such as medical malpractice insurance.
If you do not form some sort of entity, like a corporation, you, as the owner, are liable for your business’s operations. That means that, for example, if there is an injury of some sort that’s caused as a result of your work or your unofficial business – the injured party can sue you personally for the damages. With a corporation or an LLC, however, owners are shielded by the entity. If an injured party wants to seek compensation, they can only ever pursue damages from the corporation itself – an owner’s assets cannot be touched.
In short, forming an entity in a legal manner protects you and your founders.
A separate note on operating agreements and bylaws
While an entity may help shield you as an owner as long as you maintain the business formalities actively, you will also want to consider your business’s governing documents. This means the company’s charter, filed with the state, for corporations. It also includes the bylaws. For LLCs, it means putting together an operating agreement – especially if you have other founders involved in the setup of your video game studio.
Two of your best friends when you start a business may very well be your lawyer and your accountant. Your lawyer, in this instance, can help you write bylaws or draft an operating agreement. If the company grows rapidly, if the company fails, if one of the partners wants to leave, if the owners want to add a new partner, etc. The company’s governing documents should cover these sorts of contingencies.
Having a well-drafted operating agreement or solid bylaws in place when you form your legal entity can spare you and your team many headaches down the road. It’s best to err on the side of caution here and get as much documented as humanly possible.