Should I Start an LLC for My Video Game Company?
Starting a limited liability company (LLC) for your video game company can provide several benefits.
Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.
For a video game company, lawsuits can arise from things like trademark and copyright disputes, data breaches, and false advertising allegations.
LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your video game company seem more credible.
Recommended: Use Northwest to form an LLC for $29 (plus state fees).
Do I Need an LLC for a Video Game Company?
LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.
You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.
LLC Benefits for a Video Game Company
By starting an LLC for your video game company, you can:
- Protect your savings, car, and house with limited liability protection
- Have more tax benefits and options
- Increase your business’s credibility
Limited Liability Protection
LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.
Video game companies will benefit from liability protection because of the risk of expensive lawsuits related to copyright and trademark infringement claims. There are also general business risks, such as financial data breaches and even workplace accidents.
Example 1: When the Federal Trade Commission (FTC) accuses you of illegally collecting young customers’ personal information, your video game company begins accruing significant debt. As a result of its LLC classification, you (and other LLC owners) will not have your personal assets on the line for the debt, even if your business is unable to adequately compensate the claiming parties.
Example 2: As a result of failing to disclose violent and graphic content on one of your video games, your video game company becomes the subject of an FTC lawsuit. Regardless of how the case progresses, your personal assets will remain protected as a result of your limited liability in law.
Example 3: After playing one of your video games, a child’s parents allege that it has made him increasingly violent and file a lawsuit against your video games company. Regardless of the legitimacy of the lawsuit, your personal assets will remain protected from the claimants as a result of your business’s LLC classification.
An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.
To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.
LLC Tax Benefits and Options for a Video Game Company
LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.
The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.
Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.
S Corp Option for LLCs
An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).
S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.
The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.
In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.
We estimate that if a video game company owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.
You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.
Credibility and Consumer Trust
Video game companies rely on consumer trust. Credibility plays a key role in creating and maintaining any business.
Businesses gain consumer trust simply by forming an LLC.
A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.
Northwest will start an LLC for you for just $29 (plus state fees).
How to Form an LLC
Forming an LLC is easy. There are two options for forming your LLC:
- You can hire a professional LLC formation service to set up your LLC for a small fee
- Or, you can choose your state from the list below to start an LLC yourself
Select Your State
- Alabama LLC
- Alaska LLC
- Arizona LLC
- Arkansas LLC
- California LLC
- Colorado LLC
- Connecticut LLC
- Delaware LLC
- Florida LLC
- Georgia LLC
- Hawaii LLC
- Idaho LLC
- Illinois LLC
- Indiana LLC
- Iowa LLC
- Kansas LLC
- Kentucky LLC
- Louisiana LLC
- Maine LLC
- Maryland LLC
- Massachusetts LLC
- Michigan LLC
- Minnesota LLC
- Mississippi LLC
- Missouri LLC
- Montana LLC
- Nebraska LLC
- Nevada LLC
- New Hampshire LLC
- New Jersey LLC
- New Mexico LLC
- New York LLC
- North Carolina LLC
- North Dakota LLC
- Ohio LLC
- Oklahoma LLC
- Oregon LLC
- Pennsylvania LLC
- Rhode Island LLC
- South Carolina LLC
- South Dakota LLC
- Tennessee LLC
- Texas LLC
- Utah LLC
- Vermont LLC
- Virginia LLC
- Washington LLC
- Washington D.C. LLC
- West Virginia LLC
- Wisconsin LLC
- Wyoming LLC
For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.
Do LLCs Need Insurance?
All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.
For a video game company, purchasing business insurance can be crucial against IP infringement, false advertising, and data breach lawsuits. It can also help you protect and replace your hardware.
Common Situations Business Insurance May Cover for a Video Game Company
Example 1: While visiting company offices, a consultant slips on a recently mopped floor. The consultant suffers multiple injuries, including a head injury. General liability insurance would cover medical care needed after a slip-and-fall accident on company property like this.
Example 2: An employee inserts a secret easter egg into one of your company’s games. The Easter egg references another developer’s game and is meant in good fun, but the other developer takes issue and files a copyright infringement lawsuit. General liability insurance may cover costs associated with the suit.
Example 3: In order to boost sales during an initial game release, your company promises a discount on the game’s future sequel to customers who pre-order the first game. The sequel never comes to fruition, and customers sue for false advertising because they can never use the discount. General liability insurance would probably cover the resulting legal fees and settlements.
Other Types of Coverage Video Game Companies Need
While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all video game companies should obtain:
Product Liability Insurance
Since your video game company makes money by selling products, product liability insurance is one coverage your business likely should have. This insurance helps protect businesses from lawsuits related to damage or injury that their products cause.
The product-related liability risks for video game companies aren’t clear at this point, but there are a few risks that the industry one day might face. For example, customers might successfully sue by claiming that a video game was too distracting and caused them to get hurt in an accident. Having product liability insurance in place now may help protect your business from uncertain risks like this.
Professional Liability Insurance
If your video game company provides consulting services to other game developers, you may want professional liability insurance for yourself and all consulting employees. This insurance usually covers mistakes made when giving advice in a professional capacity.
Commercial Property Insurance
Any studio or building that your video game company owns should be covered by commercial property insurance. This insurance can often insure both structures and equipment kept in them. Make sure the limits adequately cover your company's computers.
Workers’ Compensation Insurance
If your video game company has employees, the business is probably required by state law to carry workers’ compensation insurance. Workers’ compensation protects against costs related to on-the-job injuries.
Among the injuries that it normally protects against is carpal tunnel syndrome. To make sure workers who develop this because of typing too much at work are covered, workers’ compensation should be in place the day your business hires its first employee.
Should I Start an LLC FAQ
Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.
Visit our LLC vs. Sole Proprietorship guide to learn more.
At a minimum, you’ll need general liability insurance.
Read our Video Game Company Insurance article for more info.
Starting a video game company requires a substantial budget. This is because you will need several computers, monitors, specialized software, and video game consoles. You will also need to employ programmers and developers, as well as lease out an appropriate space to use as an office (unless you plan to operate from your home).
Visit our How to Start a Video Game Company guide to learn more about the costs of starting and maintaining this business.
Payroll, hardware, software, rent, and utilities are some of the main operating expenses for a video game company.
Learn more about running a video game company.
Video game companies make money by developing video games and selling them to customers.
Learn more about starting a video game company.
Video games have never been more popular. Starting a video game company can require a large investment of time and money, but the potential for profit is almost limitless.
It is possible to keep costs lower by starting a video game company out of your home and doing all the work yourself. But this will be very difficult and probably limit the type of games and profit you can make.
Learn more about starting a video game company.
