Summary

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Summary

This chapter covered the first steps of organizing your company, which should happen in three steps:

• Decide ownership stakes. Sit down and figure out how the founders see their contributions and what level of ownership and control they expect. Think about whether a vesting schedule would make sense.

• Choose a business entity. Take a look at the business entity options available: the C-corporation, S-corporation, and LLC make the most sense for developers, because they give all of the owners limited liability protection.

• Issue the ownership. Once you know how you'll be allocating ownership and what business entity is best for your company, you'll need to execute an ownership agreement controlling relations among the owners.

The C-corporation is usually not appropriate for young companies because of its entity-level tax, but because most of the profits will be reinvested and/or paid to owners as salary, the entity tax becomes less of an issue. Furthermore, QSBC stock can cut the owners' capital gains tax in half if the stock is owned for five years or more.

The S-corporation offers a lot of the C-corporation's benefits but without the double tax. Ownership is limited to 75 or fewer individuals, howeverwhich means no corporate investment. Lots of entrepreneurs start their companies as S-corporations so that they can deduct initial capital losses against their income and capital gains tax, reorganizing (tax-free) later as a C-corporation.

The LLC is another popular option for game developers. It has the benefits of an S-corporation without the limit on ownership. It also doesn't have all of the regulatory requirements of a corporation (annual meetings, filing minutes, and so on). However, there are some drawbacks to the LLC, such as the difficulty of transferring ownership or adding owners, and the lack of self-employment tax reductions that may be available to owner- employees of an S-corporation.

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