Should I Inc. or Should I LLC?

For just about every freeware indie game dev there comes a point where you say to yourself, “Self, you’re spending more time making games than you are studying, working, and having a social life. Freeware’s great and all, but eventually you want to do this for a living, right?” If you’re starting to get really serious about your hobby you’ll probably want to turn it into a career sooner or later. After all, what could be better than making a living doing something you already love doing for free?

One of the first things you’ll want to consider is forming an actual company. You can have success going freelance, and many people choose to go that route. But for different reasons few do it forever, and it stands to reason that at some point you’ll want to either be part of a company, or create one yourself. This idea can be a bit intimidating, and on the surface seems to be an arduous, tedious process. It sounds scary and expensive and is a wall that many can’t seem to overcome. I myself waited far too long to set up my business. But it’s not nearly as bad as you might think.

If you decide, like I did, that you want to be your own boss and build your own company, you’ll need to first figure out what type of company it is that you should make – a standard corporation (Inc.) or a limited liability corporation (LLC). What the hell does this mean? I didn’t quite know myself, so I took to the interwebs and did some research. I’ll simplify it for you now (though you might want to read up as well, after all, I’m not a lawyer).

Inc. – Full-blown corporations are stock-issuing entities, and most large companies use this format. They are appropriate for start-ups that will be seeking investors and will eventually have stockholders and a board of directors. They’re legal and taxable entities (except for S-corps, but we’re not going to go into that… yet), so the company’s income itself is taxed before being passed along to the owners. The major disadvantage is that these funds are then taxed again as personal income. But, if you want to have investors, you’ll need to incorporate. Incorporating also gives you the maximum protection possible, as debtors can only come after company assets, and never your own.

LLC – Limited liability corporations are, contrary to popular belief, completely legitimate corporate entities. When you create an LLC you decide who the members are, and how much of the business each member owns. There are no tax advantages or disadvantages, but one useful aspect for beginning small businesses is that income is passed straight to the owners. LLCs are not taxable entities, so are not subject to the rules and disclosures that C-corps are, but they do protect the owners from debtors in the same way that C-corps do. LLCs do not generally allow for shareholders, though, so if you’re seeking investors, it may not be the way to go.

So what did I do? I went with LLC. Limited liability corporations are extremely easy and cheap to set up, are free from complicated tax regulations, and give the same protection to the owners that full corporations do.  I’m from Colorado, which is very small business friendly, with a state fee for creating an LLC of a measly $50. Other states are a bit more expensive (New York is a slightly more wallet-paining $200, and even Alaska is $180 for some reason), but LLCs will always be less expensive than C-corps because of costs down the line. And I’m not seeking any investors at the moment, and probably won’t ever. But if I do, the conversion is fairly easy.

Next time I’ll show you how easy it is to set your LLC up!

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