When and Why to form an LLC?
polycounter lvl 10
Hi everyone!
So, I have a question for all of the freelancers, company owners, and others who are off doing their own thing. When and Why did you or don't you form an LLC?
I've been freelancing f/t (or close to) since late 2013 or so. I've been doing it as a Sole Proprietor, or independent contractor if you will. I don't have a company and really haven't felt as if I've needed one until lately. Business has picked up, I'm getting work from increasingly larger entities (still small but it counts) and I've even had one client state that they prefer to work with LLC's (they still worked with me anyway).
The other thing I'm thinking about is selling assets and making my own small games. I teach at Drexel University as an Adjunct (it's separate from my freelance/business), so that gives me some freedom to pivot from working on other's work to working on my own (my own game ideas, my own assets, etc).
If I form an LLC, I'd need to purchase new web space and set up a company email, twitter, and so on since the business would be separate from me. It's a bit different than how it is now, where I am one with the business.
I'm less worried about tax advantages, since I'm not sure I'd benefit in the near term. But I'd love to hear stories or advice about taxes too.
Thanks, I'm really looking forward to hearing some thoughts!
-Dan Rose
http://rose3d.com
So, I have a question for all of the freelancers, company owners, and others who are off doing their own thing. When and Why did you or don't you form an LLC?
I've been freelancing f/t (or close to) since late 2013 or so. I've been doing it as a Sole Proprietor, or independent contractor if you will. I don't have a company and really haven't felt as if I've needed one until lately. Business has picked up, I'm getting work from increasingly larger entities (still small but it counts) and I've even had one client state that they prefer to work with LLC's (they still worked with me anyway).
The other thing I'm thinking about is selling assets and making my own small games. I teach at Drexel University as an Adjunct (it's separate from my freelance/business), so that gives me some freedom to pivot from working on other's work to working on my own (my own game ideas, my own assets, etc).
If I form an LLC, I'd need to purchase new web space and set up a company email, twitter, and so on since the business would be separate from me. It's a bit different than how it is now, where I am one with the business.
I'm less worried about tax advantages, since I'm not sure I'd benefit in the near term. But I'd love to hear stories or advice about taxes too.
Thanks, I'm really looking forward to hearing some thoughts!
-Dan Rose
http://rose3d.com
Replies
The theory I have behind this is that it lets me stay free to work with other outsourcing studios as an individual. There are other LLC's who, from what I understand, don't or can't work with other LLCs and I don't know the reasoning behind that. I'm sure that finances would have to be kept separate (say I worked for Studio Bob as an individual, and Company Dave as the LLC. Bob's checks would go to me while Dave's would go to my LLC and then I'd have to draw salary from the LLC...stuff like that). My example might be a bit fuzzy too since I'm no lawyer and I'm still doing the legwork into all of the pros and cons.
No real tax advantage over Sole Proprietorship. LLC gives your personal assets some protection if you were to get sued (sometimes it is exaggerated just how much protection it gives you-talk to a lawyer if you are really worried about it ). You don't have to have an LLC to have a company name. You can apply for an EIN (Employer Identification Number) and have your name associated with a trade name and still just use Sole Proprietorship. It's been mentioned that some people see LLCs as a sign of professionalism, but I'm not sure how much I agree with that considering anyone with the money to register can form one. One advantage of having an LLC is that there are no resident requirements. It also may help you, if you were looking to barrow money to expand your business.
I freelanced for about 4 years with it being my sole source of income, never really saw any advantage to an LLC.
Edit: Looked at your resume and this shouldn't be a concern, looks like you have a degree and a couple years onsite experience which should be enough (assuming it's a 4 year degree at an accredited school) for visa eligibility if you so desire.
As mentioned, Having the LLC also lets you get an EIN--which allows you to get a business bank account, business credit cards (convenient during biz-traveling, since you KNOW you can deduct everything on that card), register trademarks, get e/o insurance (if you need it), and, if things go that way, handle transferring ownership of assets/IPs. Also it allows you to deal a bit more securely with contractors (should you hire any) and when receiving funds (since you never have to directly share you own SSN).
You also have a stronger argument to claim certain expenses (certain percentages of utility costs, for example, as well as many games-related technology purchases). You can do that as a Sole Prop too..but as an LLC I think you're less likely to raise the kind of flags that might get a Sole Prop audited. Also, you are essentially making purchases "for the company", and not for you. That has it's own repercussions too, if I recall correctly.
Additionally, many companies don't want to work directly with anyone who does not have at least an LLC set up (Nintendo and Sony were big about this a few years back). Valve prefers them too, or did a couple of years back. That might be just a matter of them not feeling comfortable holding on to SSNs though.
The biggest downside is the annual fee...that and the hassle of setting up articles of organization and doing an annual report, but with a single-member LLC you don't have to worry about those so much...since there's no deliberating with fellow owners. You still have to file something annually, but it can be a quick forms type thing. It takes me about 30 minutes to refile annually. The annual fee varies by state. Some states are 50 bucks a year. Massachusetts is 500 a year. This sort of stuff is why you see so many companies with their registration in Delaware. I've heard there are companies who's business model is "act as a shady PO Box in Delaware for other companies so they can incorporate here". As an individual, I don't suggest bothering with that, as it might affect what you can or can't deduct if you start deducting portions of your utility/mortgage/etc.
If you're worried about setting things up correctly, something like LegalZoom can do the job pretty cheaply. Lawyers like to shit on legalzoom type services, but filling out and filing redtape-forms that vary per state is *exactly* where legalzoom excels. Save the lawyer fees for negotiating contracts and dealing with unique situations.
edit: Of course, all this said...you probably don't NEED to be an LLC for just listing stuff on the asset stores or doing subcontracting. It's making and selling your own small games that make having an LLC start to make sense.
Here's a good book on this stuff: It's cheap and very plainly written guide to this stuff--a quick read too. I try and reread it every few years so I'm refreshed. http://www.amazon.com/gp/product/0981454267?psc=1&redirect=true&ref_=oh_aui_search_detailpage
Nice job with Tower of Guns btw. I read an article you did either for or used by Gamasutra, about task tracking and keeping timers. I started doing the same at the start of last year and it's been pretty helpful.