I’ve made “Dust Scratch Games” over two years ago. This was and still is a “sole-proprietorship,” a special type of business label. When I started, I also considered the idea of incorporating this game company. This is still something that eats away at me from time to time.
While I fully intended to jump into incorporation this month, I decided at the last minute to cancel and stick with what I have now. I thought a lot to reach my current decision. I suspect many other startup entrepreneurs are in the same boat, and not many resources online give a point of view appropriate for my situation. This article outlines my logic and reasoning, and I hope it guides other game developers when they decide what to do for themselves.
- What is a “sole-proprietorship” vs an “incorporation”?
There are many links online that describe how you can start your own official business, and it varies according to different laws around the world. In Canada, the easiest is to start a “sole-proprietorship.” This basically lets you go as far as registering an optional business name… and that’s kind of it. It’s basically a way to register any self-made funds for tax purposes. According to law, virtually all income you make is taxable, and there are special forms you can declare independent income not made from a registered job or bank. In some cases you can even write off business expenses against your income tax this way.
It’s really easy to register a sole-proprietorship. In Ontario, you can do it online within an hour. As of 2016, it costs about $60 to do so, and roughly the same cost for a simple business name search and registration. That’s under $150 for your business to be registered with the government. Pretty easy!
However, a sole-proprietorship is still legally YOU. As in, any legal issues or debts with your company are also yours. You also might not be technically a business in the eyes of the rest of the world: you legally write your name, not the company’s.
In comparison, there are many other types of businesses, ranging from Ontario to all of Canada, and for single people or multiple founders. Sole-proprietorship is the easiest and cheapest. Incorporation is on a different level. Here are some of the differences:
- Incorporation: limited liability and tax tricks
If you do a quick search in Google for “why incorporate,” these are the two (and often the only two) reasons people say you should. Incorporating your business makes it, in the eyes of the government, its own legal entity, like a person. That means it has its own debt and can be sued without you, the founder, getting affected for the most part (unless law sees you explicitly at moral fault). Similarly, income isn’t on your personal income tax, it gets filled out on a separate file for the company. Tax rates are generally much better for incorporations, and even if you “pay” yourself a small salary every year, the ultimate tax being paid could be significantly less. The rest of the earnings can slowly be drawn to you and your employees to take advantage of this separation.
Keep in mind these are only available if you fully incorporate (not to sole-proprietorships). Most agree it isn’t worth it if your business is unlikely to get sued, and if you are making less than $50,000 a year off the company. As a comparison, I think my “game company” has made less than 10% of that so far.
- Incorporation: easier investment opportunities and tax breaks
For indie developers, this matters more and gets overlooked. You can sell shares of an incorporation and its much easier to find investment opportunities. Canada and Ontario are especially good at providing a variety of government-funded grants explicitly for artists, film makers and yes, even game developers. These grants seem complex, but can be really easy to get; even I was accepted for one (the catalyst for this article), but I turned it down when I decided incorporation wasn’t worth the added commitment and cost. And yes, you must be incorporated.
Similarly, Canada and Ontario have tax credit offers to help pay back what you spend on employees for all manner of business, including game development. With the currently weak CDN dollar, this is the best time to start such a business in my area of the world. Again, this requires incorporation to be considered.
- Incorporation: people take you more seriously
This relates to the previous point. As a game developer, it is a common dream to have game on a console for Nintendo, Sony or Microsoft. And if your game company isn’t incorporated, it probably won’t happen. For both investment and general growth opportunities, incorporation shows that you are taking the business seriously, and many doors simply will not open without it (the big three also require a “static IP address” among other things… do some research and see what the process is like). For this reason alone it seems worth it for all game companies to eventually become incorporated, but maybe not right away for the following reasons.
- Incorporation: costly to start
Remember how cheap it was to register a sole-proprietorship? To fill out a form for incorporation, it costs about $360. Still reasonable, but its almost unanimous for people to recommend having a lawyer do it properly for you. This is a new legal entity after all, you don’t want to mess it up, at risk of the government shutting down the business and seizing assets later on. With this, it can range from $800 to $2,000 to register a new business, and even more if you are declaring the transfer of an existing business (proprietorship or incorporated) to another. And the government will expect a permanent company address where you can easily be reached and checked on.
- Incorporation: complicated to maintain
Effectively, you will fill out taxes twice. You must have regular company meetings and keep records. You must handle shares and paperwork. Taxes and benefits for employees, and salaries regulated by industry norm. Sounds like a lot for a company if it’s running out of your bedroom. You will likely have more accountant or lawyer fees each year just to keep track of stuff, which can add an extra few thousand dollars to just maintain things. If you think you have the time, the drive, and are well settled for the experience, this is nothing. Otherwise, being committed and time-restricted to managing might block other life opportunities and leave less time actually doing the thing the business was made to do.
- Should an indie developer incorporate?
Online stores like Steam generally accept regular people (if Greenlit with a real project), even if they ask to sell under a different name. So for indie developers just starting out, there really is no reason to bother incorporating, unless you were scared of being sued for ripping off Sonic the Hedgehog. Even having a sole-proprietorship might not be required, I just do it for making sure I’m honest on my taxes. And for my purposes, and certainly for the scope I’ve been working at, this suits me fine. If your games sell well enough to quit your job, then you should incorporate, but it’s never too late to do so and waiting has its advantages. And should you find reason to quit your startup? Easier if it isn’t incorporated too.
I do hope to eventually incorporate, especially since my projects will hopefully grow in size in the next year or two. But my near future isn’t grounded enough for me to feel comfortable with that yet. Until then, even continuing on my own finances without grants or funding, I can proceed slowly to hire as needed and build as time allows.
Speaking of which, after the last few months, I’ve finished animating a foot for my new game. This is going to be a really long year…