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frosty
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« on: October 14, 2007, 08:09:35 PM »

No one has started a thread on this yet, so I thought I'd get the ball rolling.  This isn't a comprehensive HOWTO, just my experience and opinion as a full-time indie who started a business in California and has sold games online in the past year.  I was a total beginner when I started.

Note: I am not a lawyer or accountant.  This is not legal or financial advice.  Use your own judgment and/or consult a professional.


Pulling the Trigger

First, I know some people avoid starting a business because they don't want to go through the hassle of the paperwork, taxes, risk of lawsuit, lack of insurance, etc.  Some people even release their products for free just to avoid this.  I think a lot of this attitude stems from fear of the unknown, and overestimating the difficulty of it.  They will work a life-time at a "safe" job that they hate, to avoid a few days of work that could lead to an independent livelihood doing something they love.

It's not as hard as you might think.
If you can program or design computer games, you're smart enough to start a company.  If the guy running a hot dog stand at the local park can do it, so can you.  There were 17 million small businesses in America in 2002, outnumbering "big" businesses 3-to-1.   So you're not alone.

Plus, a software company is probably the easiest business to start: no inventory, no real estate, no customers visiting you, no complicated licensing or health codes to follow, no credit card processing, etc.

Recommended Reading: Small Time Operator, by Bernard Kamaroff


Paperwork and Licenses

It's not fun, and sometimes the bureaucrats tell you one thing and then someone else says another, and some still don't understand that you can sell software online.  But the pain of setting up only happens once, so stick it out. 

If you do something wrong, they'll tell you what you need to do to fix it.  Remember, despite the attitude you'll get from the bureaucrats, the government actually wants you to make money... so they can tax you.  As long as you're paying, and aren't a risk to the public, they seem to be indifferent about the details.

These are the things I had to get in Alameda County, California:

Business License
So the city of Alameda can tax me once per year.

DBA (Doing Business As)
This is so I could use a clever name like Flea Circus Games instead of my boring real name.  Once you file, you need to publicly announce it by sending it to a newspaper, who will publish it in their legal notices section for about $30.

Home Occupation Registration
Yes, they made me pay a fee for permission to sit my home computer.  They actually had to look at a map of the city, find my apartment, and make sure I wasn't violating a zoning code.  I also needed permission from my landlord, confirming that I wasn't taking customers on the premises, that I wouldn't be too loud, and that I wasn't storing inventory in the apartment.

California Seller's Permit (optional)
This is for California Sales Tax. This is only required if *you* sell physical merchandise (including CD's).  I got one just to be safe, but I didn't need it because 1) my payment processor is selling my software and paying me a royalty, and 2) it's downloadable bits, not physical.

Total time: about 8 hours.  Most of it traveling and waiting for my name to be called.
Total cost: about $300.  But startup costs are tax deductable.


Taxes

Taxes aren't that big of a deal, either.  I did everything myself this year.  If I start making real money, I will probably get an accountant, but I think it pays to grasp the basics by doing it once on your own, without tax software.

Here's the thing: The tax code is pretty much set up so that by default, you're paying the maximum tax owed -- after that, every minute you spend to claim your deductions is $$ money in your pocket $$.  A penny not given to Uncle Sam is a penny earned.

Just remember: Keep bullet-proof evidence that your deductions are legit.  At minimum, you need proof of the price paid (a receipt), and that *you* paid for it (credit card statement).  So set up a good filing system, and think of this bit of extra work as money in your pocket when you file each year.

Here are some of the things I deducted: a bunch of marketing, art, and business books, RAM upgrades, text editor license, web hosting, DSL, sound files, domain registration, rent, and utilities. Note that I only deducted part of things like DSL and computer upgrades, relative to how much it is used for business vs personal reasons.

Tax Forms

Being a sole proprietor means that I file all business income with my personal tax return.  Here are the forms I filled out for 2006:

1040 - Individual Tax Return - 2 pages
Schedule C - Profit or Loss from Business - 2 pages
Schedule SE - Self-Employment Tax - 1 page
Form 8829 - Expenses for Business Use of Your Home - 1 page

Total time: about 10 hours.  Mostly reading and organizing my paperwork.

Recommended Reading: Deduct This!, by Stephen Fishman


Health Insurance

This may be the most common reason people are afraid to leave a full-time job.  Sometimes it makes sense, especially if you have a family or pre-existing medical conditions.  But I'm sure most members here are like me: single, healthy male under 35.

I had insurance with my previous employer which, by law (for up to 18 months), you can continue if you leave the company.  I found it cheaper to get my own as an individual, thanks to the miracle of the Internet.

I highly recommend eHealthInsurance.com.  They have *great* explanations on what all the terms mean, and makes it really easy to compare health plans in your price range, from all the major insurance companies.  You can submit your application online and they will actually make sure it gets to the right people at your chosen insurance company. 

I pay about half as much per month as I would have if I had kept my employer's plan.  My goal was to just get insurance in case I had an unexpected major expense, not as something to cover dentist or eye doctor visits.  This way I could keep the monthly payments low, but had a high deductible.  And as it happens, I had a major health expense about 6 months ago, so it was worth every penny.

Total Time: about 5 hours.  Mostly research and learning the lingo.  Once I submitted the form, I just had to wait for a response and fax a form.

Recommended Site: ehealthinsurance.com


Conclusion

Overall, most things you'll encounter in starting a business aren't that hard.  It's all about being willing to break from the pack, doing the necessary legwork, and most of all, learning as you go.

Recommended Reading: Growing a Business, by Paul Hawken

« Last Edit: October 19, 2007, 02:31:07 PM by frosty » Logged

Derek
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« Reply #1 on: October 14, 2007, 08:44:23 PM »

First off, I Kiss you for starting this thread, frosty!

Second off, I have a couple questions:

1. What rights does the business license grant you, exactly, that the seller's permit does not?

2. Did you consider forming a single-person LLC?  If so, why did you decide not to in the end?
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frosty
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« Reply #2 on: October 14, 2007, 09:36:45 PM »

Quote
What rights does the business license grant you, exactly, that the seller's permit does not?

The business license grants no rights at all.  It's just a way for the city to tax me -- e.g. I renew my "Business License Tax Certificate" once per year for like $70.    Huh?

The seller's permit is for the state.  It allows me to sell physical copies of my software in California and... you guessed it, pay taxes!  State Sales Tax, to be exact.  I would only use this if I went to a local trade show and sold CDs there. The only downside right now is that I have to file my income every quarter, but it only takes 2 or 3 minutes to fill in all zeroes on the website and click submit.

Interestingly, when I went for the seller's permit, the clerks made me write down that I was selling my software at Best Buy because I *had* to have a physical location written down.

Quote
Did you consider forming a single-person LLC?  If so, why did you decide not to in the end?

I went with Sole Proprietorship because it's the simplest way to start out.  I decided not to go LLC because for liability purposes I can get insurance for that, or more importantly, a good lawyer if I get sued.  And the odds of getting sued by a user for any real damage is really small. 

The bigger risk is getting into IP issues with a bigger company, but I don't think an LLC would be much help in that case.  Good lawyers can "pierce the corporate veil" (or so I've read) and go after the owner regardless. 

I figure, if things work out, then I can restructure.  But until then I don't need anything fancy.
« Last Edit: October 14, 2007, 10:16:41 PM by frosty » Logged

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« Reply #3 on: October 14, 2007, 11:49:50 PM »

great thread, frosty.  And kudos for writing about health insurance, as that has always been my biggest fear in potentially starting a business.  I wasn't aware you could continue on an employer's insurance (group policy?) after leaving a job... I'll have to look into it.
« Last Edit: October 14, 2007, 11:52:40 PM by Golds » Logged

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« Reply #4 on: October 15, 2007, 12:25:34 AM »

Ah, I see, thanks!  But if you are only selling games online, what are the benefits of legally becoming a Sole Proprietorship?  It seems like everything is still tied to you as an individual.

i.e. is there anything you're doing now that you couldn't have done before you became a legal business?
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frosty
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« Reply #5 on: October 15, 2007, 01:40:35 AM »

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i.e. is there anything you're doing now that you couldn't have done before you became a legal business?

Legally, as an individual, when you start doing business, you are by default a sole proprietor.  And when you do business (providing a good or service with intent to profit), you need to follow all the codes and pay all the necessary taxes.  So that's what all the red tape is about -- it's not really about "becoming a business", it's about conforming to the laws.

Also, if you're just a hobbyist, you don't get to deduct expenses or business losses.  If you're in business, you can.

The book Small Time Operator covers this topic in-depth.

Quote
I wasn't aware you could continue on an employer's insurance (group policy?) after leaving a job...

Yep, the law is called COBRA.  Unfortunately, it has nothing to do with the totally bad-ass Stallone movie of the same title.  Sad

http://www.dol.gov/ebsa/faqs/faq_consumer_cobra.html

Anyway, I've added the link in the parent post.


Quote
What is COBRA continuation health coverage?
Congress passed the landmark Consolidated Omnibus Budget Reconciliation Act (COBRA) health benefit provisions in 1986.  The law amends the Employee Retirement Income Security Act, the Internal Revenue Code and the Public Health Service Act to provide continuation of group health coverage that otherwise might be terminated.

What does COBRA do?
COBRA provides certain former employees, retirees, spouses, former spouses, and dependent children the right to temporary continuation of health coverage at group rates.  This coverage, however, is only available when coverage is lost due to certain specific events.  Group health coverage for COBRA participants is usually more expensive than health coverage for active employees, since usually the employer pays a part of the premium for active employees while COBRA participants generally pay the entire premium themselves.  It is ordinarily less expensive, though, than individual health coverage.

Qualifying Events for Employees:
- Voluntary or involuntary termination of employment for reasons other than gross misconduct
- Reduction in the number of hours of employment
« Last Edit: October 15, 2007, 01:42:59 AM by frosty » Logged

Matthew
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« Reply #6 on: October 15, 2007, 03:34:48 PM »

The cost of an LLC changes a lot by state.  California has a yearly $800 "tax" for running an LLC incorporated there.  In Arizona it's a one-time fee of $60, and that's it.
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« Reply #7 on: October 16, 2007, 07:35:50 PM »

When we originally formed Celisphere, we decided to go with an S Corp for security reasons.
I mention that becaue I'm not sure whether or not it has anything to do with what I am about to mention:

I can't speak for states other than NY, but because I was co-founder of a company, I was unable to collect unemployment when I lost my day job several years back.  Despite a number of conversations with the State, the final statement given to me on the situation was that since I was co-founder of an existing for-profit company and was an active participant in that company's operations, I was not eligible for unemployment benefits.  This was regardless of the fact that at that time, Celisphere hadn't made a dime in almost 3 years of existence and wasn't about to any time in the near future.

So, I'd advise anyone looking to incorporate a company that won't be making money any time soon that they may be out of luck if for some reason their perfectly good "day job" goes south.

Just something to keep in mind.  I don't regret a minute of it, since officially incorporating Celisphere gave us the drive we needed to really step into the game development field, but that whole situation was really frustrating for me.
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Golds
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« Reply #8 on: October 19, 2007, 05:57:10 AM »

OK, so I read the Department of Labor FAQ on CORBA.  Apparently, you can only extend coverage from an employer's group insurance policy for 18 months after to leaving a job, unless you have a disability.

So it looks like taking out an individual policy is the only long term solution, which may work for some but may also end up being prohibitively expensive or impossible if you've had any expensive medical procedures in the past.
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« Reply #9 on: November 14, 2007, 04:26:05 AM »

One thing to mention is that if you make less than a certain amount you don't have to pay taxes; I once heard it was about $6000 a year, though don't quote me on that. Most indies don't make anywhere near that much. Also if you sell through an e-commerce service like BMT-Micro they act as your seller and handle sales tax.

As for health insurance, I've never had it (my family's relatively poor), so I don't see a reason to go out and buy something I've had no use for for nearly 30 years. It's not illegal (yet) not to have health insurance, except in Massachusetts where I believe there's a fine if you don't have it. It might be risky, because you could always get in an accident and need surgery or something, but considering that more people die from medical malpractice (such as adverse reactions to prescription drugs) than from heart disease and cancer combined, I think using the mainstream medical system is pretty risky too.
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frosty
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« Reply #10 on: November 14, 2007, 05:21:22 PM »

If you make less than $400, you don't have to pay Self Employment tax (typically 15%), but that's the only thing I'm aware of like that.
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« Reply #11 on: November 19, 2007, 11:20:21 AM »

thank you so much for this resource frosty, so many of us don't know where to start with a lot of the things you cover here.  I haven't gotten to the point of registering a company yet, but I have recently started working on my indie project fulltime, and I am going to use the healthcare site you mention to help me find some coverage.  Thanks!
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« Reply #12 on: November 21, 2007, 12:12:39 PM »

For Canadian residents, you can voluntarily pay into the unemployment insurance program in order to maintain your eligibility once you leave your job.  I wouldn't be surprised if many states had a similar program but didn't advertise it, you might want to check.
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« Reply #13 on: January 02, 2008, 09:15:40 PM »

As for health insurance, I've never had it (my family's relatively poor), so I don't see a reason to go out and buy something I've had no use for for nearly 30 years. It's not illegal (yet) not to have health insurance, except in Massachusetts where I believe there's a fine if you don't have it. It might be risky, because you could always get in an accident and need surgery or something, but considering that more people die from medical malpractice (such as adverse reactions to prescription drugs) than from heart disease and cancer combined, I think using the mainstream medical system is pretty risky too.

I might add that in order for the health insurance companies to make money, more than half of its clients need to be giving more than taking. That's why I wish insurance worked more like insurance. Where anyone can join and chose to or not to donate money--or perhaps just be selfish (or poor) and just create a personal account to hold money, and have others donate into it if it's not sufficient.


I want to start a company in four years (hopefully) after I get out of college. What would be a good way to employ people? The problem with over-the-web is that there's no face-to-face meeting, and the problem with in-person is that there might not be many people available.

And a related one: How many would be good to hire to start out?
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« Reply #14 on: January 02, 2008, 09:25:31 PM »

I don't know of very many independent game companies that use the employer-employee structure. All the ones I know of, and the one I have experience in, use a partnership model where each person who worked on a game owns part of that game and gets part of the profits.
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« Reply #15 on: January 02, 2008, 11:07:01 PM »

I think the employer-employee model can work well if you have enough sales income to pay someone a fixed rate for work. 

Additionally, contracting out for specific jobs seems like a good way to go.  For example, you could pay an artist a few hundred for an icon or logo, or some other art or audio assets.  Since so many people want to work in games, if you've got a product that's significantly far into development, some people are willing to donate their work/time to be a part of the project, or work for cheap.

As far as starting a company, I have some friends who run medium sized software businesses (LLCs), selling shareware with salaried employees and regular small contract people, where each person in the company lives in a different city (or country).  IRC and AIM are used for almost all the day to day communication.  It seems to work well for them, and not having an office saves a lot of money and logistics.

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« Reply #16 on: January 02, 2008, 11:45:35 PM »

Well, I was planning on a corporate structure similar to Valve, but I still need a way to recruit people.
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« Reply #17 on: January 03, 2008, 08:13:54 AM »

In that case it's probably better to ask questions like this on the gamedev.net forums or something, since it's not the type of thing most independent game developers and enthusiasts have experience with or knowledge about.
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« Reply #18 on: January 03, 2008, 08:44:47 AM »

I might add that in order for the health insurance companies to make money, more than half of its clients need to be giving more than taking.
All businesses work on the theory of "more money coming in than money going out," whether they are providers of health insurance or producers of serious interactive media. If they don't, they will go bust in short order.

Personally, health insurance is somewhere just below food, water and housing on my priority list. Ensuring that you're covered in case of deteriorating health is just about the most important thing you should take care of when embarking on a professional career of any form (be it by insurance policy from evil KKKorporation, filthy collectivist red public health cover, extremely large piles of gold hidden in a swiss bank, or some combination of all three.)

If anyone tells you otherwise, hit them around the head. This purpose of this striking action is twofold; One, it'll knock some sense into them. Two, it will provide a practical demonstration of the need for cover against losses caused by injury.

A summary for those who found my deluded rant distasteful: Health Insurance = important. If you can get it, make sure you have it.
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« Reply #19 on: January 03, 2008, 08:48:02 AM »

I agree that ensuring you're healthy is one of the most important things, and a major priority. I just think that health insurance is one of the worst ways possible of ensuring that. A much better way is to eat well and exercise, preventing most diseases from occurring.
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