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Game Industry Start Up 101
Workshop #1: LegalBusiness Formation Basics
www.GameStartUp101.comTwitter@WINetwork
Workshop Sponsored by:
Game Industry Start Up 101:Business Formation Basics
Kha DangPerkins Coie, LLP
The following presentation is intended to assist entrepreneurs in spotting legal issues relevant to new businesses in the State of Washington. The attached is not meant to cover all issues that you may face. There are many factors to be considered in determining which actions and decisions would be most appropriate to any specific situation. This presentation is not intended to substitute for specific legal advice. You should decide which course of action is best after discussing it thoroughly with an attorney.
Choosing a Business Entity
Types of Business Entities
Sole Proprietorship General Partnership Corporation
C Corp S Corp
LLC Limited Partnership; Limited Liability Partnership (not
covered)
Sole Proprietor Simplest and most common
type of entity. Automatically formed when an
individual or married couple goes into business.
Business income is taxed on individual’s tax return.
Unlimited personal liability
Sole Proprietor Simplest and most common
type of entity. Automatically formed when an
individual or married couple goes into business.
Business income is taxed on individual’s tax return.
Unlimited personal liability
General Partnership Formed when two or more unmarried
individuals go into business Partners personally “jointly and
severally” liable (unlimited) for business.
Profits/Losses generally allocated along % of ownership
Each partner’s share of the business income is taxed on her own individual tax return.
General Partnership Formed when two or more unmarried
individuals go into business Partners personally “jointly and
severally” liable (unlimited) for business.
Profits/Losses generally allocated along % of ownership
Each partner’s share of the business income is taxed on her own individual tax return.
Corporation Formed by filing with
Secretary of State. Must keep good records
and comply with management formalities.
Owners (shareholders) are not personally responsible for business debts.
Two different types of corporations “C” and “S” corporations.
“S” Corporation Income not taxed on corporate level (pass
through taxation). Corporate income taxed on an individual level,
whether received by shareholders or not. Must file an “S” election with the IRS and
comply with specific requirements to maintain the “S” status.
S Corp.Difficult to qualify
Common stock only - no preferred (no VC investors)
Individual shareholders (no entities) Limitation on shareholder number Residency requirements
(Very) Basic TaxS Corp
One level of tax on S Corp
$100 earnings($35) shareholder tax $65 net available for distribution $0 shareholder tax on distribution $65 available for shareholder
“C” Corporation
Double tax: Income of business is taxed on corporate
level. Income (dividends) shareholders receive from
corporation taxed on individual level. Usually not the best choice for a small
business.
(Very) Basic TaxC Corp
Two levels of tax on C Corp
$100 earnings($35) corporate tax $65 distribution ($10) shareholder tax $55 available for shareholder
Limited Liability Company
Formed by filing with Secretary of State
Must keep good records and comply with management formalities.
Limited Liability Can elect to have
pass through tax treatment
(Very) Basic Tax (cont.)
LLC – Like S Corp.
But Preferred Stock and Entity Shareholders OK
LLC Not Pre-Financing Entity
No tax exempt owners Not good for options (but profits interests
available) Expensive if raising investor $
Online filing
Advantages Speed Cheap
Disadvantages Not complete for Corp.
Organizational requirements Contribution of assets Founders relations
Not complete for multiple member LLC Operating Agreement Future investors
Founders' Issues
Founders' Issues
Vesting Voluntary termination of employment Termination for cause; without cause Change in control
Single Trigger Double Trigger
83(b) election
Licensing/PermitsDo I need permission
to do what I do?
Licenses and Permits
Master Business Application: http://access.wa.gov/business/index.aspx
City Specific Licenses (Bellevue on line; Seattle is paper filing)
FEIN: (IRS)
Financing
Financial DilutionDilution in preferred stock rounds often greater
than entrepreneurs realize Series A Round Statistics
Pre Money $6,000,000
Raise $2,000,000
Post Money Value $8,000,000
% Ownership Proceeds On Liquidation
$5,000,000 $10,000,000
$ % $ %
Founder 1 30% $900,000 18% $2,400,000 24%
Founder 2 30% $900,000 18% $2,400,000 24%
Employee Plan 15% $450,000 9% $1,200,000 12%
Series A Investors* (fully participating preferred) 25% $2,750,000 55% $4,000,000 40%
Investor Controls
Founders' Majority Ownership ≠ Control of All Decisions
Protective Provisions Class Voting Rights Other Contractual Rights Investor Expectations
Securities Laws
Applies to all issuances of securities Federal and State Laws Accredited Investors
Employees v. Independent Contractors
What is an Employee?
Employees are subject to the employer’s control
Employer must withhold and pay employment taxes on employees, severe penalties for failure to do so.
Employer must comply with labor laws.
What is an Independent Contractor?
Independent contractors are people who perform services for others but who do not have the legal status as employees.
Independent contractors are not subject to the employers control
Employer must file form 1099-MISC if paid more than $600 to an independent contractor
Knowing the Difference
It is very important that a business properly identify a person as an employee or independent contractor.
The burden is on the employer to prove the worker is NOT an employee.
BE CAREFUL….
Classify your workers correctly, if you classify an employee as an independent contractor, you can end up having to pay the employment taxes with interest and penalties!
If in doubt, check with an attorney or with the IRS!!
IRS Guidelines
General standards Behavior Control (tasks, results, training) Financial Control (reimbursements, how
paid,extent of worker’s investment, opportunity for profit and loss)
Type of Relationship (written contract, benefits, permanency, integral to regular business)
Tips to Protect Yourself
Sign a contract with an independent contractor
Arrange a flat fee for the job, not hourly or weekly rate
Independent contractor should be able to hire his own assistants and offer his services to other businesses
Independent contractor should have control over the project and provide his own equipment and materials.
Independent contractor should provide his own insurance, business cards, invoices, etc.
Do not give employee-like benefits (sick days, vacation time) to an independent contractor
Keep a file with the independent contractor’s business card, advertisements, employer ID number, etc.
IRS Employer Publications
Employers Tax Guide: http://www.irs.gov/pub/irs-pdf/p15.pdf
Employers Supplemental Tax Guide (categorization of employee and independent contractors): http://www.irs.gov/pub/irs-pdf/p15a.pdf
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