LLC VS Sole Propietorship for start up business that hopes to get funding

segosego89

Hi there,

Apologies if this is not the correct forum to ask the following questions but I'm considering setting up a video game studio at the moment and I'm trying to understand whether I should set it up as a sole proprietorship or a limited liability company.

I hope to set up a Kickstarter campaign in the next two to three months in order to get the project off the ground and I'm worried that if I receive significant funding(in the thousands) from Kickstarter that I will have to pay more tax on that funding as a sole proprietor than if I had set up my business as a limited liability company beforehand.

I'm just wondering does it make sense for me to have the business set up as a LLC in anticipation that I may be able to receive significant funding from Kickstarter and might not have to pay as much tax on that funding compared to just being a sole proprietor?

If I receive the Kickstarter funding it will be many months before I'll be able to actually sell the video game so I wont have any income coming into the business at all for perhaps two years.

It would be great if I could get advise regarding what I've described above to give me an idea of what to do.

Kind regards

JohnRock

When you say kickstarter "funding" aren't these usually preorders? People pay in advance for something you promise to build?
If this is the case then you don't need a limited company. These preorders are treated the same as sales.

If you are sure you will make a significant profit and or you'd like to keep the money in the business ie you don't need to take a salary from the business then it would make more sense to setup a limited company as you may qualify for the 3 year startup tax exemption

Just be aware, the costs of setting up a company, (year 1 incl. 1st CRO return €500-€1,200). Also you will have a number of filing obligations and implications of missing a return. eg. If you miss your CRO return you'll lose your audit exemption. It costs a lot to get your accounts audited.

segosego89

JohnRock wrote: »

When you say kickstarter "funding" aren't these usually preorders? People pay in advance for something you promise to build?
If this is the case then you don't need a limited company. These preorders are treated the same as sales.

If you are sure you will make a significant profit and or you'd like to keep the money in the business ie you don't need to take a salary from the business then it would make more sense to setup a limited company as you may qualify for the 3 year startup tax exemption

Just be aware, the costs of setting up a company, (year 1 incl. 1st CRO return €500-€1,200). Also you will have a number of filing obligations and implications of missing a return. eg. If you miss your CRO return you'll lose your audit exemption. It costs a lot to get your accounts audited.

Thanks very much for the helpful reply.

Although in some cases I think some Kickstarter campaigns state that the funding that they get can be considered "pre-orders" for the product that they are trying to develop but this is not so in my case.

The funding I get from Kickstarter will be put directly into the project over a two year period approximately to work on the game before it gets released. Those who funded the project on Kickstarter will have to buy the game full priced when it comes out. That's how other projects similar to mine have operated in the past so that's what I'm going to do.

That initial Kickstarter funding is very important to the project at the start and I'm just worried I'll be taxed more on that Kickstarter money if I was a sole proprietor rather than an LLC.
From reading your reply there doesn't seem to be a good enough reason for me to set the business up as a LLC at the beginning.
For example if I received 100 grand on my Kickstarter campaign I will have to pay income tax on that 100,000 Euros regardless whether I'm a sole propietorship or an LLC.

Am I correct in saying that even if I get tax relief for the first three years as an LLC, whenever I take money out of my LLC's coffers to pay myself I will be subject to the same level of income tax that a sole proprietor would?

Tippex

you have me intrigued.
I have looked at kickstarter many times and invested in a few things on it (all tiny pledges).

What pledge levels are you going to offer especially as you have an expectation that people who pledge are then going to have to buy the game anyway if it gets released (I say if as I "invested" in something back in 2013 and it still has not been released)

segosego89

Tippex wrote: »

you have me intrigued.
I have looked at kickstarter many times and invested in a few things on it (all tiny pledges).

What pledge levels are you going to offer especially as you have an expectation that people who pledge are then going to have to buy the game anyway if it gets released (I say if as I "invested" in something back in 2013 and it still has not been released)

I'm glad I have you intrigued.

Before I answer your question can I ask whether it's more common than not to offer "video game Kickstarter backers" free copies of the game? I know that Shovel Knight offered a free copy of their game when they did their Kickstarter campaign in 2013 which resulted in 300,000 USD in backer funding. But I know that games like Hollow Knight and Banner Saga offered something like HD wallpaper or something like that...

Tippex

segosego89 wrote: »

I'm glad I have you intrigued.

Before I answer your question can I ask whether it's more common than not to offer "video game Kickstarter backers" free copies of the game? I know that Shovel Knight offered a free copy of their game when they did their Kickstarter campaign in 2013 which resulted in 300,000 USD in backer funding. But I know that games like Hollow Knight and Banner Saga offered something like HD wallpaper or something like that...

I will start by answering "can I ask whether it's more common than not to offer "video game Kickstarter backers" free copies of the game?" that you need to do a lot more research if you do not know the answer to this within 2 minutes of looking at Kickstarter for games. If you took the time to look at both examples you mention you can see both give the game away at pledge levels of $10

Depending on the different level of pledges then yes I would not expect to have to fork out for a game again.

E.g. if I had pledged $75 for a certain pledge level I would not expect to have to fork out $50 to play the game especially if I have to own the game in order to get the benefits of what is contained in the rewards.

The Banner saga gave a wallpaper fo a pledge of 5$ or more but for $10 or more you got a copy of the banner saga and all previous rewards.
Out of the $723k that was raised there were only 35 at the $5 level ($175 total for a level not including the game) whereas there was 9,028 ad the $10 level ($90,208 at the lowest level that included the game)

Hollow knight for $10 you received the digital copy of the game and that had 869 backers (This was the entry-level of pledges) they raised a total of $57k AUD.

I would doubt very much that you will get anywhere near raising 100k without including a copy of the game at the reward level.

I think you are putting the cart before the horse and I would recommend looking at your reward levels before you start worrying about whether to set up as a company or as a sole trader. If you don't have your reward levels enticing enough you will not reach your goal.

segosego89

Tippex wrote: »

I will start by answering "can I ask whether it's more common than not to offer "video game Kickstarter backers" free copies of the game?" that you need to do a lot more research if you do not know the answer to this within 2 minutes of looking at Kickstarter for games. If you took the time to look at both examples you mention you can see both give the game away at pledge levels of $10

Depending on the different level of pledges then yes I would not expect to have to fork out for a game again.

E.g. if I had pledged $75 for a certain pledge level I would not expect to have to fork out $50 to play the game especially if I have to own the game in order to get the benefits of what is contained in the rewards.

The Banner saga gave a wallpaper fo a pledge of 5$ or more but for $10 or more you got a copy of the banner saga and all previous rewards.
Out of the $723k that was raised there were only 35 at the $5 level ($175 total for a level not including the game) whereas there was 9,028 ad the $10 level ($90,208 at the lowest level that included the game)

Hollow knight for $10 you received the digital copy of the game and that had 869 backers (This was the entry-level of pledges) they raised a total of $57k AUD.

I would doubt very much that you will get anywhere near raising 100k without including a copy of the game at the reward level.

I think you are putting the cart before the horse and I would recommend looking at your reward levels before you start worrying about whether to set up as a company or as a sole trader. If you don't have your reward levels enticing enough you will not reach your goal.

Thanks so much for the detailed response. To be honest I didn't have a good understanding of the Kickstarter pledge levels etc.

I've been so busy with developing a prototype for the game and figuring out how to get the project off the ground funding wise etc that I didn't really have a chance to look over those examples in detail and understand how the pledge system works.

After reading your helpful response I will definitely be offering a free copy of the game to each person who donates to my future Kickstarter(maybe if they pledge 10 USD or more) campaign. I will also have to figure out the different kinds of pledges to offer to people over the coming months.

I have been looking into other ways of funding before coming across Kickstarter and I just thought it would be wise to figure out the best possible way to receive the funding from a tax point of view so that I can hold onto as much funding as possible in order to use it for the project and complete it. That's why I was wondering whether I should set up my business as a LLC in order to keep more of the funds for the project.

ironclaw

Can you break down why you need 100kEUR for this btw? Seems like a huge amount of capital considering you can self publish on a lot of platforms these days and Apple are signing up independents at a fierce rate of knots for their new one.

What is your barrier to bootstrapping the business and self publishing?

segosego89

ironclaw wrote: »

Can you break down why you need 100kEUR for this btw? Seems like a huge amount of capital considering you can self publish on a lot of platforms these days and Apple are signing up independents at a fierce rate of knots for their new one.

What is your barrier to bootstrapping the business and self publishing?

I just used the 100K figure as an example in a previous post. I should have made it clear that it shouldn't be seen as an exact figure.

Just because you can self publish games through digital distribution on Steam etc nowadays doesn't mean you can make a game without needed significant funds before hand especially when it comes to hiring people etc.

I don't understand your last sentence.

pedroeibar1

I think you have the wrong priorities here. You have an idea for a video game, you expect potential customers to provide their hard earned cash to you and you are offering nothing in return other than a possibility to buy the finished product at full price, or perhaps (if lucky) they get a free image.

You admit to have no idea of kickstarter, you pick a 100k figure out of the air……..What plans/figures have you drawn up? What are your timeline details? Planned launch of a beta version? What id your offer?

Your questions on Ltd. co or sole trader route and the level of taxation to be incurred on the funds received are the least of your worries! It's hard to take you seriously on what you have written so far......

segosego89

pedroeibar1 wrote: »

I think you have the wrong priorities here. You have an idea for a video game, you expect potential customers to provide their hard earned cash to you and you are offering nothing in return other than a possibility to buy the finished product at full price, or perhaps (if lucky) they get a free image.

You admit to have no idea of kickstarter, you pick a 100k figure out of the air……..What plans/figures have you drawn up? What are your timeline details? Planned launch of a beta version? What id your offer?

Your questions on Ltd. co or sole trader route and the level of taxation to be incurred on the funds received are the least of your worries! It's hard to take you seriously on what you have written so far......

Excuse me, I used the 100k figure as just an example for a question I had about LLCs. I have already clarified that. I do not understand why using a specific worked out figure is so important to you? Also, who said that this is my sole priority? You know nothing detailed about me or my project at all!

Your description of me not knowing anything about Kickstarter is quite insulting and facile.
I did not understand at first that it was common for campaigns to offer free copies of the game if they pledged a specified amount. Did you personally know every nuanced thing about Kickstarter campaigns at first all at once? I have been researching numerous funding methods over the last few weeks whilst juggling game development so please do not make an offensive assumption about my knowledge of these things because I did not understand something about Kickstarter fully at once.

Also I think it is pragmatic of me to think of the LLC issue along with the other things involving my project well before hand and to understand it fully.
My initial question was a business related question. I was not asking for a critique of my project as a whole especially from someone as unforgiving as you.

My initial post was just an innocuous question about LLCs and now my understanding of how Kickstarter and the usage of hypothetical figures is being scrutinized? Would you talk to someone like this in person? Grow up.

pedroeibar1

segosego89 wrote: »

Excuse me, I used the 100k figure as just an example for a question I had about LLCs. ……………………..I do not understand why using a specific worked out figure is so important to you?

The amount of investment in the project, the conditions on how it is invested, the how, when and where the funds will be used are factors critical to how the business is structured, both legally and tax-wise. Without knowledge of these, worthwhile advice cannot be given on the topic.

segosego89 wrote: »

Your description of me not knowing anything about Kickstarter is quite insulting and facile. .

Emmm – your own words, read this

segosego89 wrote: »

.....To be honest I didn't have a good understanding of the Kickstarter pledge levels etc. .

segosego89 wrote: »

Would you talk to someone like this in person? Grow up.

Yes, when asked for advice I do ask questions, not all of them easy, it’s part of the process and usually sorts out dreamers from those who are serious and have done a bit of very basic research. That should be done first, as pointed out by other posters above.

Tippex wrote: »

..... you need to do a lot more research if you do not know the answer to this within 2 minutes of looking at Kickstarter for games. If you took the time to look at both examples you mention you can see both give the game away at pledge levels of $10

I think this project has as much chance of success as your last one of living on a boat! And, before I go, LLC is an American abbreviation, the Irish use Ltd.

segosego89

pedroeibar1 wrote: »

The amount of investment in the project, the conditions on how it is invested, the how, when and where the funds will be used are factors critical to how the business is structured, both legally and tax-wise. Without knowledge of these, worthwhile advice cannot be given on the topic.

Emmm – your own words, read this

Yes, when asked for advice I do ask questions, not all of them easy, it’s part of the process and usually sorts out dreamers from those who are serious and have done a bit of very basic research. That should be done first, as pointed out by other posters above.
I think this project has as much chance of success as your last one of living on a boat! And, before I go, LLC is an American abbreviation, the Irish use Ltd.

You actually went through the trouble of going through my previous posts on my account to find something from years ago in a desperate attempt to insult me? How invasive and loserly. You don't really come across as someone who interacts with people much outside of Boards...

The way you carry yourself is also a bit pretentious. No one specifically asked you for advice nor has anything you have posted been of any help. You seem to think you are some sort of guru who's knowledge and advice on things is incredibly precious!

I think you are just one of those people online who spreads negativity as there's nothing much going on in your life and you don't get a chance to interact with that many people outside of your insular online presence!

Gloomtastic!

Please remember folks to attack the post and not the poster. Throwing insults just makes people angry.

The Gloomster!

ironclaw

segosego89 wrote: »

I just used the 100K figure as an example in a previous post. I should have made it clear that it shouldn't be seen as an exact figure.

No worries. But my question stands, can you break down how you will use the money? As if you can, the potential avenues for investment either open or close. You're effectively running a blue sky project e.g. You have an idea and a rough idea of how to get there but I'm assuming you have zero experience, hence blue sky. So your avenue for in-sector investors is limited unless you had a seasoned business partner who could bring some credibility to the whole thing. Generally, these people want to see people with a track record.

On the flip side, assuming you needed less money, say 50kEUR, you may be able to get a grant.

In other words, you may as well be open with the amount, even in round figures, and how you intend to spend it.

Just because you can self publish games through digital distribution on Steam etc nowadays doesn't mean you can make a game without needed significant funds beforehand especially when it comes to hiring people etc.

See, this is interesting. You mention hiring people. So I'm assuming this means you are not a developer? This greatly changes the conversation and increases the amount of cash you'll need if you need to pay wages. Most investors won't invest if you'll be paying wages, especially to the founders. Maybe one or two employees but you'd want a very viable initial product to get that sort of interest. Yes, you could hire people on equity but again, good people will look for people with track records, not just ideas.

I don't understand your last sentence.

Bootstrapping generally means using your own cash, and a flow of cash from an initial product to build the product. This is common in software development.

Lastly, with respect to pedroeibar1, they can come across as abit crass (no offence pedroeibar1!) but what they post is frankly gold most of the time. I'd heed it as its nothing like the level of push back and perceived negativity you'll get from industry and investors.

pedroeibar1

ironclaw wrote: »

.....Lastly, with respect to pedroeibar1, they can come across as abit crass (no offence pedroeibar1!) but what they post is frankly gold most of the time. I'd heed it as its nothing like the level of push back and perceived negativity you'll get from industry and investors.

No offense taken Ironclaw, although I don’t like the description of ‘crass’. (Crude and unrefined without delicacy or sensitivity; gross; obtuse; stupid’.) My responses are at times brusque (blunt, curt, abrupt). I’m not a ‘life coach’ making money by telling posters that ‘they can achieve their dreams’ or that all they need to succeed is to ‘be true to themselves’. I agree with you that business does not succeed by wrapping some egos in cotton wool.

When someone posts here looking for advice, do they really want advice or simply want praise and confirmatory waffle that they have super ideas/plans/projects? Those posts that eventually grow to involve Mods inevitably start out from hare-brained schemes that already are dead in the water. If I post a response and it is contradicted I will defend my reasoning. For example there was a thread some time back about a service to write business plans yet the OP had poor spelling and syntax in his/her thread posts. Cupcake / donut threads are another.

My input is forthright – I call it as I see it. Tough love if you like. Failure to speak my mind in a posted response is a betrayal of experience.