I’m starting to make more business decisions around Brainfart Studio. Unfortunately, that means dealing with something a lot of developers avoid thinking about until they have to: taxes and business structures.
I’ve spent a lot of time lately researching the options and which ones make sense for a solo developer or a small studio. Here’s what I found, laid out for anyone else in the same spot.
Quick disclaimer before any of this. I’m not a lawyer or an accountant. This is what I learned researching my own studio’s setup. Talk to a professional before you make anything official.
Sole Proprietorship
This is the default. If you sell a game, sell some assets, run ads on a YouTube channel, or write on a blog (like this one!), and you haven’t filed anything, you’re already a sole proprietor. There is no paperwork required to start. The IRS just treats your business income as your personal income.
The tradeoff is liability. Liability means legal and financial responsibility if something goes wrong. This includes things like a lawsuit, unpaid debt, or a contract dispute. As a sole proprietor, there’s no legal separation between you and the business. If the business owes money or gets sued, your personal savings, car, or house are fair game to cover it. The business and the person are treated as the same thing.
For someone with no income yet, this is usually fine. There’s nothing to protect and no reason to pay for paperwork you don’t need. It’s the starting point.
Single-Member LLC
LLC stands for Limited Liability Company. This is the common first upgrade from sole proprietorship, and the name tells you what it does. It limits your personal liability.
Forming an LLC creates a legal separation between you and the business. The business becomes its own entity. If it gets sued or runs into debt, your personal assets are generally protected. But you must keep the finances separate.
Mixing personal and business money is the most common way this protection gets undone. There’s a term for it: piercing the corporate veil. It refers to a court deciding that you and the business were never actually separate, usually because the money wasn’t kept separate either. Once that happens, the liability protection disappears and your personal assets are exposed again. A dedicated business bank account, used only for business income and expenses, is the simplest way to avoid this.
Cost and maintenance depend on your state. Where I live, there’s a one-time filing fee and no recurring state fee. Other states charge annual fees or franchise taxes. Check your own state’s specific rules before assuming yours works the same way.
This kind of surprised me. By default, a single-member LLC is still taxed exactly like a sole proprietorship. Forming the LLC changes your legal liability. It does not automatically change how you’re taxed.
LLC with S-Corp Election
An S-Corp is the next step after the LLC. It is not a separate path. You form the LLC first and run it as a default LLC for a while. Once the studio is consistently profitable, you file for S-Corp tax treatment on that same LLC. Nothing about the entity changes. An election is just a form filed with the IRS that changes how the LLC is taxed.
The reason people make this switch is self-employment tax. As a default LLC, all of your business profit is subject to self-employment tax, currently a little over 15%, on top of regular income tax. An S-Corp election lets you split your income into two parts: a salary, which is still subject to that tax, and a distribution, which isn’t. Only the salary portion gets taxed that way, which is where the savings come from.
The catch is the salary part requires running actual payroll for yourself, including tax withholding and filings. That adds time, cost, and paperwork you didn’t have before.
The profit threshold is where the decision actually gets made. Past a certain point, commonly cited around $40,000 to $60,000 in net profit per year, the tax savings outweigh that added admin. Below that threshold, the extra paperwork usually costs more than it saves. It’s a later-stage decision once your studio is consistently profitable. You do not need to set this up on day one.
Multi-Member LLC
A multi-member LLC is the same core structure as a single-member LLC, but built for more than one owner. This becomes relevant once you bring on an actual co-founder. A co-founder is someone else who owns a piece of the LLC itself.
Contractors and employees are both paid for their work. Neither one owns any part of the business, even if their pay includes a percentage of revenue. A co-founder is different because they hold equity, an actual ownership percentage in the LLC, rather than a payment arrangement. That ownership is what forces the LLC to become multi-member. Adding more contractors or employees does not.
With more than one owner, a few things need to be defined up front that a single-member LLC never has to deal with.
- How much of the business each person owns.
- How profit gets split between them.
- Who has authority to make which decisions.
This usually gets written down in an operating agreement. An operating agreement is a document that spells all of it out so there’s no ambiguity later if a disagreement comes up.
C-Corp
The reason C-Corps exist comes down to stock. A C-Corp can issue shares, and those shares are what investors buy when they fund a company. Venture capital firms and most outside investors expect a C-Corp specifically, since shares are standardized and easy to transfer. (An LLC can technically take on investors too, but the ownership structure is messier to negotiate.)
For a solo dev or small studio, none of this applies unless you’re actively trying to raise money from investors. Without that goal, a C-Corp adds cost with no benefit. There is more paperwork, a board structure (even if that board is just you), and double taxation (meaning the company pays tax on its profit, then you pay tax again on whatever gets paid out to you personally).
If your studio is self-funded through game sales and wishlists, a C-Corp isn’t something to consider. It only matters once outside investment becomes part of the plan.
Where Freelancers and Employees Fit In
A common growth path looks like this: solo first, then hiring freelancers as the workload grows, then eventually bringing people on as salaried employees.
Freelancers are 1099 contractors. You pay them for specific work, they invoice you, and they handle their own taxes on that income since you’re not withholding anything.
Employees are W-2, which means you withhold income tax from their pay. As the employer, you also owe additional payroll taxes on top of their salary.
Neither one requires you to change your entity type. A single-member LLC can hire contractors, and later, employees, without converting to something else. The entity change that actually matters is bringing on a co-founder. That’s the point where a single-member LLC needs to become a multi-member one.
The Most Common Progression
Put together, the typical path for a solo dev or a small studio looks like this.
- Sole Proprietorship, while there’s no income yet and nothing to protect
- Single-Member LLC, once there’s income coming in and liability actually starts to matter
- LLC with S-Corp election, once profit clears the threshold where the tax savings are worth the added payroll overhead
Freelancers and employees get added onto that same LLC as the studio grows, no matter which stage you’re at. Neither one forces a change in entity.
The only thing that does is bringing on a co-founder or taking on an outside investor. For most solo devs and small studios, neither of those ever comes up.
0 Comments