06 - Setting up your business

Submitted by ehanuise on Wed, 27/03/2013 - 14:50

06 - Setting up your business

This is a trade, not a hobby

Some board games are published as a hobby, or a side business. This is perfectly OK, and contributes to the growth and diversity of the landscape. But it also means these games will probably remain niche items as distributors and retailers prefer working with businesses that are there for the long term. Setting up shop as a board game publisher and making it your main source of income requires dedication and commitment. Once you gain momentum and start to grow, so will your customers and business partners' expectations. If you grow big enough to hire employees, you will have a responsibility to them to run your business professionally. It is first and foremost a business venture, and your day will not be all fun and games. Actually, you will end up having much less time to play than you ever did once you have become a board game publisher.

You need a legal business

To sell your board games to customers, you need to be a legit business. There are some exemptions in some countries for small volumes of sales by an individual, but even if you intend to self-publish a single game as a one-off, you must make sure you're legit. Be aware that if you have a job your contract might forbid you to have other income-generating activities, or require you to secure permission from your company or boss. Starting to publish and sell games without permission could get you fired, and your employer could assume you have been operating during work hours and lay claim to your games and intellectual property (IP). The same applies to most kind of unemployment money, insurance, retirement pensions, etc. : you need to carefully check what you can and cannot do before you start printing games or selling anything to customers.

Operating outside a legal business form or any specific exemption framework is considered to be fraud by the government in most countries, as you will generate income that does not fit the tax paying framework. This can lead to severe penalties, fines, possibly prison, suppression of unemployment/pension, etc. I can not stress enough how important it is to make sure you have a legit business.

Becoming a business will also ease up many things such as creating contracts with your designers and artists, distributors and manufacturers as a company instead of as a person.

It's complex and country-specific so get local advice

Each country has its own business laws, regulations, kind of companies, and idiosyncrasies. As stated above when deciding for your business location, it can pay to shop around. Maybe a neighbouring country or state will offers much more auspicious conditions to your endeavour.

Once you have decided on the location, you need to hire a local professional accountant or business consultant and get him to walk you through the whole process, recheck your numbers and challenge your business plan. Expect this stage to cost you some money, which you will be glad you spent. Getting this wrong simply is too costly to skimp on the preparations.


Here is some extra US specific info about incorporating your business, from Ryan Scott Dancey (Pathfinder Online and Game Industry Veteran):

1: Form a C-corp. Don't let anyone kid you; in the end it's the easiest route through the bureaucracy. S-Corps and LLCs have hidden tax dangers that you may not understand until AFTER they bite you HARD in the ass. In many states you can set up a C-Corp on-line in less than a half hour for a small fee. Every year you'll have to file a tax return for your C-Corp. It's just not that hard.

2: Set up a QuickBooks account and learn how to use it. It's really not that hard. Once you get the hang of it, you'll be amazed at how easy it is to "do your accounting right". There will be a handful of things you'll need professional help with. Telling the CPA "I have it all in Quickbooks" will cut through a lot of hassles.

3: Unless a person works for you at an office you provide using equipment you provide, you can almost certainly treat that person as a 1099 contractor. Yeah, there's a lot of corner cases. Realistically you're unlikely to ever have to face a reckoning. On the other hand, if you have office space and you provide equipment, you have employees and you should pay them correctly.

There are basically two kinds of corporation: C corporations and S corporations.

The difference is that C Corporations pay tax on their profits at a specific rate (the "corporate tax rate") and keep those profits in the company accounts. S Corporations "pass through" their profits to their owners, who pay income tax pro rata on their share of the profits. If you own 30% of the S Corp, you are responsible for 30% of the S Corp's profits.

The benefit of an S Corp is that you can take the company's profits without any further complications. So if your S Corp makes $100 of profits, you own 30% of the S Corp, you get $30, and pay tax on that $30 as if it were ordinary income. After tax, you probably have $15 or so that you can put in your bank account.

In a C Corp, the profit stays in the company's bank account. If you want to get it out, you have to disburse it; usually through the form of a dividend. This is where the problem of "double taxation" appears. The C Corp paid taxes on its profits. If it gives you a dividend, then you pay taxes AGAIN on that money. The two taxes can add up to more than the tax you would have paid to take the profits out of an S Corporation.

All other factors being equal S Corporations might be a good deal. But here's the factor that makes them a trap:

PROFITS do not automatically equal CASH.

You can easily run a company in a way that generates a profit, but has no cash. You have to pay tax from cash, so if the company has no cash, its owners have to put up the cash instead.

I have personally had to write a check to the IRS because an S-Corp I was a part owner of made a paper profit, didn't have cash to disburse to ownership, and we all got stuck with a tax bill. Years later, the S Corp in question made up that difference, but in the short term, I got stuck writing a big, unexpected check. I know many, many people who have had the same experience. Sometimes even really carefully managed S Corporations can end up with a last minute need for money that screws the owners; it's not just a function of being careful to set aside cash for taxes.

How do you avoid the double-taxation issue with a C Corp? Pay yourself a salary. There's some overhead to this but it's been reduced to a fraction of what it once was by easy payroll service integration with Quickbooks. Today, setting up payroll even for a small company costs a couple hundred bucks, and a few bucks a paycheck. You and your co-owners can agree on salaries that have no relationship to the underlying ownership percentages if you wish. You get control over how the money comes out, and you don't get the risk of a tax shock. Had everything gone perfectly, you’d have paid less tax with an S Corporation, but in small business, things so rarely go perfectly that I think the difference in tax is worth the risk protection.

LLCs are just an additional legal structure that sits on top of an underlying entity for the purpose of trying to separate ownership of a company from responsibility for the company's actions. In most cases, an LLC is not doing anything useful and it's just added complexity.

They're useful when you have one group of people (investors) who want to put in money but not have any oversight or operating role in a company, and another group (managers) who will run the company and make all the key decisions. They were all the rage a decade ago but I think many entrepreneurs are figuring out that they're not worth the hassle.


What is your job ?

From this point on, you're an entrepreneur. Congratulations. So what's your actual job ? This is a question you should ask yourself regularly, as your job will change time and over again as your business grows.

Your job is ultimately to work "on your" business : make it grow and evolve, address its shortcomings and improve its efficiency. This is very different than "working your" business, which is doing the day to day work, taking and delivering orders, following up the production and logistic processes, doing advertising and promotions, and everything that the business people calls 'operations'. In the beginning, you'll be in 'start-up mode' where you have to do all 'operations' yourself with little time left to actually work on your business. This is where all the preparation work will pay, since you will have spent lots of time working on your business before you start. As you grow and can delegate some of the tasks to your staff, you will eventually be able to focus more and more on your real job : working on your business. Once you get started working your business it is easy to lose track of this, and to get so involved in operations that you don't actually manage your business any more. Be careful about it as you could end up losing a lot of money that way : repeating the same mistakes because of a lack of analysis, lost opportunities because you didn't identify them, etc.

Funding

To start your business you will need some sort of funding. Having a legal business form usually carries some sort of guarantees to your suppliers and implies you have properly funded your business. Again, the specifics vary from country to country. The best source of funding you can use is your own spare money. You will then not owe anything to anyone, and have full freedom with running your business. Maybe you can also secure some funding from your family and friends. In any case be sure to manage the risk you take by committing that money to a business venture. Only use money you can afford to lose, otherwise should your business fail you will end up much worse than you started and this could have potentially devastating consequences on your life or your funder's. In that regard, I strongly advise to never ever use a mortgage on your home property or similarly important assets to fund your company.

If you use money from third parties (family, friends, ...) for funding also make sure to establish a contract stating exactly what they can expect and what you are liable to. Consult a lawyer to make sure it is valid. The same goes if you use a bank loan, venture funding, or business angels. You need a contract that defines your liability and the funder's level of implication in your business. A well-meaning funder that insists on taking part in the day to day decisions of running the company can end up being much more of a liability than an asset.

At this stage you must also have defined your long term plan for the company : do you intend it to remain a sole ownership or a partnership for its lifetime, or do you intend to resell it to a bigger company once it has gained enough traction, or even to go public at some point ? Knowing this from the start will help you secure the kind of funding that is best suited to your plans. I advise to start small and stay privately owned if at all possible, for maximum freedom.

You fund a company, not a game

The recent rise of crowdfunding platforms opens new avenues of funding. However these tools are well suited to a specific project such as funding the first print run of a new game but not to fund a company's début. Most crowdfunding platforms even have guidelines stating that funding campaigns must be for a specific project and not an ongoing venture, life project, or funding a company.

There are however a few crowdfunding platforms that specifically fund start-ups. This could be an interesting opportunity, just make sure you know exactly what level of control you will keep once funded.

Wages are a recurring expense

This should be obvious, but it bears repeating : wages are a recurring expense. Every month. Only hire when you absolutely must, and make sure you can support these wages for the required time. This is the number one sin of start-ups, burning payroll money without actually generating income, until they dry up and must close shop. You should not hire anyone on a permanent basis until you actually are profitable. During the start-up phase you should be able to do most of the work either yourself or by managing freelancers for specific tasks. Cash flow is the blood of a start-up, and every hire is a cut in its veins.

If you must hire someone on an ongoing basis, make sure to be able to pay them in the future, and let them know in advance if you know this will only last for a limited time. You do have a responsibility to the people you hire.

Fire if you must

On the other hand, if you hire someone and you see that this person won't be the right fit for the job, let them go as soon as you can. Firing someone is a very tough thing to do, probably the most difficult thing a young entrepreneur faces, however you can not afford to keep someone unfit on the payroll and experience says no matter how well meaning you are, the situation will not improve over time. Most importantly, improper or illegal behaviour (stealing, embezzlement, ...) should have immediate consequences as you face legal liability if you fail to address it in a timely fashion.

Plan for the long term

There are rough steps in the growth of any company that are directly related to its staff size. There is the first hire, going to 2 persons, then growing up to 5, 20, 50, 100, and over 500 employees. Each step brings in new challenges and overhead. From 5 staffers on you will need to appoint someone (very likely you) as the manager. At a size of 20 to 50 you will need to add more managers, and from 100 on you will need a layer of middle management. The same kind of steps will affect your IT infrastructure, your offices size and organisation, your communication, your marketing, your accounting and reporting processes, your manufacturing and sales management, etc.

You will need to remain agile and adapt to the changes, but you should have a plan from the start on. It will act as a baseline and help you assess your progress. It will also offer a safe default option when a quick decision is required and you cannot commit resources to an in depth analysis right away. This means you have to keep your plan current and updated and make it evolve over time. The good news is his can be done outside the heat of battle when 'operations' are a bit quieter.

Embrace profit, it's OK

Your business must be profitable to be healthy. You need to make profit, so it should be your goal and you should be confident with it. Of course profit should not be your only purpose, and should not come at any cost, but never ever feel guilty or ashamed to make your business profitable. In some places such as the US most people view it as perfectly normal and healthy for a business to seek profit. In other places such as Europe, some people view profit as a bad thing, something morally wrong. Such opinions vary widely from person to person and country to country, and you should be aware of these differences.

When reading online forums or speaking with gamers, you will sometime meet people that talk like they are under the opinion that publishers should sell games at cost, and that making profit from publishing games is somehow bad or morally wrong. This idealistic view ignores some basic market facts and is not realistic or sustainable. Publishers need to generate profit in order to make it attractive for designers to create new games, in order for the board games hobby to grow or even actually exist, and in order to be able to take publishing risks on inventive or disruptive designs that would otherwise never be printed and distributed to a wide audience. And as any business, they need profit in order to sustain the workers they hire and reward the funders for the risk they have taken.

So embrace profit, it's OK and you need it.

Set goals and deadlines for evaluation

This is an open-ended venture, with no set end date, unless you have set plans to become a publicly traded company or to sell your business at some point. This means you have to set goals and deadlines for their evaluation to allow you to assess your success and provide another baseline which you can use as a guide along the way. You should have some short term goals (publish game X, get a company van for deliveries, etc.) and long term goals (grow up to 5 employees, obtain press coverage in a national newspaper for one of your releases, win an industry award, etc.) so you see your short term and long term progress as you go along.

Manage by the numbers, not by the guts

No matter how good your business instinct is, you should run your business by the numbers. Many little things seem obvious but when you actually run the numbers they are proved to be unintuitive. Keeping tabs and running projections, analysis, and charts on a regular basis will allow you to know exactly what makes you money, what doesn't, and what does cost you. It will allow you to know whether a sales augmentation is due to your good work or just a side effect of some other factors. Your accountant is not just some bean-counter who runs the books to fill up the state tax form, he is your main source of intelligence on your business' performance. He will be able to help you set up dashboards and reports that provide relevant information for the day to day and the long term assessment of your decisions.

This is all very basic business advice, and my main purpose here is to make you realise this is a vast topic and an important one. There is extensive literature available about the creation and operation of a small business or company, so do the legwork and go read a few of these books. It's your business, so at some point you have to work on it.

Now that we have dealt with the serious business-related stuff, let's start with the fun part in the next chapters : making games!