An Independent Game Developer’s Diary

I’ve spent the first fours days of my company time on miscellaneous tasks, and I thought I’d share.

The main thing is getting the accounting setup right.  There is no legal reason why I needed to spend four hours with my accountant understanding business accounting, and then produce a document and spreadsheet to work out my balance sheets, but the time I spend here will hopefully save me time later.

I decided to write an opening balance sheet for my company.  This shows the amount of money the company is worth, what it owes me and what items belong to the company.

I’ve also racked up some expenses before I started the company, and a few after.

For example, I have given / sold my laptop to the company.  I purchased this laptop with the intention of it being for this business about a year ago with money invested for me by my grandfather.  Working out the depreciation, we reckon the laptop is now worth about £800.  I also have a server that is wholely dedicated to the company, it has tape backup, raid hard drives, ubuntu linux, the whole shebang.  We valued it at £0 as I was very kindly given it by my previous company when they were disposing of computing equipment.

So, the company has assets worth £800, and didn’t pay for them.  it also currently has no cash as I’m waiting for the bank account to be setup.  So In order for our balance sheet to actually balance, I have to work out that the company owes me £800.  Now I paid some startup expenses, the company formation costs and so forth, which are about £80, so company now owes me £880.  Finally, I started my company and took 100 shares, valued at £1 each, so I owe the company £100.

The balance sheet now tells me that the company owes me £780 at startup, and that it owns one Dell server and one Laptop.

So why is this important, well, it means that when I give the company cash to get started, it will owe me even more, but it’s cash will increase.  When I get some money from sales or contracting, I can now do one of three things.

• I can retain the profit in the company, and pay Corporation tax at end of year on my Net Profit (Sales - Expenses), and pay myself a dividend after Corp Tax.
• I can pay myself the money, paying income tax on that amount, but it counts as an expense which reduces amount of Corp Tax that I’ll pay.
• I can repay the company loan, which is an expense, so reduces the amount of Corp Tax, and is not counted as income for personal taxable purposes.

So that means that working out what I’ve invested in the company, and calculating the amount the company owes me for that gives me a tax free cash bonus that I can take out of the company at a later date, when it’s wildly profitable.

Now I’ve also created a spreadsheet to account for business expenses.  For legal and tax reasons you must keep every reciept for anything purchased for the company.  I’ve purchased a few office things, a white board, some suspension files, paper for my printer that kind of thing.  I can account for all of this with a years worth of reciepts when it comes to doing my year end accounts if I want, or I can do them monthly, and when I do year end, simply put my monthly’s together, and then
check them all over.  It seems easier to me to take a couple of hours every month to  do that than spend a week in January doing it.

Setting up a limited company isn’t actually that hard, it just takes a bit more organisation and money than being self-employed.

The cheapest method is to go directly to companies house (www.companieshouse.gov.uk) and pay them the £20 fee to setup your company.
You can request a company startup pack from them which will give you the relevant forms (two forms to fill in, fairly simple). However, you will need two more items to be truely legal.
You need to have what are called the Articles of Association.
This is a legal document that defines what your company will be doing. The reason for these are lost in the mists of time, essentially I think the reason is for limited companies with multiple directors, where there is division about what the company should do next, they can look at the articles of association to see if the plan is within the company scope.
Secondly you need a memorandum of association. You need this, not companies house, but it is supposed to be a legal requirement.
This document is essentially the minutes of the first ever directors meeting. It has to be laid out in a special way, and it says things like who is going to be your accountant, who the directors are and what they will be paid, and what banking you’ll do and so forth.

I searched for a while to find examples of these documents, and this is the thing that made me not form my company direct in the end. If you have a lawyer friend, they can draft these documents for you, but I wouldn’t advise writing them yourself as if they are wrong your company may not be legal.

In the end I found an online company formation agent, called Company Wizard (www.company-wizard.co.uk). Forming the company took me about 25 minutes of form filling, and I got the registration document the next day.
I purchased not only the registration but a bound portfolio for the register of members shares and other legal documents, and total cost was approx £70.

Now you’ve done that you will receive a registered company number for your company name. Thats it you are officially a director of a limited company. Now you need to tell the Tax office that you are employed as a director, and that you are a new employer as well.
You may also want to think about VAT Registration. As for me I haven’t registered for VAT yet, I’ll cover why later.

I had to decide when setting up my company whether to go self employed or register a limited company. For those who don’t know, the main differance is to do with liability.
As a sole trader, if the company can’t meet the costs of a liability, then my whole life is liable. Literally anything I own, my car, my house, my TV can all be claimed by bailiffs to repay the companies debt.
With a limited company, this is not always true. The directors have a limited liability. They may owe the company money which can be collected, but the amounts and how it is collected is far more limited.
A director is still personally liable for some risks of the whole company, but those risks are reduced for a lot of cases.

So how does that relate to Games development. Well to be honest it doesn’t.
The risks that you will face as a games developer involve going out of business owing money to banks and or equipment leasing companies. (Sorry if thats a shock, but theres a good chance that your company will never make money, and will go bankrupt).
Those are exactly the sorts of cases where a director can be found to personally liable, if the business went under because of bad management, poor money handling or tax mistakes (tax fraud technically), then you will still be personally liable.
Generally games don’t kill people, and are unlikley to cause accidents (which is why you probably wont need public liability insurance), and those are the cases where a Director would not have to personally pay to settle.

So the main differances between Sole Trader and Limited Company are

1. Sole Traders are wholey and totally peronsally responsible for all company debts / liabilities, Directors aren’t always (but there are priviso’s)
3. Sole Traders have to do a personal tax return as self employed, Directors have to submit an employed persons tax return, and a company tax return, and pay tax twice, once on company profits and once for themselves
5. Directors need to ensure they do full employer tax records, and have to submit yearly company accounts, Sole traders dont

In addition to this, setting up a limited company is reputedly difficult work, and will result in a lot of extra business paperwork and administration.

So am I advocating that you should go self employed?

Limited companies do have their advantages as well, the main being that they are more complex and difficult to setup. Why is that an advantage I hear you cry. Well, anyone you deal with knows that Limited companies are more reputable because you need to be more organised. Secondly they know that they have better legal recompense if you default on a payment, as the company itself has assets and they dont have to chase an individual person. So you are more likely to be trusted for equipment hire, business development loans.
Also there are a number of developers who make money on the side with contracting. A lot of the major firms will only deal with Limited companies when outsourcing contract work. Again because they know they have better legal recompense if something goes wrong.
This means that a limited company will find it easier to get external cotnracts, to get trade cards from stores like Makro or Costco.

Also the aspect of partners comes up often. if you and a freind setup a company and it is a sole trading arrangement then you are in a partnreship. In that case you absolutly must get a partnership agreement. But I would never recommend this, a partnership is almost always the wrong style of company except for certain special cases. In almost all cases a better system is to create a limited company, with the partners being directors.

So in the end, what is the best way to go? Well I decided that the extra overhead of a Limited company was worth the effort. I felt that the benefit of being more genuine, and the possible tax advantages made it worthwhile. whether you will feel the same is up to you.

Yup, I got through my registration documents today.  My company is an official limited company in the UK now.

I decided in the end to go for a more generic name.  Originally of course I was going to go for MIB Games Ltd, but after a bit of thought I figured it was probably easier to go for MIB Solutions Ltd, then I can trade as MIB Games for games, and any work I do that is serious (like money making work) can sound more business like.

Registering was easy, I’ll cover it soon, as I haven’t blogged in a while.

Speaking of which I’ve told my bosses, and have a leaving date for my full time job.  July 31st will be my first full time day working for MIB Solutions!

All I need to do now is earn some moeny so i can pay myself!

So, I have a business idea, and it’s crazy.

I’m going to quit my nine to five job (well more seven till seven job when travelling is included).

I’m going to loose over thirty thousand pounds a year salary. To do what?

To design, develop and publish computer games.

Now of course, being a developer, this seems like an ideal job, I can get up about two hours later each day, I can sit at my desk and program all day, and at the end of about 6 months, I can sell my game and make loads of money right?

No, of course it’s not going to be like that.

I posted recently on the indie game developer forums http://www.indiegamer.com/forums/ where I announced my plans to quit, and got some feedback.

I was struck by the number of people who said, don’t quit your day job, programming games doesn’t bring in that much money.

But a few people did point out that when you decide to quit your day job, and go into business for yourself, your doing more than just becoming a self employed programmer. You’re actually becomming a businessman, an enterpreuner, a marketeer, an accountant and a manager all at the same time.

I think a lot of people who do this themselves aren’t really prepared for the business reality. Setting up your own business requires more than just being good at my chosen skill, it is going to require being able to run a business as well as program a computer game.

Of course I’ve heard a number of people give me advice that essentially boils down to “when you work for your boss, your earning money for him with your skill, when you work for yourself, your skills are working for you”
I’ve heard this quoted a number of times by people, but it is just not true. The reason your boss gets paid more than you is that he or she is required to have a lot more flexible skills. Management is very hard, and is a skill. As developer we often deride management for making poor technical decisions. But a business does not survive on technical output alone.

People who don’t realise that and start they’re own business up are doomed to fail in the end, because making business decisions, made from the correct viewpoint, with the health of the business rather than the product in mind is the only way to succeed in the end.
So where does that leave me?

Well, I think understanding this point is probably a good first step. I know that I’m a fair to good programmer. I hope that I have a reasonable business head.

But more importantly, I know that just writing my game and making it good isn’t enough. Setting up your business takes more than just setting up your compiler, your source control system, and the technological programming tasks. Its going to mean setting up a business as well.

And that is the bit that scares me!