This is one of presentations from the 2009-2010 Game Industry Start Up Workshop Series. The first workshop topic was "How to Form and Protect Your Business" and it took place on 9/15/09.

1. Game Industry Start Up 101 Workshop #1: LegalBusiness Formation Basics www.GameStartUp101.com Twitter@WINetwork Workshop Sponsored by:

2. Game Industry Start Up 101:Business Formation Basics Kha Dang Perkins Coie, LLP 206.359.6334 KDang@perkinscoie.com

3. 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.

4. Choosing a Business Entity

5. Types of Business Entities Sole Proprietorship General Partnership Corporation C Corp S Corp LLC Limited Partnership; Limited Liability Partnership (not covered)

6. 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

7. 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

8. 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.

9. 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.

10. 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.

11. “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.

12. S Corp. Difficult to qualify Common stock only - no preferred (no VC investors) Individual shareholders (no entities) Limitation on shareholder number Residency requirements

13. (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

14. “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.

15. (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

16. 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

17. (Very) Basic Tax (cont.) LLC – Like S Corp. But Preferred Stock and Entity Shareholders OK

18. LLC Not Pre-Financing Entity No tax exempt owners Not good for options (but profits interests available) Expensive if raising investor $

19. 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

20. Founders' Issues

21. Founders' Issues Vesting Voluntary termination of employment Termination for cause; without cause Change in control Single Trigger Double Trigger 83(b) election

22. Licensing/Permits Do I need permission to do what I do?

23. 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)

24. Financing

25. Financial Dilution Dilution in preferred stock rounds often greater than entrepreneurs realize

26. Investor Controls Founders' Majority Ownership ≠ Control of All Decisions Protective Provisions Class Voting Rights Other Contractual Rights Investor Expectations

27. Securities Laws Applies to all issuances of securities Federal and State Laws Accredited Investors

28. Employees v. Independent Contractors

29. 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.

30. 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

31. 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.

32. 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!!

33. 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)

34. 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.

35. 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

36. Kha Dang Perkins Coie LLP 206.359.6334 KDang@PerkinsCoie.com