Care and Feeding: Accountants
Accountants, along with lawyers, are the primary professional service providers with which you will interact as a small game studio. Accountants are very different from lawyers, but with both professions an ounce of prevention is worth a pound of cure (or 0.028kg of prevention is worth 0.4536kg of cure). In order to garner the full benefit of your accountant, you must be aware of what you are doing ahead of time, and you must help them to understand the differences between the business of game development, as opposed to the more traditional business dealings with which they are likely familiar.
This discussion will be in the context of the United States tax code, however the concepts mentioned should be broad enough that you can consult your tax professional about specifics. This post is not intended as financial, or tax advice, and can not be used as such.
About the Accountant
Accountants do not make you money. Accountants help you keep money that you have made. The accountant does not know your business, they know accounting. You should explain to your accountant, in general terms, how your company makes money, how your company spends money, and how you expect to make money in the future.
Accountants generally like organization, and dislike unexpected surprises. You can make your accountant happy by delivering monthly bank/credit card statements and letting them put things in order incrementally. You will likely make them unhappy if you hand them a disorganized pile of papers at the end of the year, and then wonder why your tax forms aren’t done quickly.
Accountants are accustomed to working with people who largely go against the suggestions made in this discussion. Most clients of theirs will shove off their books, and talk to them once a year during tax time. This may result in your accountants being caught flat-footed by questions you ask. It is not unreasonable to expect them to do the foot-work, but do at least a cursory investigation of your own. It’s your money, not theirs. If you find yourself with an accountant that repeatedly does not have good answers for you, and does not find those answers and get back to you, it may be time for a new accountant.
Confusing your Accountant
Game development is not a standard case for accounting. Sure money comes in, and money goes out, but that is where most of the similarities end. As game developers, we do not make physical goods. We make ideas, data, and we build value in our studios through these things. An accountant is likely familiar with businesses in which value is based around physical properties, not intellectual. If you want to confuse an accountant, or a banker, simply tell them that your industry has no concept of ‘unit cost’ — a measure of total cost incurred to put one unit of product into the hands of a retailer/consumer. Not only does game development have no real way to quantify what a ‘unit’ is, there would be no deterministic way to assign that a value.
Now that you have a confused accountant on your hands, you can further throw them for a loop by telling them that acquisitions of game studios are largely equity deals. This will cause more confusion because they will be thinking in terms of physical goods, liabilities, and other traditional business concerns. I explain it like this:
When you buy a game company, you are buying brains; you are buying the intellectual property developed by that studio, and the brains that make it valuable. You are doing an equity deal, because the brains have equity. If the brains aren’t happy, you got nothin’.
This matters because the accountant has many things on their mind with regard to the structure of your studio. When, say for example, a manufacturing business is sold, the original owners likely keep their equity; the new owners do not want it. It gets them nothing but liability. Making your accountant aware of the differences of an intellectual-property-based industry is important.
Making your accountant aware of the specifics of the game industry is important for discussions about company structure. In the United States most studios are organized as either an LLC, s-corporation or c-corporation. These different types all have advantages and disadvantages, and you may revisit your decision. It is very easy to start an LLC, and you have the option of converting to a corporation at any point in the future. However, once you make the election to convert to a corporation (s-corp, or c-corp, it does not matter) you can not “switch back” to just being an LLC. Having a discussion with your accountant or tax professional about structure, when they hold untrue assumptions about the nature of your business, is counterproductive. They don’t know your business, they know numbers — you know your business, so help them understand it.
Saving Money with your Accountant
Your accountant/tax professional can save you money, but likely only if you know what you are planning to do ahead of time. For example: in the United States, qualified research & development activities are eligible for a tax credit. Salaries, expenses, even some contracting may be things that the government will give you money to do. There is a catch (Lesson 1: with tax law, there always is) — these must be done in the proper way, and with supporting evidence. With programming, we have the advantage of…version control software! Want to prove that qualified research activities took place, exactly what they were, and when they happened? Well you have a commit log! But you need to make sure that you are going about the research in the right way. Informing your tax professional about your plans, and asking questions is important.
Asking questions is important. Your accountant can’t steep themselves in your business — you need to understand a bit of their world to gain the depth of their knowledge. Do you need to buy hardware? That’s a capital asset, ask what kind of options are available for accelerated depreciation. You may be able to write off the entire cost of that new server this year. Are you hiring employees? Ask what kind of hiring incentives are available at the state and federal level. Are you considering offering, or currently offering health care (I hope so)? There are possible tax credits available in the United States for doing so — ask your accountant!
Talk to your accountant, and corporate attorney about your structure. Share with them your goals for the structure, your future plans, and what you would like to provide for your employees. Be aware that their recommendations are not made in a vacuum; they are based on their experience, so do your own research as well. You write the checks, not them. They may see the balance in your company bank account, but you are the one that will feel it. So do your homework.
Get your Mind on your Money
At the end of the day, it is up to you to use your money wisely. Accountants can help you to do more development, provide better benefits for your employees, and help you make best use of your resources, all while helping your bottom line. Accountants will not make you money, but they can help you do smart things with it.