Do Amateur App Developers Need to Form an LLC?
As of June 2016, there were more than 2 million apps available in Apple’s App Store and 2.2 million apps for Android users. With make-your-own app programs readily available and a huge market of smartphone users, these numbers are clearly on the rise. If you plan on making and selling an app, there are a few important facts to consider before you enter the marketplace or file for an LLC.
Creating an App That Stands Out in the Crowd
You have a great idea for an app, you’ve spent countless hours writing code and perfecting it, and now you’re ready to launch it to the masses. Unfortunately, creating your app just might have been the easy part. Here are some important statistics that highlight how competitive the app landscape is:
- In May 2015, there were 40,037 app submissions in the App Store, while applications for games totaled 13,905. In all, there were 53,942 submissions for apps and games during the month, representing an average 1,798 submissions per day. (International Business Times)
- About 73% of the apps and games are free. Paid apps have an average price of $1.27, while paid games are priced at an average of $0.63. (International Business Times)
- In the United States, smartphone users spend almost 80 percent of their total app time in their favorite three apps and a stunning 96 percent in their personal top 10 apps. (Statista)
- In many cases, the top 3 apps are messaging and social networking apps, which are to a large extent used to consume media. (Statista)
- 26% of mobile apps are opened only once, which shows how fickle mobile users are with downloaded apps. (Quora)
These statistics outline how the app space is a crowded market and making your millions in it has been compared to the odds of winning the lottery. However, let’s say that you still want to take the journey despite the odds, there are some important business steps to consider and understand.
Do I Need a Business License to Sell My Saas or App?
To register your app in the App Store, Apple gives you the option of enrolling as an individual/sole proprietor or as an organization, which requires the appropriate documentation for legal entity status. (So no, you don’t need a business license at this point to register your app in the App Store.) Each state requires different fees for a business license and Apple requires a $99 fee to be registered as one of their app developers. If you’re not making money in the early stages of launching your app, you may want to wait a little while to determine when you should apply for an LLC for your app business.
However, from a marketing standpoint, being an official organization in the App Store may make you more credible to potential buyers. The only visible difference when registering as a business or LLC when developing apps is how your name appears in the App Store. Apple states:
“If you enroll as an Individual, your personal name will appear as the ‘seller name’ in the App Store. If you enroll as a Company, your legal company name will be displayed as the ‘seller name’ in the App Store and you will have the ability to add additional members to your development team.”
It’s also important to understand tax implications whether you register a business for your app developer company or not. “As a business, you want your App Store revenue to go to your business account because its tax rate is usually lower than personal or employment tax,” recommends Reinder de Vries, Founder of LearnAppMaking.com. However, “if you sign up for a personal account now, and open a business in time, you can always create a new business account for the new business. Moving your app over isn’t such a hassle as it used to be.”
Do I Need the Protection of an LLC? Well, Yes and No.
No, for the following reasons:
First of all, many developers are concerned about copyright laws and protecting their assets in case someone claim rights to their intellectual property (IT). Circular 61 of the U.S. Copyright Office, Copyright Registration for Computer Programs states that “Copyright protection extends to all the copyrightable expression embodied in the computer program. Copyright protection is not available for ideas, program logic, algorithms, systems, methods, concepts, or layouts.”
This means that if you have your app in place and you have documentation of when your app was created, you don’t need to worry about someone suing you for stealing their idea if you have proof your app existed first. However, if you just have an idea that doesn’t come to fruition, copyright law does not apply.
Additionally, with so many apps out there, it’s highly unlikely that “patent trolls” will fight you for the rights of your app. The simple fact is that they are focusing on big businesses that have the big bank accounts.
Beyond copyright laws, app maker lawsuits have been few and far between, so protecting your personal assets is not as big of an issue as it is with brick and mortar companies. Nonetheless, there are a few that do exist: in April 2016 in Chicago, the “Down to Lunch” app maker was sued for sending unwanted texts to its users without receiving prior consent. In March 2012, Path, Facebook, Twitter and Apple were sued for uploading user address books without consent. In December 2010, Apple and several of its app developers were sued for helping advertisers secretly create profiles of iPhone users without their consent. As you can see, many of these lawsuits violate user privacy and do not stem from the app functions themselves.
Yes, you might need the protection of an LLC because an LLC has several advantages:
If you are creating your app with another developer, you should consider seeking legal council. If your app becomes profitable and conflicts later arise, it could get ugly deciding who did what in the process and how the assets should be divided. An LLC allows you to define who the “members” are in your company, and you can assign what percentage each member owns.
Taxation is another reason why developers should consider forming an LLC. Without an LLC, the developer is required to pay expensive self-employment taxes. “One main advantage of a limited liability company rests in how the IRS treats the business under tax rules,” explains FreeAdvice.com. “Usually, an LLC is taxed as a partnership or a sole proprietorship, which means that the LLC pays no federal income taxes. The profits and losses are passed through to the members. Each member reports his or her share of profit or loss on his or her personal tax return. If each member owns 50 percent of the LLC, then each member will be responsible for paying 50 percent of the federal income taxes.”
Most importantly, your personal assets won’t be at risk if the LLC incurs debt or is sued. Nonetheless, members are not necessarily shielded from wrongful acts, including those of their employees, because it is “limited” liability and there are some ramifications is certain instances.
So let’s get back to the question at hand: should you create an LLC?
If you are making thousands of dollars and your sales continue to grow, then yes, the protection and investment of an LLC can not only give you peace of mind, but it will help you with your tax payments and creating structure for your business operations. If you are in a partnership and need other legal guidelines to protect your assets and rights, then legal documentation is definitely the right choice. But, if you’re in the beginning stages, hold off on the financial strain of forming an LLC as an amateur app developer until you get your business off the ground.