I sure this may be obvious to some. But I'm wondering about the idea that several people get together to build a game. The game makes money, and they distribute it between them. Do they need to form some sort of legal entity for tax purposes or other reasons. I'm presuming there is no legal requirement to do this. This is in the US, and specifically Wisconsin.

It seems an obvious no, but I'm wondering about how they report the source of the income, and if there is any thing wrong with no combined legal entity.

I'm also viewing this with the idea/agreement that each individual has equal rights to the software. I.e. all the income is not reported as if it went to the game for one person, but more as if it were evenly distributed to the owners.

I sure this may be obvious, but such a team at least needs a collaboration agreement. A "company" per se is not implied thereby.

http://maientertainmentlaw.com/?p=28

Probably doable, but unwise if your business is any more complex than two guys doing odd jobs out of the back of a van. At the very least the distributed income would be taxed at your personal income tax rate (lumped together with your other income), and the defacto "company" wouldn't be able to write off any of its expenses.

I would wager that if made more than about $5000-10,000 off your game, the cost of incorporation would pay for itself--not to mention the rationality and peace-of-mind that a contract between contributors confers. Imagine one of your contributors gets angry, leaves the colaboration, the group continues and hits paydirt, then the angry little man comes back and sues for "what he's due" -- If you don't have a reasonable agreement in place, just about any jury or judge anywhere will probably find that it is more likely than not (the standard for civil matters) that his contribution played some part in your ability to deliver. Its always best to work these things out up front, when everyone is rational and in a non-adversarial mindset.

My first question is:

Who actually owns the rights to sell it?

Without a collaboration agreement, work for hire agreement, or rights assignment, then NOBODY has the right to sell the final work. Legally each part is owned individually by each contributor. The transaction itself violates the rights of almost everyone who worked on the project.

Another way to pose this question would be around a band, who wrote a song, and go play at gigs. They receive money for playing, but how many bands (that don't start corporately funded) sign legal agreements with each other about ownership, funds distribution, etc..., unless it gets signed by a label. No band I've ever been in, or worked with.

True, no one would individually have the rights to sell the song that they all made together, but they would all agree to let it be played on the radio, or get paid to play it somewhere. It doesn't matter if all their amps and equipment belongs to one member alone. They still all get paid for it.

The group still makes the agreement together to have the game online and split the funds however.

So long statement short, The group as a whole has the rights to sell/decide how to proceed with it.

I sure this may be obvious, but such a team at least needs a collaboration agreement. A "company" per se is not implied thereby.

http://maientertainmentlaw.com/?p=28

This is useful, a good article on the topic. I can see the point of at-least preparing this in a contract/written agreement to begin with.

This has been useful information, and between this and another post dealing with Minors in game teams, contracts and written agreements seem the safest way to start. To the point where I would ask why risk not having it.

Very funny that you brought up a band as an example-- when I read your questions that's exactly the example I was going to use...

No, you do not have to form a separate legal organization. There are benefits to doing so, but it is not required.

Regarding the money.. Assuming there is no separate legal organization, then someone (one of you) will be the one to whom the checks are actually made out or whose bank account the money is deposited. And someone (one of you) will have to provide your SS number to whatever you are using to collect money (beit paypal, Apple, Steam, etc.). So that means that one of you will have to report the game income on your taxes. This will, of course, increase the amount of taxes that you (personally) need to pay. So to deal with that, you have to make sure that you write checks to the other members of the team for 'their share'. And then, come tax time, you may need to tell the IRS "Hey, I paid some people who worked on the game, so don't tax me on that." You will (unfortunately!) become quite familiar with "Schedule C" and "1099's".

That's actually very much like how a band works as well. Someone got the gig, and the check is paid to them, then they turn around and pay the band members.

Yea, it's a bit of a hassle, but that's generally how its done. Good recordkeeping is essential. It's for this reason that, even if there is no separate legal entity, most people set up a separate bank account only for the 'business'.

It is by far preferable to have an agreement written up well beforehand to explicitly state ownership and money expectations. You're correct that often that doesn't happen until 'later', but that is really just asking for trouble. As with a band, once real money is on the table, all the "unsaid" assumptions get challenged and things can get nasty quickly. Far better to agree before there's anything really at stake.

You don't necessarily need a fancy contract (though it's certainly best). A simple plain English document explicitly spelling out what you all believe the arrangement to be (and then signed by everyone) is certainly far better than a verbal agreement or unsaid assumptions.