Business and Tax Law and Its Impact on the Esports Business Ecosytem

Business Entities in Esports

As esports revenues continue to increase, the need to ensure that every individual involved is maximizing their earned funds becomes even more pressing. This applies to any talent involved in professional gaming, including “competitive” gamers and gaming “influencers” as well as any professional esports teams and organizations. Consequently, in many cases within the United States, it is advisable and most convenient for a gamer or team to form their own business organization entity, such as a corporation or a limited liability company (LLC). Whether the party ultimately forms a C-Corporation, S-Corporation, LLC, or some other type of business entity typically will depend on which state the entity will be formed in as well as other issues including taxation and control. An examination of the anticipated business structure that the business owners envision creating is also of interest. The operating location of the company may also be a factor in this decision. For instance, a corporation in New York does not have the same costly publication requirement that a New York LLC has.⁶⁷² However, the fact that each entity has its own unique ownership restrictions is important to explore prior to selecting one of these business entity types. Additionally, each state provides different tax treatment for the business entities established within its state as well as imposing different statutory limitations on ownership of a particular entity. Therefore, in most cases, it is prudent to consult with a qualified professional, such as an attorney or accountant, when deciding which type of business entity to form as well as when selecting which state is appropriate for a particular gamer or team to form the entity in. Once the company is established, the entity acts as the foundation for all of the team and player’s business endeavors.

One of the most important benefits of many formal business organizations is that the entity may protect the business entity organizer’s personal assets. This means that these limited liability entities may shield the owners from personal liability for any claims arising from any contracts or other arrangements entered into on behalf of the individual through its entity. This includes protecting any residential and personal property as well as any financial investment and bank accounts personally owned by the gamer or team owners. These companies can protect their assets such as cars, stocks, bonds, jewelry, securities, and bank accounts which are established in the individual gamer or team owner’s name. Again, an individual should always consult an experienced attorney or other tax professional for assistance in forming any of these business organizations as well as to understand the intricacies and specific entity requirements.

Generally, to receive this protection, the created business entity is the party that should enter into an agreement with a third party on behalf of the entity’s owner (the gamer or the team owner). If this occurs, then if a sponsor, a league organizer, or some other third-party creditor has an existing claim against a team or individual gamer (who had properly entered into the original agreement using their created entity), the only recourse for that creditor would be against the business entity, not the individual owner and their personal assets. This means that creditors generally cannot recover against the individual owner’s personal assets. For example, this may be beneficial if you are an owner of an esports team and during a tournament one of the team members spills a drink on a computer and destroys it. If the agreement with the tournament organizer is solely entered into with the limited liability company entity (which it should be), then the entity and their assets will be the only party contractually responsible for the damaged property while the team owner and its individual team members are not held personally liable for the damage. Therefore, the tournament organizer’s only option is to attempt to recover the funds required to fix or replace the broken equipment from the entity (which may not have sufficient assets to cover this amount). However, if this did not occur, then the organizer might be able to recover any suffered damages or losses directly from the team owner or gamer personally.

Ute existence of these companies also provides easy management over any tangible property owned by the organization or the gamer. This could include ownership of any streaming equipment, gaming peripherals, consoles, or computers as well as any commercial or residential property. The created entity also provides its owner with the ability to easily manage all of their intellectual property for licensing and distribution purposes. This includes managing any trademarks, copyrights, audiovisual works, photographs, logos, or web sites owned by them. The created entity is also perfect for organizing and utilizing traditional “work-for-hire” arrangements and other rights assignment documentation. These documents are useful to ensure that all the rights that any ancillary parties may possess in a created work are properly owned by the company. This would then permit the company to use the work for whatever purpose they require. Such agreements could be with any third parties utilized by the gamer or esports organization, such as any graphic designers, photographers, videographers, and any other independent individual.

Additionally, some of the third parties that the team or gamer works with could require that any payment to them is made with the entity’s Employer Identification Number (E.I.N.) (also referred to as a Tax-ID number), as opposed to paying them personally. This could include payments from a streaming platform such as Twitch or a merchandise website that processes orders on their behalf. In these cases, an entity must be created as an E.I.N., which is analogous to the company’s social security number, can only be obtained by an existing business entity.

As with any business, more than one individual or even another entity can possess an interest or a share of the created business and be an owner of it. This could include ownership by any potential third-party investors or any other industry professionals such as a talent manager or an agent (if the gaming talent has one). In the situations where there are multiple parties involved in an entity’s ownership, it is prudent to execute a written agreement that outlines each party’s ownerships rights, how the company is managed, and any other powers of each interest holder. Therefore, in most cases, a business entity is typically governed by a written contract that outlines how the entity will operate. For example, an operating agreement is created for an LLC and a shareholder agreement is drafted for a corporation. These documents typically include an outline of the split of any profits and losses among owners. They may also specify how any management decisions shall be addressed and how additional owners and members can be added to or removed from the entity. Without these established outlined contractual procedures, it may be very difficult to determine certain business decisions, especially when more than one individual is involved in these important choices.

While these business entities provide numerous benefits to their owners, there are potential ways a third party can “pierce the corporate veil.” Piercing the corporate veil is an attempt by a third party to disregard an existing business entity’s protection of its owners and attach an individual’s personal assets.⁶⁷³ To combat this action, it is essential that a company follows any and all mandated statutory procedures and guidelines, which are different in each state. One of these formalities includes the preparation of annual corporate minutes to ensure that a corporation is a real functioning entity. Other requirements might be the filing of an annual Statement of Information or other yearly documents. Also, careful usage of the company’s bank accounts is essential to ensure the separation of business revenue from any personal accounts. This is meant to ensure that the entity is utilized for a proper business purpose and not just merely as a “shield” for the owner from personal liability. Further explanation of this topic is out of the scope of our discussion but is a factor that a business owner must be aware of.

It is clear that the use of a business entity provides unique protections and benefits for its owners.⁶⁷⁴ Thus, an individual should explore the need for the entity and how the existence of it may factor into the party’s long-term business goals.

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