How do app development businesses make money?

There are four business models for applications and various combinations of them: Work for hire: Getting paid to create applications for others. Advertiser-supported free apps: An app that is popular and can earn revenues from associated advertisements. Free to try with premium paid service: An entry-level app is either a free trial for a specific time or a limited version. Those who pay for a premium version get enhanced features and can remove advertisements. Paid apps: These apps charge for their use by timeframe, by the number of users, or by other means, such as a license fee. There are no free versions. These apps may be highly specialized and very valuable to those who pay for them. Learn more about starting an app development business.

Should I Start an LLC for My App Development Business?

Starting a limited liability company (LLC) for your app development company can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For an app development company, lawsuits can arise from things like developing an app that’s too similar (or identical) to a competitor’s, or suffering a data breach.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your app development company seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

People using papers to develop an app design

Do I Need an LLC for an App Development Business?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for an App Development Business

By starting an LLC for your app development business, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

App development businesses will benefit from liability protection because of the risk of intellectual property claims, trademark infringement, and even workplace accidents.

Example 1: One of the apps your development company recently published was found to contain unlicensed content distributed by another online publisher. As such, this publisher decides to sue your company for copyright infringement. If the court finds you liable to pay damages, limited liability will protect you from these being imposed on your personal assets.

Example 2: Your app development company suffers a serious security breach that links the financial details of a number of your users. If one of the affected individuals decided to bring a lawsuit against your company for this data breach, any damages you may or may not be required to pay could only be levied against the business’s assets.

Example 3: While on your premises to discuss an ongoing project, a client slips over an unmarked wet floor and suffers a cranial fracture. The client believes the bodily harm they suffered to be the fault of your company, and so sues for damages. In this instance, limited liability would protect your personal assets and limit compensation to only the business’s assets.

Example 4: One of your competitors claims that your latest app is built off of code you copied from his app. He files a lawsuit against your company.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for an App Development Business

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if an app development business owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

App development businesses rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All LLCs need to possess insurance. Without it, their assets are left unprotected and exposed to the numerous liabilities businesses face on a daily basis.

It is easy to confuse the limited liability protection of LLCs with insurance, but these are two different mechanisms. Limited liability protects the personal assets of the owners, while insurance protects the assets of the business itself.

Common Situations Business Insurance May Cover for an App Development Company

Example 1: A potential client is visiting your office and trips on a power cord and falls, breaking her wrist. She asks that your business pay for her medical treatment. Your general liability insurance will likely cover this cost.

Example 2: One of your competitors claims that your latest app is built off of code you copied from his app. He files a lawsuit against your company. Your general liability insurance policy would pay for your legal defense and for a settlement if you settle out of court.

Other Types of Coverage app development companies Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all app development companies should obtain.

Commercial Property Insurance

All of the equipment you use to develop apps for your clients, including all of your computer hardware, would be expensive to replace were it to be damaged in a fire or other unexpected event. Commercial property insurance helps pay for the repair or replacement of your business property if it was damaged by a covered event.

Product Liability Insurance

No matter how carefully you design your apps, there is always the possibility that a client could claim that what you made and sold them caused them harm. Were a client to file a lawsuit demanding damages, your product liability insurance would pay for your legal fees and the cost of any settlement.

Workers' Compensation Insurance

If your app development company has any employees (full-time or part-time), you are legally required to carry workers’ compensation insurance. This type of coverage will help compensate your employees in the case that they get injured on the job.

Home-Based Business Insurance

If you run your app development company out of your home, there is a possibility that your homeowner’s insurance would not cover accidents resulting from business activities. Home-based business insurance can be purchased as part of a business owner’s policy or possibly as an extension of your current homeowner’s policy.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance, commercial property insurance, and product liability insurance.

Read our App Development Business Insurance article for more info.

If you intend to start with a professional development team, initial costs will be a lot higher. Expect to pay upwards of $10,000 in total for business licensing, rent, computers, and software.

In order to avoid this high start-up cost, many developers choose to work individually from home until their businesses are sufficiently in-demand that they can expand.

Learn more about starting an app development company.

App development companies need to rent office space and pay for Internet access, computer maintenance, and potentially salaries. They also may need to subscribe to development software.

Learn more about running an app development business.

There are four business models for applications and various combinations of them:

Work for hire: Getting paid to create applications for others.
Advertiser-supported free apps: An app that is popular and can earn revenues from associated advertisements.
Free to try with premium paid service: An entry-level app is either a free trial for a specific time or a limited version. Those who pay for a premium version get enhanced features and can remove advertisements.
Paid apps: These apps charge for their use by timeframe, by the number of users, or by other means, such as a license fee. There are no free versions. These apps may be highly specialized and very valuable to those who pay for them.

Learn more about starting an app development business.

An app is a program that runs on phones, tablets, personal computers, and other mobile devices. Although millions of apps have already been created, there is still plenty of room in the market for innovative new apps that help people do things better. This can be a rewarding, lucrative business.

The profit an app development company makes depends entirely on the popularity of its apps and its monetization strategy, meaning it can range from zero to billions of dollars.

Learn more about starting an app development business.