BUSINESS STRATEGY
Part 2 of a 6-part series
In our last article, we discussed basic business entity choices and why you should avoid partnerships. Many webmasters, however, find it profitable to combine their content or skills with another webmaster’s skills for the purpose of pursuing a joint business effort.BUSINESS STRATEGY
Part 2 of a 6-part series
In our last article, we discussed basic business entity choices and why you should avoid partnerships. Many webmasters, however, find it profitable to combine their content or skills with another webmaster’s skills for the purpose of pursuing a joint business effort. What is the best means for doing this from a legal protection perspective? Read on.
Why Even Worry About It?
My site is successful. Their site is successful. We will obviously be successful working together, so let’s get on with it. Right? Wrong! Each party worked very hard in developing their side of the business. In gaining “experience” (better known as making mistakes), each party will have developed strong opinions about how things should and should not be done. The pursuit of the joint business effort, thus, is full of pitfalls. The nature of the actual agreement that should be reduced to writing between the parties will be covered in another article. Here we will focus on how you should structure the new business.
Solely for the purposes of discussion, we will look at two hypothetical, but common, parties trying to do business. Our first party is providing content and will be called Muffy. The second party is Mark, the established owner of HotLawyers.com (it’s available, I am not.) Muffy and Mark believe they can combine their talents to make big money with a membership site. How should they do it?
The number one concern in such a situation is to make sure that each party has protected their profitable business. You worked long and hard to get your site up to snuff or shoot high quality content. Why would you possibly want to expose it now? How well do you know the person you are going into business with? Are you willing to risk all your hard work? You should not be. Don’t get caught up in visions of money.
Neither Mark nor Muffy Is Incorporated
Assuming neither Mark nor Muffy is incorporated…they should each incorporate pursuant to the previous article in this series. If they refuse…
The best option is to jointly form a corporation. Each will own an agreed upon percentage of the company. Mark will contribute his designing and marketing ability while Muffy contributes her content. The bylaws (administrative rules) of the corporation will detail how expenses and revenues will be split. The entity will obtain a tax identification number and the name and tax identification number will be used on all accounts including billing and affiliate programs.
What has been accomplished? Muffy and Mark have protected themselves from being liable if the site they create does not make money. If the site fails and they cannot pay their bills, the corporation will simply file bankruptcy without either individual facing personal liability. Are they completely protected? NO!
In the above scenario, Muffy and Mark are still open to liability on the “back end”. Without realizing it, each trusts the other to run their independent businesses properly. How can this be?
Assume that Mark and Muffy form a corporation and create a great site. The site is hauling in members each and every hour. In short, life is great. One day, Mark receives notice of a lawsuit from an attorney who was listed on his hotlawyers.com site by an ex-boyfriend. The lawyer follows through and wins a judgment against Mark who never got around to incorporating his independent business. The lawyer takes a “debtor deposition” and learns about the corporation that Mark and Muffy jointly have as well as the money they are making.
Guess what happens next?
The lawyer seizes Mark’s interest in the joint corporation. Muffy has a new partner and isn’t she happy! Would you be?
It is absolutely vital that you protect profitable businesses from new ventures. The above scenario happens every day in the courts.
Okay, okay. You realize that you have to incorporate, but what do you do about an investor who does not want anyone to know they are involved in the business? We will cover that subject in the next article.
Richard Chapo is the lead attorney for AdultInternetLaw.com, based in San Diego, California. AdultInternetLaw.com provides legal services to adult businesses, focusing on business strategy, corporate and contract preparation and site reviews. He can be contacted at adultlaw@yahoo.com. This article is for general education purposes and does not address every facet of the laws surrounding the subject. Nothing in this article creates an attorney-client relationship.
