BUSINESS STRATEGY
Part 3 of a 6-part series
[Part 1, Part 2]
In previous articles, we discussed the reasons and basis for using corporations to protect your adult business from liability.BUSINESS STRATEGY
Part 3 of a 6-part series
[Part 1, Part 2]
In previous articles, we discussed the reasons and basis for using corporations to protect your adult business from liability. In this article, we discuss the use of corporations to create privacy for an investor or participant who does not wish it to be public knowledge that he or she is involved in an adult business. Since a corporate filing will be a public record, the creation of privacy for shareholders requires additional tactics.
Flying Low On The Radar Screen
It came to you in a rush. Yes, you nailed down the perfect niche market. Naked Greenland Girls is going to make you a mint. The only problem is that you have to raise $20,000 to travel, shoot content and design the site, not to mention buying warm clothes. You approach an old friend who has the money and he agrees that it sounds like a profitable proposal. The only problem is that he works for a bank and can’t risk bad publicity if the local “Greenland Is Great” group raises a fuss. What to do?
Option One
The easiest option to protect the identity of your investor is simply to have him make a loan to you. The ideal method for doing this is to form your own corporation and then have the investor make the loan to the corporation. To protect your investor, you need to sign a personal guarantee for the loan. In short, you are agreeing to be personally responsible for the loan debt even if the company fails for some reason.
Is this a viable option? Theoretically, it is very viable. Realistically, it rarely happens. Why? Well, what did you tell the investor to get him interested in the site? You told him you are going to make millions with the Greenland Girls concept because no one else is in that niche! Do you think your investor is going to be happy to receive a ten percent return on his loan when you are predicting millions in income? If the investor doesn’t mind, send him my way!
Typically, the investor is going to buy the “power of potential”. The “power of potential” is the psychic greed factor every person has wherein they envision making a lot of money for doing nothing. (Do not insert a lawyer joke here!) Everyone has heard of the poor sap that sold Bill Gates the basic DOS program. He must surely have gone insane by now. Your investor does not want to be in a similar situation. If a loan is not an option, what can be done?
Option Two
Your investor is sold on the Greenland Girls concept and is ready to go shopping for a Ferrari. The only thing to overcome is the privacy issue. You’re so close, you can taste it! What do you do?
The best option available is known as the double corporation strategy. Initially, you will form your own corporation in which you will be the sole shareholder (owner). A second corporation will then be formed in which you and your investor will both be shareholders. For the second corporation, you will negotiate an ownership split. Do not split the shares in half! Someone has to have the power to make decisions and you can get stuck if each person has an equal amount of shares. In this case, the tie does not go to the runner as in baseball. The best option is to give one person 51% of the shares and the other person 49%.
Once your corporations are formed, what do you do? The Greenland Girls (“GG”) Corporation will be the active corporation. The content and site will be held by GG Corporation. All billings, expenses for the business, etc., will be held in the GG Corporation. In short, it will act exactly as a “normal” adult corporation would act if you had sufficient money to start the business yourself. But you don’t, so…
The GG Corporation will sign a management contract with the second corporation, known as the Management Corporation. The Management Corporation is the one owned by both you and the investor. To make this all work, the investor will donate the amount of money you have agreed upon to the Management Corporation as a capital contribution. The Management Corporation will then sign an agreement to provide “management services” to the GG Corporation for a fee. The agreement will be absolutely binding, but the fee will be adjusted from time to time. The adjustment allows you to modify the figures to get the necessary cash out of GG Corporation. It sounds easy, but there is one problem. The Management Corporation has the money, not GG Corporation. Hmmm…
The transfer of money is a relatively simply function. The Management Company will loan the investment money to GG Corporation. The loan will be documented through a normal written loan agreement and GG Corporation will pay reasonable interest. Note that this MUST be a formal agreement. You cannot agree to pay 1% interest. It must be a reasonable figure, at least 6% in my opinion. So what have we accomplished?
Our goal was to get money from the investor while protecting his privacy. In the above scenario, GG Corporation has received the money and is carrying all of the risk. If anyone investigates the ownership of GG Corporation, they will find no trace of the investor. Since the management agreement is not filed with any public authority, there is no way to connect the two companies. Your investor is also happy because all the risk is with GG Corporation and all of the profit should be coming into Management Corporation where it is split by the two of you. Off to Greenland you go…
Does the above strategy completely protect the investor from discovery? No. This strategy will provide sufficient protection approximately 80% of the time. The weakness lies in the fact that GG Corporation could be sued. During the lawsuit, the existence of the management agreement could be discovered. Once it is discovered, the suing party could run an investigation of the Management Corporation and discover the investor’s identity. As long as you are doing business in the United States, this will always be a possibility. Regardless, most investors are willing to take on the relatively small risk that comes with the double incorporation strategy.
Total Privacy
Let’s take the same example as above, but make one change. Let’s assume your investor has a lot to lose if his identity is discovered. Perhaps he sits on the board of a publicly traded company. Is there anything you can do to make him comfortable enough to invest in your business? In the next article in this series, we discuss the completely misunderstood area of offshore banking and business.
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.
