REVIEWS

On February 13, a seminar entitled “Corporate and Tax Strategies” was held at the YNOT offices in San Diego. The seminar was jointly hosted by YNOT and AdultInternetLaw.com, and was the first of a series of seminars for adult Internet webmasters.

The primary speaker for this seminar was Richard A.REVIEWS

On February 13, a seminar entitled “Corporate and Tax Strategies” was held at the YNOT offices in San Diego. The seminar was jointly hosted by YNOT and AdultInternetLaw.com, and was the first of a series of seminars for adult Internet webmasters.

The primary speaker for this seminar was Richard A. Chapo, Esq. of AdultInternetLaw.com. Much of what Richard discussed is contained in a six-part article series that is currently being published on YNOTNews. To avoid redundancy, this seminar summary will primarily address issues which are not presented in Mr. Chapo’s article series.

Mr. Chapo indicated that there are four basic business types that a webmaster can utilize in operating his/her online business: a sole proprietorship; a partnership; an LLC; or a corporation. He instructed that, given the nature of our business, webmasters must always be conscious of taking measures to reduce risk. One way to do that is to form a business entity that limits personal liability. Neither sole proprietorships nor partnerships (at least the garden variety) do so.

A partnership involves two or more people entering business together and sharing ownership. While there are tax advantages to a partnership (single taxation as opposed to double taxation with a corporation, which means that both the corporation AND the shareholders are taxed when net income is passed to shareholders), the partners remain personally liable for all debts and legal liabilities. Mr. Chapo went so far as to state that, “It is better to have died a small child than to be in a partnership.” One partner can be held liable and lose personal assets, such as a house, due to the actions of the other partner, such as injuring someone while driving drunk. While this holds true for your run-of-the-mill partnership, if a “limited partnership” is formed, the limited partners do not risk personal liability – only the general partner does. However, a limited partner loses all protection if he/she is actively involved in the business.

Because of these personal liability issues, Mr. Chapo recommended LLCs, or more preferably, corporations, as the business entity of choice. LLCs are business entities that first came into being in the 1980’s, and may be formed in nearly every US state today. They are similar to corporations, but are more flexible and simpler. In a lawsuit, LLCs are treated similarly to corporations – the company itself faces legal exposure and not the individual owners of the LLC. Only a minority of legal jurisdictions treat LLCs like partnerships and hold the individual owners liable for any judgments against the company.

Further, LLCs are subject to single taxation, like partnerships, as opposed to corporations which are double-taxed. The LLC entity itself doesn’t pay tax – all net income “flows through” to the owners (called “members”, not shareholders or partners), who individually pay their proportion of company taxes in accordance with their ownership percentage. So, LLCs are somewhat of a hybrid between partnerships and corporations – LLCs share the positive attributes of partnerships (single taxation) and the positive attributes of corporations (limited liability), while avoiding the negative attributes of each business type.

LLCs can also be a useful vehicle in cases where one of the members (owners) doesn’t want it to be known that he/she is involved in the adult Internet. For example, the State of Wyoming allows the formation of either a member-managed LLC or a manager-managed LLC. If a member-managed LLC is chosen, then all members (owners) will be identified in documents that will be filed with the state and hence will be public record. If a manager-managed LLC is chosen, however, only the manager is identified in public records, and all other members stay out of the public eye. So, LLCs may provide an additional layer of privacy, if such privacy is needed and the entity is formed properly.

However, and this is a big however, LLCs have a major drawback. Many states, like California, now charge LLCs formed within that state a tax for the “privilege” of doing business in that state. In California, LLCs are taxed on their gross revenues, irrespective of whether or not the LLC has any net income. So, it can cost many thousands of dollars to operate an LLC even if the business doesn’t turn a profit, which is a huge disadvantage. For this reason, Mr. Chapo recommends forming corporations rather than LLCs.

In Mr. Chapo’s opinion, corporations are a lot safer from a personal liability standpoint that any of the other business entity types. Many states allow the formation of corporations with only one shareholder (owner). Mr. Chapo recommends that webmasters form corporations in the states in which they reside – a webmaster may face fines and tax complications if he forms a corporation in another state but does not fully comply with specific legal requirements in operating the entity.

It should also be noted that while garden-variety “C” corporations are subject to double taxation as described above, “S” corporations are subject to single taxation just like LLCs. The corporation itself isn’t taxed, and the individual shareholders pay tax on their proportion of the corporation’s net income. Generally, an “S” corporation should be formed where net income is expected to be under $150,000. However, certain tax deductions are lost with an “S” corporation that would remain with a “C” corporation. So, an analysis of personal deductions should be taken into consideration when deciding which type of corporation to form.

While a corporation provides limited liability to its shareholders, that advantage can be lost if corporate formalities are not maintained. There must be written bylaws and resolutions. Stock must be issued to the shareholders. Shareholder meetings must be held at least annually, and written minutes from those meetings must be recorded. If these measures are not taken, in a lawsuit in which the corporation is a defendant, the corporation may be “pierced” and the individual shareholders held personally liable for any adverse judgment against the corporation.

The seminar lasted nearly 2 ½ hours, quite a long time, as there were many topics covered and issues discussed. For future seminars, we will attempt to have a narrower focus, so that the seminars aren’t as lengthy and at the same time, cover the subject matter in great detail. We are looking into the following seminar topics: Obscenity – what webmasters can legally show and what they should steer away from; Shooting Content – legalities involved in shooting content, how to solicit models, and how to treat models at shoots; and Law Enforcement Perspectives – we’d like to have visitors from the local District Attorney’s Office, the FBI, and possibly other law enforcement agencies, for an open dialogue to discuss how we can work together to clean up the Internet and how webmasters can avoid investigations and prosecutions. Stay tuned. And feel free to provide us with suggestions for future seminar topics.

REVIEWS

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