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Legalese Column: Building a Business

Just getting started? Avoid these stumbling blocks.

Legalese Column: Building a Business

This article originally ran in the December 2013 issue of AVN.

There are many obstacles to starting a new business, particularly in the adult milieu. Many of these will cost more than your budget allows. But when deciding where to cut corners, it’s important to remember that some mistakes can cost dearly in the long run. Following are a few things to think about.

Creating the Business Entity: Assume for a moment that you are to own 100 percent of the business. It is then fairly simple: Start a business entity—a corporation or limited liability company. But which? And in what jurisdiction? Corporation services abound that will do this for you. Those companies claim that they do not give legal advice. (It is illegal if they do.) That is sometimes true; but where they do give you unsanctioned legal advice, it often is very wrong. You will be surprised to learn that it is often not much more expensive for an attorney to set up a corporation for you than to use one of those services. Why? In the first place, the attorney likely will not charge you to act as registered agent; the service will. Secondly, lawyers often will keep rates low at the outset because they are looking to get in on the ground floor of your business.

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If you are going to have more than one owner of the business, you optimally will have one attorney for each owner. More realistically, you will have one lawyer who will require you to sign a conflict waiver. The importance of having an attorney set this up at the outset cannot be overemphasized because, unlike you, lawyers know a long list of things that can go wrong among partners. If the business succeeds, there can be disputes over division of the spoils; if the business fails, then who is stuck with the bills? When you have more than one owner of the business, there are many other things to think about, which lawyers will hammer home: What if one owner dies? Gets divorced? Goes bankrupt? Starts some side business? Steals from the business? Stops contributing? Or the owners’ respective contributions become dramatically unequal? Perhaps the business will need money, but the only possible source is a loan from one of the owners. All of those things have happened—and attorneys know how to write corporate/LLC documents to deal with them.

Counting the Beans: Next, conduct the business like a business. Open a corporate/LLC bank account, and obtain a separate corporate credit card. Use the corporate accounts exclusively for the corporation and the personal accounts exclusively for personal matters—always, always always! If the business needs some of your personal funds for startup, write a personal check to the corporation. Deposit it into the corporation account—and call it a loan, which is what it is. Also, no later than about November of the first year of opening a corporation/LLC, go to a certified public accountant, not just a bookkeeper. If you have any employees, however, you will need the latter as well. Be especially careful about how you pay people. You will be tempted to pay them as independent contractors, a potentially dire mistake, especially if they are working on your premises.

Naming the Business: You also need to name your business, which is particularly crucial. You have two names to think about: the corporation/LLC name and the trade name. Often they should not be the same. Your corporation/LLC name needs to be businesslike, which your trade name might not. Dealing with banks, vendors, trade accounts and so forth, you might not want to have such a sexy name. Dealing with the public, on the other hand, you might want to have a sexy name that could offend the suits. That is why most gentlemen’s clubs are owned by corporations/LLCs with names like Anytown Restaurant Management; while the clubs have names like—well, you are probably familiar with them.

Selecting your corporation/LLC name is not too difficult. It simply needs to be a very professional-sounding name that is not confusingly similar to any other entity in the state. Most states allow you to look up corporations on the secretary of state’s website.

Your trade name, on the other hand, can be a formula for disaster if you select the wrong one. Potential disasters can include a cease-and-desist letter—either from the attorney for an industry company whose name is the same or similar to yours, or the attorney for a famous company claiming that you are tarnishing its trademark. On the other hand, the name you select could lay an egg because it has no market appeal. Therefore, selecting as trade name is really tricky.

Find a unique but catchy name. The best names are those such as Google, Xerox, Exxon and so on—words that otherwise don’t mean anything. The worst ones are in the form of geographic names (such as “Glendale Video,” if it is in or near the city of Glendale) and names that do little more than describe what you do (such as “Quality Internet Hosting” if you are in the Internet hosting business).

Once you arrive at a trade name, Google it to death. Also, look in the United States Patent and Trademark Office (the “PTO” at uspto.gov) and search for it. Par for selecting a name is probably 25 tries. Once you have found a good one, it is a good idea to file what is called an “intent to use” trademark application at the PTO (also called a “1b” application). That has the effect of reserving the name. All of that should be done long before you start negotiating with web designers and so on, because the PTO process takes quite a few months. You should, however, have a corporation/LLC in place before you file the application for continuity’s sake.

The above is far from exhaustive. However, it should give you some things to think about when starting a business.

Clyde DeWitt is a Las Vegas and Los Angeles attorney, whose practice has been focused on adult entertainment since 1980. He can be reached at ClydeDeWitt@earthlink.net. More information can be found at ClydeDeWitt.com. This column is not a substitute for personal legal advice. Rather, it is to alert readers to legal issues warranting advice from your personal attorney.






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