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July 04, 2016

Legalese Column: Lawyers vs. Paper Pushers

This article originally ran in the July 2016 issue of AVn magazine. See the digital edition here. You may read this column as an unabashed advertisement for lawyers. Maybe it is. However, after years of undoing mistakes arising from using legal-form services, the author figures that it is time to look at this problem. Nevada, for example, has been a good place from which to operate. Many companies—especially internet companies—seek to plant their roots in Nevada. Some want the glitz of the Sin City moniker; some want to take advantage of Nevada’s lack of corporate income tax; some just like to take tax-deductible trips to Vegas; and some would rather keep their neighbors in their Small Town America locale oblivious to the fact that they are running an adult website from down the street. So, there are many who set up a mail drop in Nevada, set up a Nevada LLC or corporation and operate it by remote control—sort of. They use a legal-form service to get started. For the purpose of the article, let’s call this service “Incorporation, Inc.” There appears to be no company with that name; if there is, this column does not necessarily apply to it. Companies use Incorporation, Inc. to set up their corporation or LLC, thinking that it is saving them money. Wrong; at least in Nevada, a lawyer can set up a corporation or LLC for little if any more than Incorporation, Inc.—and probably will charge no more than Incorporation, Inc. (or even less) to act as registered agent. (You probably know that every corporation or LLC is required to have a registered agent for service of process in the state in which it is chartered.) If you surf the Internet, you will find a laundry list of companies that will set up a Nevada corporation or LLC for you, with the caveat that they do not give legal advice. Many of the companies will do that for you in any of the 50 states (and, presumably the District of Columbia). Think about the “we don’t give legal advice” part. These companies are no different than a stationery store that sells legal forms. They don’t help you fill them out. If they do, they are engaged in the unauthorized practice of law, which is why they claim that they don’t give legal advice. So, for example, suppose that you want to set up a corporation—you in the USA and your partner in Hong Kong. You tell Incorporation, Inc. that you want to set up a Subchapter-S corporation in Nevada. They give you the form. They don’t give you legal advice, so they don’t tell you that the guy in Hong Kong can’t be a shareholder in a Subchapter-S corporation. As a result, you are stuck with two levels of taxation. (A lawyer would have known to recommend an LLC instead.) The number of stories of Incorporation, Inc.-type nightmares must be numerous. Worse, Incorporation, Inc. probably charges more to be your local registered agent than a lawyer might. That isn’t to say that all Incorporation, Inc.-type outfits are overpriced. However, if you compare their prices with attorneys, you might think twice about Incorporation, Inc. There’s more. Incorporation, Inc. professes to give no legal advice. So, you and your Hong Kong partner need to think about a great deal more than legal forms. What if one of you dies? What if one of you stops performing or becomes disabled? Oh, you are only in your 30s; no problem, right? Wrong! Do you want to be partners with your partner’s spouse? In the 1970s, Robert Ringer wrote a series of books, the cornerstone of which was Looking Out For #1. In his books, Ringer talks about a lawyer—he called him “Legalman.” After blasting Legalman in an earlier book because Legalman kept screwing up deals, Ringer admitted in a later book that Legalman was useful. Legalman, he opined, was good at identifying things that can go wrong because Legalman had seen it all. So, assume, for example, two buddies get together. One is an artist and the other is a numbers person. Artist has no clue about how to run a business; numbers guy is a CPA. Let’s say CPA dies. Incorporation, Inc. didn’t give you a form for that, did it? There’s a thing called a buy-sell agreement. Do you really want Incorporation, Inc. to give you a form for that without consultation with an attorney? There are two axioms that come into play here. One that has been around for decades is, “A lawyer who represents himself”—which is exactly what you would be doing if you use Incorporation, Inc.—“has a fool for a client.” And you probably aren’t a lawyer. The second that is believed to be original with this author is, metaphorically, “Don’t fill your own teeth.” That is what you could be doing, with Incorporation, Inc. selling you the drill. So before you do that, it would behoove you to speak to an attorney first. You might be surprised to find out that it doesn’t cost all that much more to acquire some legal advice with the forms. And, while you are at it, talk to a CPA at the outset, rather than waiting until your entity’s tax return is coming due. Any attorney will tell you to do that. 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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