Business Records: Are They Secretly Destroying Your Internet Business?

When you set up a corporation or a limited liability company to shield your personal assets, that’s just the beginning.

No business owner enjoys keeping business record books…but if you don’t you could still be personally liable in a lawsuit or worse.

Why? Corporations and limited liability companies are designed to be fictitious entities separate and distinct from equity owners. In plain English, they are considered under the law to be a separate “person” from the individuals who own them. That’s what makes these entities attractive for doing business.

However, in order to maintain this separate and distinct status, your business entities have to meet certain requirements to go on “living.”  This includes many things, such as filing proper paperwork with the government, paying taxes when due, and keeping necessary business records.

The types of records that must be kept depend on whether you own a corporation or a limited liability company. For example, a typical corporation will keep records of its formation, organizational meeting, notices of meetings, waivers of notice, minutes of meetings of shareholders and boards of directors, corporate resolutions, documentation regarding loans, money put into or taken out of the corporation, names and addresses of all equity owners, copies of issued stock certificates, a stock register, buy-sell agreements, shareholder agreements, and proxy agreements.

What happens if the record-keeping formalities are not observed?

•    If you try to sell your business, few will want to purchase for a fair price without adequate business records.
•    If you get sued, a court may disregard your business entity under “alter ego” theory and hold you personally liable for damages.
•    You could pay extra taxes because you didn’t document financial transactions correctly in the business entity records.
•    If caught, you may have to pay extra penalties to the government for not keeping required records.

For an example of what not to do, check out Amazon Affiliate Tax: Jerry West Has a Bad Solution.

What’s the solution?

Have your lawyer look at what you’ve got, determine what is missing, and then clean up your business records by bringing them up-to-date. This will give you a fresh start and you can put into place a business record-keeping system with your lawyer that will enable to you to add new documentation as needed in the future.

Remember that memories fade, employees quit, people move or die, and other events occur that make it difficult as time passes for you to create the necessary record books. In other words, it won’t get any easier than now to clean up your records.

Amazon Affiliate Tax: Jerry West Has A Bad Solution

Like many Internet marketers, it took Jerry West losing 40% of his affiliate commissions to suddenly realize that there are some big legal issues facing online marketing. This is known as cleaning up a mess after the fact rather than taking reasonable steps to avoid the problem in the first place.

For an overview of the affiliate tax mess, check out:

Internet Taxes Threaten Your Online Business (May 2008)

Internet Taxes: State Governments Want You to Become Their Tax Collector (May 2009)

and

Special Report: The Future of Affiliate Marketing (June 2009 PDF file)

After consulting with his lawyer and accountant, Jerry claims that he has found the “Amazon Affiliate Tax Solution.” Although this might be the solution for Jerry (and I’m certainly not going to offer legal advice in this blog post), his solution is a horrible idea for many affiliate marketers because it exposes them to additional taxes and even potential personal liability.

Although you can watch his video at the link above, Jerry’s affiliate marketing solution in a nutshell involves setting up a foreign corporation in a state where you do not live that doesn’t have Internet affiliate taxes (Nevada was used as an example) and hiring a virtual office “for about $200 per month” to field all your affiliate mail and transfer incoming phone calls directly to you in the state where you live and actually run your business operations. You run the rest of your business using a second corporation based in your home state.

The main flaws in Jerry’s solution were pointed out by me last year in a special report “Scam Artists and Your Business” (PDF file).

Here are some of the key dangers created by the scheme:

(1) Affiliate program operaters can still be required to collect affiliate taxes because the out-of-state company is essentially a sham or alter ego of your in-state company.  At best, you’re engaging in unethical conduct. At worst, you’re engaging in fraud. Want to explain explain as an affiliate or as a defendant in a lawsuit the scheme and claim you were only acting unethically rather than illegally? Who do you think affiliate program operators will go after when they get stuck with tax bills because of your conduct?

(2) State governments where both of your corporations are based can argue that Company 1 should be registered to do business in State 2 (where you don’t live) and Company 2 should be registered to do business in State 1 (where you do live). Think of the joys of paying franchise and income taxes in two states for two companies, both in the state where each company is incorporated and in the other state as a foreign entity.

(3) The failure to observe corporate formalities can lead to personal liability because the corporate shield gets pierced. Going to run separate bank accounts for two businesses in two states? Not going to commingle the funds, are you? How about meetings of directors and shareholders? Corporate resolutions? Like to travel alot? How about paying for lawyers and accountants in two states to handle the mess of paperwork?

Unfortunately, people want a quick fix for their problems. If that’s what you’re looking for, Jerry West offers it with additional risks to your ethics, your business, and your personal assets…plus you’ll always be wondering if either a state department of revenue or your affiliate program operators will catch you.

What’s the best solution until the courts sort out the affiliate tax?

Move your online business operations to a state that doesn’t impose affiliate taxes. That doesn’t mean pretending to move and hope you don’t get caught.

A final few things to note.

1. This is not an attack on Jerry West. He’s got a good rep for delivering for StomperNet.

2. Virtual offices (and executive suites) do provide Internet marketers with valuable services. Just don’t use them for unethical or illegal purposes.

3. Yes, these affiliate taxes are a raw deal and the politicians who voted for them should be tarred and feathered. But railing against the unfairness of the taxes won’t solve anything. Take legal (hint: see a qualified Internet business lawyer) appropriate action to protect your business and then vote for your financial self-interest in the next election.

07/18/09 Update: Jerry West has subsequently revised his content to respond to this post. You’ll find my response at Jerry West: Lawyer Wannabe Gives More Bad Amazon Affiliate Tax Advice.