Re: Am I responsible if my spouse's business fails?
I am an attorney with 18 years of experience in corporate and intellectual property transactions.
In order to protect yourself if your husband's business fails, you should have your husband get a legal entity. I would probably recommend forming your entity in the State of Nevada, because it provides the greatest degree of asset protection of all the states. Nevada law allows your husband to take out a lien against the assets of the business. Your husband becomes the first in line creditor.
In the alternative, your husband may also want to consider establishing his entity in the state of Delaware. Delaware's Limited Liability Company Act allows Delaware LLCs to create Series. What that means is:
1. Each seperate movie could be put into its own series.
2. The debts and obligations of a series cannot pass up to the LLC or your husband.
3. The debts and obligations of one series do not pass to another series.
4. Profits and losses from each series can split differently. Consultants who are not working on a particular movie, would not get any of the profits from that movie.
The non payment to the consultants/workers raises serious personal liability questions. You need a proper written independent contractor agreement, and the consultants must act as independent contractors at all times. The Consultants must set their own hours, work schedule, purchase their own tools, have other clients, have their own business cards, etc.
Lastly, the greatest personal liability concern is the securities law implications. Your husband is proposing to pay the consultants out of profits. This is not a royalty arrangement. The relationship with the consultants is (1) an investment of money (the consultants time they they could otherwise be getting paid); (2) in a common enterprise; (3) with the expectation of a profit; and (4)to be derived in whole or substantial part from the efforts of others. That makes it a securities offering. Securites law imposes liability on all persons offering securities for any mistatements, omissions, or any failure to disclose material information.
You want to make sure it is a private placement as opposed to a public offering, You will need an attorney to prepare a private placement memorandum to give to the Consultants, as Rule 505 of Regulations D, Rule 506 of Regulation D, and Regulation A all require that all unaccredited investors receive a private placement memorandum. Also the anti fraud rules of the Securities Act require that all investors receive material information on the business anyway.
If you want to avoid the legal expense of writing a private placement memorandum, another alternative is to offer the consultants unit appreciation rights (if you entity is an LLC). Unit Appreciation Rights are not securities. But you need to have a valuation done on your company in accordance with Section 409 of the Internal Revenue Code.
