Hobby turns Profit

3 people from 3 continents

[viggen]

Maybe some of you had a similar experience and can shed some light on what or how to do things.

Our hobby site is at a point where we all three (1 american, 1 european and 1 from asia) could live from the site, but how do you set up a company with people from three different continents with people you never seen, and only know via the web.(we go on very well, but well we are till now friends and not business partners)

Any ideas how that would work best?
Legal wise, tax etc..

[anallawalla]

Register a company in the country with the lowest tax and pay each person as a contractor.

Better still, ask one of the offshore company specialists (one of my clients in my profile) if you are big enough for them.

Ash

[rogerd]

Virtual partnerships can be tricky. I HIGHLY recommend taking the time to set up a solid corporate structure with ownership shares distributed based on performance and participation. I've been involved in a few arrangements like this, and despite the best intentions of all parties, things can and do change. If one of the three partners decided to, or had to, stop participating actively, would you still be comfortable with the same division of company ownership? How about distribution of profits in the form of dividends, pay, etc.?

I recently went through this exact scenario with a couple of partners in different locations. Two of us put forth considerable effort to build a business, and one (after an initial burst of enthusiasm) practically vanished. Because we had not done a great job of spelling things out in writing initially, an intense negotiation was needed to sort out ownership issues based on that individual's lack of contribution. When we brought on a new partner, we got a bit smarter - we created a contract that distributed equity only after various milestones of participation were reached. That worked very well, both because we chose a good partner and there was no wiggle room in our agreement.

My advice:
- reach a good understanding of responsibilities and expectations for each partner
- set the business up as a corporation, and distribute equity over a period of time, contingent on continued participation in the business
- distribute profits as contractor pay that takes into account effort by the owners; do not create an expectation of dividend distribution unless you are prepared to share profits with an inactive owner
- include a buy/sell agreement that specifies how an owner can get out of the business and how he can sell his stock. In a small corp like this, you probably want the ability to buy stock back rather than suddenly finding one of you sold some of all of his shares to a stranger. Ditto for death/incapacity of a partner - do you want to be in partnership with someone's spouse?

In short, take the time to consider all eventualities up front. It's a time-consuming effort, and you'll have to pay some legal fees (and/or do creative cutting and pasting if you are good at that sort of thing), but it will be well worth the effort if the business is even moderately successful.

I can't comment on the best location for the corporation, but I'd be sure that the country of incorporation has a solid and fair legal system; in some courts, there might be a strong bias toward the participant from that country. (Conversely, if your company is likely to be sued by other firms, incorporation in a location with inaccessible, biased courts might be a plus. Just hope you don't fight with your partner. ;))

[viggen]

I just wanted to to say thanks for the valuable replies.

Great stuff. :)