I am in the process of jumping into the escorting business as an independent and I know I want to create some sort of legal entity for obvious reasons. I have been doing a lot of research on the topic and I am torn between an LLC and sole proprietorship. I understand the difference between the two and I am unsure if I really need the protection that an LLC offers. I would like to know what the "norm" is for the escorting business. Any help would be appreciated. Thanks.

-Madi

When you say you want to form a legal entity for the "obvious reasons," I don't know what the obvious reasons are for creating a shell for a business hat may be illegal at the worst, or questionable at the best.

Basically, you would be creating a paper trail after paying filing fees to do so.

For businesses that are basically a cash business, I can't see any advantage.

I don't believe there is a norm in the business most people just fly the way they can and hope everything holds together, Ill tell ya my personal situation and see if that helps answer your question.

I have owned an agency for a few years and started out as a Sole prop. I was audited on taxes for 2 years after a flag in thier system.
After a very lengthly audit 11k for accountant I walked away owing about 44k to the feds. As A sole prop I was responisible for self imployment taxes that drove my rate to over 40%. We now currently run as an LLC with a C Corp as the managing member. I still pay a bunch of taxes but its not as bad as it was.

IF your concerns are Legal as in the LE sense, an LLC will not protect you from Prosicution or arrest. As you would probably be the only member. A trust will stop a lot of personal seisures, but in the event a paper trail leads from illegal activity to the trust I believe it too can be compromised.

I would reccomend you contact a good criminal attorney and a CPA, Be honest with both of them as to your intentions, nothing worse than finding out mid problem after you mislead them they are uninterested in helping you anymore. Good professionals can be costly but can easily save you 2 even 3 times what you pay them a year.

Mine saved me about 100k and my anal virginity

I have been doing taxes for 25 years. My suggestion would be an SCorp, rather than an LLC. Although LLC's have been in place for the past ten years or so, there are still questions regarding personal liabilities passing through to the owners. There is not a lot of case law on this yet. An SCorp (an election you make when setting up the corporation) is well established and will protect your personal assets from lawsuits. In addition, in most states it is more expensive to setup and maintain an LLC than an Scorp. I cannot stress enough, that everyone here probably knows a good lawyer, but your example of working with the IRS shows that very few people know a good accountant. If you are setting up a business, remember know a good lawyer, good accountant and nowadays a good IT person. Also remember an accountant is not a lawyer (unless he practices tax law), what you tell him in NOT privileged information. Good luck.

Even when one is operating a "legal" business, the "obvious reasons" are often illusory for an individual.  What has your "research" indicated would be the benefit of being a LLC when the nature of the activity violates criminal law?  Many individual businesspersons fail to follow all the details that are required in order to obtain the protections that LLC or corporations are intended to provide.

I am under the impression that most women do not earn enough to even think of filing tax returns.  Those who do file have to figure out another way to describe their activity.  (As has been noted here before, Al Capone was put away for tax evasion, not vice operations or murders.)

Calling yourself a fitness trainer might be one way to describe the activity.  In theory you should obtain a business license from your city or county and perhaps a home occupation permit if you do incall.  However, that paperwork might draw the attention of local authorities.

-- Modified on 1/12/2008 7:10:19 AM

Good point! I guess I have a lot more research to do and few more people to talk to. Thanks.

-Madi

I am not familiar with all the advantages and disadvantages of incorporating in your situation.  However, if I were engaged in an illegal enterprise I would avoid as much documentation as possible.  It would be an all cash business for me.

is not as obvious as you might think. If it is to legitimize your income, create an entitiy to pay taxes from etc. this is more of an accounting question than a legal one.

If your question is being asked from  a perspective of protecting your assets, keep in mind that neither a corporation or an LLC will give you a "corporate shield" that will protect you from any issues with LE.

Speaking from the accounting side of your question, unless you are generating a large amount of revenue, mid six digits minimum, there is no need to go to the expense of incorporating or forming an LLC.I would advise going the sole-prop route, the cost is neglibible.

If you feel you must create a legal entity to do busisness as, an LLc is very easy to form. You can download the forms off state govenments web page, the articles of organization can be written in a single paragraph, an EIN can be had with a phone call and you won't be out much more than a hundfred bucks. I still would question the wisdom of doing this, the potential problems that you are creating will almost certainly outweigh any benefits that you will derive.

Good luck in whatever you decide to do.

As rare as it may seem, I am in complete agreement with Mr. Daniels.  If someone is giving four crisp $ for an hour or two of your time why would you want to have any record of that?  Corporate, banking, or otherwise?
    The only way your idea makes sense is if you were taking some sort of holistic, spiritual, tantric, or massage service angle and, even then, the state you live in might require some minimal license requirement.  If you took this approach, you might possibly wind up being a target of a sting by LE to see if you were legit.
    You might want to contact some tantric or holistic practitioners to see how they do business and I would warn against being too obvious about the services you provide under these circumstances.
    In the meantime, I would find a good hiding place for the coffee can and enjoy what's left of the barter system in this country.

I would think that most providers would want to eventually come out of the closet(LOL) if they are doing very well in their chosen profession.

So assuming that is true reporting income is important. Establishing credit,saving for retirement cannot be done without reporting income.

Let me give you a couple of pointers:

1. An LLC that is owned by a a single person is considered a disregarded entity for tax purposes.

2. That means that you will report all the income on Sch. "C" just the same as you would if you did not have the LLC. Thus you will owe the same self-employment tax.

3. Schedule "C" filers have the highest chance of being audited by the IRS! Thus

4. You should incorporate and elect Subchapter"S" status. This will lower your chances of being audited and will give you the chance to save some payroll taxes.

5. The business should be a service business i.e. massage or consulting etc.

6. The biggest problem I see is depositing the cash received in the Company. The rules require banks to file cash reports when they exceed $10,000. This applies to a series of deposits not just 1 deposit.

7. Depositing cash as a massage therapist etc. is not definately a problem but be prepared to answer the question of where the cash came from. It will also increase your chances of being audited.

Summary
1. Set up a "S" Corp
2. Get a good CPA
3. Be honest as one poster said. If you are audited you want to be represented by the CPA. You do not want to to go in front of the IRS by yourself!

Also in agreement, but it might be worth adding that even if you were involved in a "tantric, holistic" practice, if the ad said it involved a "happy ending" or "mutual release" an arrest would still be legit, as it would create a nice jury question of whether the business as a cover for prostitution.  As has frequently been said, creating a jury question merely raises a defense that the jury can accept or reject.  If the jury rejects it, so will the court of appeal.  

Any time a massage or tantric or similar practitioner has an ad with a photo that is sexually suggestive, an investigation into whether it is legit is a legally, proper investigation.

Creating a shell to say, "See, I'm legal" isn't bullet proof.

Also in agreement, but it might be worth adding that even if you were involved in a "tantric, holistic" practice, if the ad said it involved a "happy ending" or "mutual release" an arrest would still be legit, as it would create a nice jury question of whether the business as a cover for prostitution.  As has frequently been said, creating a jury question merely raises a defense that the jury can accept or reject.  If the jury rejects it, so will the court of appeal.  

Any time a massage or tantric or similar practitioner has an ad with a photo that is sexually suggestive, an investigation into whether it is legit is a legally, proper investigation.

Creating a shell to say, "See, I'm legal" isn't bullet proof.

Trying to stay UTR with IRS. IRS has recently picked up compliance with none filers. In addition, you can't just keep and pay with cash all the time. How are you going to pay rent or a mortgage in cash? Unless your renting from a mom and pop, no management company is going to continually collect rent payment in cash. Its just unrealistic to expect to pay all your bills in cash. If you own property or investments its even more interesting. Given the new guidelines for mortgage lending, you will need to provide some record of your income, the only record most will accept now is a tax return. Lets say you have a mortgage, you will need to report income. If you don't, even though you may not file, the IRS still has a record of your mortgage interest paid. If they see no income and substantial mortgage interest, they will figure it out. Same thing goes with investments, income continually rises, because you keep socking it away. There is a paper trail somewhere and the IRS is very good at figuring that out. Here's a great example. While working for a CPA firm, a client was audited by the state for sales taxes. The state auditor got records from the clients supplier! The auditor was able to figure out how much product they sold and figured out the rest from there. Client was a gas station, great cash business until you get caught. Don't assume that auditors are idiots, never underestimate your adversary. Most common mistake with clients. I would suggest most providers start a 'legit' business, you can figure the rest out from there. Hence, see a CPA that practices law, everything can be kept confidential since he's a lawyer. Be sure to double-check this with a lawyer.

The first is that you are a citizen of a country where the vast majority pay up to provide the services that we all depend on, and if you don't pay up as well, you are freeloading and we all know about karma, don't we?

The second is that someday you might get busted for solicitation and that could create a situation where the IRS decides to look into the matter and if you have not filed and paid taxes on the income that they can document that you must have earned (Cars and houses don't just fall out of the sky, you know.) then you could be in for some very serious doo-doo.

Solicitation is a misdeamenor, tax evasion is a felony.

Think about it.

(still not a lawyer)

-- Modified on 1/13/2008 8:07:53 AM

Good points Mr. Fisher...I wonder if any CEO's or other "good citizens" who rip off the tax system in corporate America are reading this post...oops, sorry, maybe my response belongs on the politics and religion board....

If a person wants to actually make a success of themself in this country, filing taxes is mandatory. As you so accurately point out,"cars and houses don't just fall out of the sky"

A provider might live UTR for many years quite compfortably without filing taxes. Lets face it, six digits a year, tax free sounds attractive. The problem is, anyone who doesn't file is still just part of a subculture that can't own property,invest for the future, etc.

Strippers, commission only salesmen, drug dealers, all fall into this category.No one wants to pay taxes, but if you ever want to be "wealthy" it is a neccesity. Why do you think there is a money laundering business? To actually make it in this country you have to be part of the system.

If you want to pay taxes, having a shell of a company isn't much help.  You could still decide on your "cover" job, selling beads at the beach or consulting on make-up, file returns for what ever you want to launder (declare).  Haveing a limited corporation or sole providership doesn't add to your legal protection for what you are really doing.

the IRS has a program to award people who rat you out.

Do you have any enemies?

Think about it.

(still not a lawyer, or a CPA for that matter.)

-- Modified on 1/13/2008 6:24:59 PM

on why not to get legal or tax advice on an escort board.

TaxExpert you are wrong on so many levels, I don't even know where to begin. The only good advice you gave was to get a good CPA. I know your intentions are good, but take it from a professional, your advice is so, so wrong.

I am glad we agree on something!

PS

I am not guessing.

If its just going to be you as an independant, it really does not matter.  As others noted, if you don't report income and pay taxes, none will protect you.

If, on the otherhand, you want to be able to do things like register a domain name, place ads, have a listed tel #, without using your real name, an entity can be a great way to do this.  Many states allow you to form an LLC, use a service company as a registered agent, and keep your name/address away from prying eyes - e.g. stalker ex clients, snopping spouses (but not govt/law enforcement if they really want to know).  But check the law of your state or shop states and see which ones allow you to remain anonymous - if the registered agent is your attorney, then your private info has attorney client privilege.

An entity also allows you to sell your set-up as a business if you expand and perhaps manage other providers - you just sell the entity and everything it owns goes with the sale - domain name, telephone, etc.

An LLC with only one owner is very easy to do - for example, in VA, you can visit http://www.scc.virginia.gov/division/clk/fee_dom_llc.htm to down load a form you can fill out yourself and file for just $100 if anonymity is not a concern - if it is, you need someone to be your registered agent.  do a "google" search for "registered agent" and you'll find hundreds of firms that offer the service and their fees - expect to pay about $100-200/year for this service.

As another noted, an LLC is a disregarded entity for tax purposes, so to the IRS its the same as a sole proprietorship.

I currently have an LLC and 2 S-Corps and I'd like to share my perspective.  I don't claim to be an expert or even know what I'm talking about half the time, but thought I'd toss my two cents into the pile.

LLC - My understanding is that an LLC if managed properly (no intermingling of private and business money, etc) will help shield your personal assets if the business is sued.  A prime example would be something like a remodeler or building contractor - there are equipment, income, liabilities and such officially owned by the business and the LLC functions to separate that from your personal property, savings and such if the business does something stupid (like shotty construction work).  

Inc or S-Corp - My understanding is that creating a corporation establishes a new legal non-person entity.  There are some big tax and legal reasons for this but some of the big ones would be the ability to pay yourself (a salary or wage going to yourself) which you cannot do with an LLC (that would count as some kind of equity draw - something to be avoided) Many small businesses use the S-Corp status for some tax reasons that aren't worth going into now.

My essential question for this thread is this - Why do you want to create a company?  

If you wish to be a single provider, there's no need for any type of company (sole-prop, LLC, Corp or S-Corp) unless you are fortunate enough to be in Nevada where such a career choice is acceptable by the state govt.  Anywhere else in the Union, establishing a company whose sole product/service is considered a misdemeanor is useless at best and makes you a target for attention from various govt agencies as well as making for a LOT of ongoing paperwork (my tax forms suck)

If you want to establish an agency or massage parlor, creating a business would seem to be a prudent move and personally I'd go to one of them (far enough away that there's no competition) and ask them to offer some advice.  But remember that they come with a pile of licensing restrictions and once you create a company, you'll never fly under the radar again.

If you are planning on being a single agent outside Nevada, I would think it'd be best to have a regular legal job with a regular legal paycheck that goes into a checking account which you use to pay all the big bills like rent, car and such and use any cash you acquire on the side to buy all the little things of life (gas, music, TVs, etc)  Just make sure that you're not dumping big chunks of cash into your checking acct that you can't explain...

Personally, I'd highly recommend to anyone that wants to be legal about it - contact one of the Nevada brothels (Chicken Ranch just outside Vegas is a personal favorite) and spend a few weeks there from time to time.  It's unbelieveably safe, legal and I've known girls that have made enough in a few weeks to carry them several months.

(also not a lawyer or CPA)