Student entrepreneurs who sold booze stand to lose--big
Jul 2nd 2010 8:00AM
Updated Jul 2nd 2010 9:37AM
For those of you looking to entertain your entrepreneurial spirit and start your own business while an undergrad -- whether it be to beef up your resume or to fund your alcohol addiction -- you'd be wise to learn from the failures of your predecessors. Otherwise, you may end up facing expenses you can't afford.
Take, for example, the brave founders of CampusDrank.com.
Campus Drank -- an online alcohol delivery service based in Madison, Wisc. -- came under serious legal scrutiny for operating without a liquor license and violating local laws governing the sale and distribution of alcohol. Such laws, according to Assistant City Attorney Jennifer Zilavy, dictate that a face-to-face transaction must take place in a store before a consumer can take possession of alcohol and the company could face fines of up to $500,000. The University of Wisconsin is still determining whether or not they will separately hold the student founders of the company responsible for violating UW policy.
While I find all of the impending legal sanctions a tad overbearing, the Campus Drank founders made some apparent mistakes.
It's a sound business idea. What self-respecting social drinker, fraternity brother or budding alcoholic hasn't daydreamed about the existence of an alcohol delivery service, a la Southern California's King Keg? A world where getting booze is as easy as ordering a pizza? This is an insanely viable market, especially in cities that depend on college campuses for their very survival. Imagine the DUI's that could be avoided if there were businesses who could reliably and responsibly perform this service.
But Campus Drank founders Danny Haber and Matthew Siegel, it appears, carelessly conducting business outside of the law and arguably could have done a great deal more to save themselves the trouble of dealing with these serious legal sanctions as minors. The idea was undeniably a good one -- but these guys got bad advice. In court documents, Siegel says Alderman Mike Verveer told them not to worry, that there was loophole in the ordinance involving delivery.
Here are just a few ideas to keep you out of bankruptcy court before you turn 21:
1. If Siegel's claims are proven correct, then take any business or legal advice that Mike Verveer has to offer with a gigantic grain of salt.
2. Carefully consider what sort of identity you want your "company" to assume. A fraternity brother of mine started his own LLC while still in high school. He discovered it was much easier to secure contracts as a corporate entity while still a student. Some of the most obvious benefits of starting an LLC relate to how your company will be taxed -- you avoid double taxation -- but there are also benefits associated with limited liability. For businesses trying to get on their feet, this is perhaps the most important attribute.
There are many ways to form an LLC, but for those with limited capital who aren't well-versed in business/corporate law, one of the best is through LegalZoom.com. They file all of the necessary paperwork and ensure that your LLC is operating as a legal entity within the boundaries of the state where it's established. Hiring a lawyer to make things official is much more expensive (about $200/hr for simply sending certified legal correspondence), and you'll get the same results.
3. Micromanage. The distributor secured by Campus Drank -- University Avenue Liquor -- did not have a license to also be a wholesale distributor. You can't depend on others outside of your company to be in compliance with all the regulations, even if they are intricately involved in the business that you are conducting
4. Try not to conduct business out-of-state. At least at first, especially if your business involves shipping tangible goods. Being ambitious is great, but don't bite off more than you can chew. If you're serious about making your venture work, you'll treat it like a venture and not a game of slap the boxed wine bag. There are, however, certain tax benefits associated with conducting interstate commerce once you're comfortably on your feet. For example, the Federal Interstate Income Tax Law prohibits any state from collecting taxes on income generated from a business that's simply soliciting orders without a physical presence in that state. If this sounds confusing, it's probably not the right time to expand your business. The bottom line, is consult a tax expert in your area.
Overall, your goal should be to start small and make sure you are operating legally. If you can consistently run your own business, you'll have experience that most people don't have years out of undergrad.
Remember: Avoid loopholes and always expect that somebody, somewhere is waiting for you to make your first mistake.