For college athletes who think they should be able to get paid for the use of their name, image, or likeness (NIL), 2021 has been a banner year. Several states passed laws providing that their athletes could receive NIL compensation. In June, the U.S. Supreme Court issued a decision against the NCAA which — while not directly addressing NIL compensation — was interpreted as evidencing a willingness to strike down NCAA policies punishing athletes for receiving such payments. And in July, a new NCAA policy took effect in which the NCAA stated that it would not penalize college athletes who receive NIL payments.
These developments have led to a new kind of business — one based on the income that can be earned from an athlete’s name, image, or likeness. This includes, for example, income earned through endorsement deals, appearance fees, speaking engagements, memorabilia sales, autograph signings, and other financial opportunities. It also resulted in a new kind of entrepreneur — the college athlete entrepreneur.
Forming an LLC or corporation for an NIL business
College athlete entrepreneurs, like many other entrepreneurs, are deciding to form statutory entities like LLCs or corporations. The main reason to form an entity to own a business is to limit personal liability for the business’ debts. If, for example, there is a breach of a business contract and an LLC was the contracting party, the LLC is liable, not the person owning the LLC.
Forming an LLC or corporation is deceptively simple. Just provide a couple of items of information on the articles of incorporation or articles of organization form, send it to the Secretary of State with the filing fee, and voila. You are the proud owner of an LLC or a corporation.
However, owning an LLC or corporation is a huge responsibility. And it is one that requires the college athlete entrepreneur to make several very important decisions before filing those articles. And once it’s been formed, the LLC or corporation has to comply with the requirements of the LLC or corporation statute under which it was formed. Attention must be paid to those compliance requirements or there will be penalties.
Four important pre-formation decisions
Once you’ve decided to form a statutory entity to own and operate your NIL business, rather than owning it yourself, there are a number of important choices you must make. These include the following:
- Choice of Entity. There are actually a lot of entity types. But most small business entrepreneurs choose either an LLC or a corporation. Both provide limited liability. An LLC is the most popular choice, in part because it is a more flexible entity, with few restrictions on how to manage the company or split financial interests among multiple owners.
However, there are situations where the corporation is a better fit.
- Choice of Formation State. This is important because your LLC or corporation will be governed by that state’s laws.
- Choice of Name. You can’t just choose any name you want for an LLC or corporation. You will have to meet the requirements of the governing LLC or corporation statute. That’s a consideration, along with the marketing, branding, and other concerns.
- Choice of Registered Agent. Your LLC or corporation must appoint a registered agent who is located at a physical location (the registered office) in the formation state.
What is a registered agent?
The name and address of the registered agent have to be set forth on the formation document. It is not uncommon for new entrepreneurs to wonder what this is. What a registered agent is, is an agent — an individual or an entity — who you authorize to receive, on your LLC or corporation’s behalf, service of process (the notice that your LLC or corporation is being sued), other court documents, and official communications from the state (such as the annual report form for the LLC or corporation).
You can choose yourself, another individual, or appoint a corporate service company that can provide you with a professional registered agent. Before appointing yourself as registered agent and your dorm room, frat or sorority house, or other temporary location as your statutory address, remember that the registered agent is supposed to be at the statutory location during normal business hours to receive documents.
So if the company is sued and the registered agent is not there when the process server shows up, or a registered/certified letter is delivered, that can lead to “substituted service”. Substituted service can sometimes result in a failure to respond to the summons. And that can lead to your LLC or corporation having a default judgment issued against it.
Another risk is that the state will send your LLC or corporation an important document to the statutory location and you will be gone for days, weeks, or longer and not receive it in a timely manner. A professional registered agent can alleviate those risks (and also save you the embarrassment of process servers or sheriffs showing up to your dorm looking to serve you).
In deciding whether to appoint a professional registered agent, you should also be aware that the state laws require timely notice of any change in registered agent or registered office. So if you pick your college residence as your registered office, and then move, you need to remember to file a notice of change with the Secretary of State setting forth the new address. There can be penalties for failing to file which can include in some cases administrative dissolution. And not having the correct address on file can also lead to default judgments as you may not receive the summons and complaint on time to respond.
Once you’ve formed your company, you can’t ignore it. Remember that LLCs and corporations are statutory creations. The LLC and corporation statutes have certain compliance requirements. And non-compliance brings penalties. There are monetary penalties. Continued non-compliance can result in administrative dissolution.
Although these requirements vary by state and entity type, the two main compliance requirements are to file an annual report — which is an informational report filed with the Secretary of State and to pay annual franchise taxes — which is the fee the state charges for granting the LLC or corporation the right to exist.
Other compliance obligations
There are also numerous requirements to keep in mind besides those related to the governing LLC or corporation statute. These can include the following:
- obtaining a business license,
- applying to the IRS for an Employer Identification Number,
- registering with the state tax department, and
- registering any doing business as (dba) names you’ll be conducting business under.
It’s also important to remember that if your LLC or corporation will be transacting intrastate business in a state other than the formation state, it will have to “qualify” to do business there. This requires applying for a certificate of authority and appointing a registered agent in the state. Penalties are imposed for transacting business without authority.
Respect the LLC or corporation’s existence
It’s also important to recognize that LLCs and corporations have their own legal existence, separate and apart from their owners. The LLC or corporation owns the business and its assets and property. Don’t use the LLC or corporation’s money or assets for personal purposes. And follow any management formalities that may be required — such as holding meetings and keeping minutes.
A failure to do so can result in a court “piercing the veil” and holding you liable for a debt owed to a creditor of the LLC or corporation. And not being liable for business debts is a main reason why you formed a separate entity in the first place.
Dissolve, don’t abandon
One final suggestion. If you decide you no longer want to have an NIL business, formally dissolve the LLC or corporation. Don’t just abandon it.
As long as it exists, the LLC or corporation will have to meet those compliance requirements we mentioned and will rack up penalties if it doesn’t. The state has every right to try to collect the money owed it. It also means your LLC or corporation’s status as being delinquent, dormant, or administratively dissolved will be a matter of public record. Business identity thieves look for abandoned entities so they can reinstate them, name themselves as managers or officers and obtain loans, buy things, and otherwise cause the actual owner of that entity lots of headaches.
If you are a college athlete who wants to profit from your name, image, or likeness, it can make sense to form an LLC or corporation to own that business, while you own that entity.
But remember that ownership requires some key pre-formation decision making and post-formation compliance.
Explore your incorporation options.