Legal

Great news for people wishing to startup in an agile way and possibly seek funding later.

Feld Thoughts has discovered new Delaware legislation making it easy to convert an out of state LLC to a Delaware Inc. Delaware Inc’s are the prefered corporate structure of VC’s and wall street alike.

The second innovation allows for the one-step conversion of non-Delaware limited liability companies into Delaware corporations. These conversions/reincorporations have historically required 2 steps – for instance, an Ohio LLC would be merged into a newly-formed Delaware LLC, and then that Delaware LLC would be converted into a Delaware corporation. Now you can go from an Ohio LLC to a Delaware corporation in one step. This eliminates one of my main objections to LLC’s that I wrote about in S-Corp’s vs. LLC’s. (via Jeff Clavier )

I have written many times about the serious benefits in starting up with LLC’s and converting to an Inc. later if necessary. So this makes it all the easier to do this.

Freedom of speech is a very important thing and has been in the news for many reasons recently. Many of us have grown used to it and just think it natural. But Freedom of Speech was something that many people lost their life for. We bloggers depend on this Freedom of Speech and should defend it at all costs.

The same is also true for Web 2.0 services. We should not start deleting things we are not in agreement with on our services or accept harassment by authorities at home or abroad.

As blogs and Web 2.0 applications become a greater and greater part of our free speech we will be hit by more and more attacks on our free speech.

A good example is the current attempt of a NJ legislator to ban anonymous forum posting_. If this became law and spread to other states and countries it would affect all of us bloggers and most Web 2.0 apps that have some sort of content creation or information sharing.

It is very tempting as a bootstrapping micro business under press by death threats, legal action and what have you to buck under the pressure and accept every piece of harassment you might get. Don’t get me wrong the reasons are very good. You are small, you cant afford the lawyers, the Denial of Service attacks the lost sleep etc.

But we are the independent presses of our century. As bloggers we are not just the pamphleteers of this century but also the printing presses supporting them.

I believe it vital that we as providers of Web 2.0 communities and software specifically address this issue.

As an example in my usage agreement I spell out exactly what my stance is on this. I will not go to jail for your beliefs, but I will go as far as I possibly can to protect the rights of free speech for my users:

I will follow the laws of wherever I am legally doing business, which currently is Denmark. As I said above this might change if I incorporate or move elsewhere, just so you know. Luckily very little is illegal in Denmark so you’re safe. We also have very strong free speech here in Denmark and there is little I will do to go against that, even if I am in absolute disagreement with you.

However I do not want to go to jail for something you do, so I will follow local rules. Which is exactly what you need to do. If you do something with WideWord, where you could get in trouble at home please don’t. I can not take responsibility for learning all the laws of the world.

I am a man of principles, but stronger men than me have changed principles with 3 hovering black helicopters over them. If you know what I mean.

As an example of this my site WideWord is currently being used by what looks like a Croatian (I think) group to spread their word. I do not understand Croatian and most likely am not in anyway in agreement with what they are saying judging by the few words I can work out. That said they feel they have something very important to say. People can read it and respond or they can chose to ignore it.

I would encourage other sites that enable people to communicate and publish to publish their stand on this. The whole NJ case has also encouraged me to launch a quick new site soon, where New Jersiites, Saudis and other people who have no free speech at home will be encouraged to speek loudly and freely.

As my readers know by now I really like the LLC there are however one or two valid reasons to stick with a S or C Corp if you are a US based company. Brad Feld has added another good reasons for why S-Corps may be preferable to LLC’s:

While there are several advantages of an LLC over an S-Corp (ability to issue different classes of securities, ease of set up, informality of operating agreements, lower state taxes, non-US investors), venture funds typically cannot (or don’t want to) invest in LLCs. When a VC invests in an LLC, they risk getting an income tax called UBTI (unrelated business tax income). This type of income is frowned upon by investors in venture funds partnerships and most funds have a provision in their fund agreements that they will use best efforts not to bring UBTI into the partnership. As a result, VC funds shy away from investing in LLCs.

It’s good to see this particular reason
for it. So if you are planning to have investors in the future it would be a good idea for an S Corp.

He mentions the ease of conversion from a S-Corp to a C-Corp. Which is also a valid point.

LLC’s are like Ruby on Rails

However to put it in geek terminology then generally speeking the LLC is the Ruby on Rails of legal entities. It is fast and agile. It allows you to focus on your business now and not on the huge enterprise you will be in 2 years time.

Corporations are like J2EE

The corporation on the other hand was designed historically as an entity to protect outside investors. If you need outside investors from the get go thats fine. But if you are bootstrapping it is just like investing money in developing a huge J2EE application so you in the future can deploy it on a clustered Websphere server to keep your investors happy.

There are valid reasons to using J2EE, but many and most of them are based on outside pressures and not from your real business. If you look at the reasons for why LLC’s aren’t always a good idea you can see that virtually all of them are external compliance reasons. Such as Californias LLC Tax.

LLC is still the way to go in most cases

I still think that it is better in the short term to go for ease of implementation and this is exactly where the LLC counts. If you reach the point where you want investors, then go do the conversion from LLC to Inc and accept the cost at that point.

At early stages of a company the simplicity of an LLC keeps everyones focus on the business and not on future paper millions.

It’s the same thing as scaling your web service. Do you set up an expensive clustered environment while the only people who visit your site are yourselves, your mothers and a stray uncle somewhere. Is it really worth the time, effort and cost of setting up a super flexible “enterprise” when you’re not even sure you have a business yet?

As I have blogged about before there are some good reasons for when you should use C or S Corps, but unless you fit those reasons exactly I think it better to stick with LLC. One of these reasons it would appear is venture funding.

I still think that an LLC is the best thing since sliced bread. However read up on Roth & Company’s blog on some of the specific reasons why LLC’s might not always be ideal .

These are mainly US centric reasons. But in particular it looks like there are specific problems with California based LLC’s. I am not sure how this would work if only one partner is in California and the rest elsewhere.

I use the EasySpeedy for my hosting. They already provide the most transparent hosting plans and hosting contract I have seen, but they continue to impress me. I’ve got 2 servers there and will put my 3rd one there if need be.

Apparently one of their clients where spamming with spoofed IP addresses from other users on their network. This is obviously a big problem as no one wants to get black listed.

From the beginning they have been incredibly open about it and gone that extra yard in uncovering the spamming vendor of Viagra and Penis enlargers.

I am not 100% sure if he used one of my ip addresses. I haven’t got mail servers on any of my servers. Both of do do outgoing mail though via ActionMailer in Rails.

Now what they did is send out a fantastic email that I will share with you below: