Legal

I am constantly getting questions emailed to me about LLCs, Incs, Ltds etc.
because of the article Legal structures for
bootstrappers I wrote.

One misunderstanding many people have is about limited liability. To understand Limited Liability you first must understand that it was originally introduced to protect the investors and not necessarily the managers of a company.

This basically means that as a stock holder in Microsoft you wont receive a demand for payment of whatever their legal judgments make them pay each month. You can only loose the money you paid for their shares in the first place. Now a large company with thousands of investors is very different from your average one or two man company. First of all you are likely to be the only shareholder(s) as well as officer(s) in the company.

What can you be liable for?

The normal things that a company it self can be liable for are (highly generalized that is):

• Accidents
• Debt

For the accident part you really need some sort of liability insurance if there is some kind of risk involved. This might be something stupid like dropping a printer on the foot of someone at a client site if you are a consultant.

Debt might sound simple, like a business loan or credit card. However you need to remember it also includes things like unpaid bills, unpaid taxes, demands for repayment of fees if your client kicks up a fuss.

Through a company you might be able to skip payment of your unpaid bills and ignore your clients without having to sell your house, but the tax man would more than likely start taking action against the corporate officers. Most
corporate credit cards or loans for small businesses also require the guarantee
of the officers or main share holders. So you really don’t protect your self
all that much.

Officers liability to shareholders

Remember if you are an officer you have a fiduciary duty to your shareholders.
So if you have other shareholders than yourself you can be sued personally for
mismanaging the company. Thus know limited liability.

Liability against partners actions

LTD’s, Inc’s and LLC’s do provide a greater amount of protection against your
partners actions than a regular partnership. This is where there is a clear
benefit.

I stick with my recommendation on using LLC’s for actual moneymaking ventures with more
than one partner. To keep things safe invest the money and register your LLC when you are getting serious.

Limited Liability has nothing to do with Tax planning

Remember to separate tax planning from the other issues such as limited liability, governance etc. For one person operations save the money and hassle
unless there is a real tax advantage in creating an personal holding company
with a Inc. or LTD. LLC’s provide no real tax benefits in this case. A LLC can
easily be structured where each partner has his share through a Inc as well.
This is ideal as each person has different tax requirements.

I will cover the basics of tax planning your business in another post some day,
but simply speaking until you break even there is in most jurisdictions a
distinct benefit in deducting your loss from other income (such as a salary).
When you break even you can incorporate a personal company to hold the profits.
Here you pay an often lower corporate tax and have other benefits.

As long as you save the money up in the company you have a tax benefit. If you
pay some of your profits out in salary and/or dividends you most pay income tax
on this. Thus there really isn’t much of a benefit to the average small
entrepreneur if he needs all of this money to live for. As you can imagine this
is in no way complete information and you should check with accountants on
this. If you can’t afford to pay one you probably aren’t at the point yet where
you need a personal corp.

As always I am not in anyway a lawyer and you should never trust a word I say as I don’t want to have to pay a lawyer myself.

Particletree have written a good quick guide to the paperwork part of starting a business. It has generally good advice and pointers for more.

My only real comment is that most bootstrappers should only really start worrying about these things, when they are doing real business.

Their advice is for creative freelancers and they would generally tend to get into real business straight away. The same is true for any other freelancers such as IT Consultants/Contractors.

However when starting your web or software startup where there is real ramp up time, wait until you are seeing real steady income for incorporating, tax, legal etc advice. It is much more important to spend your energy and money on building your business. The only exception for this is if you want to take deductions against other income (eg. salary).

I am at the point, where I would like to form a US LLC. I may wait until the new year so I finish 2005 as a sole trader. I have gone over the various kinds of Legal structures for bootstrappers before.

One real pain of being in Denmark and not the US is that I can’t just buy this Nolo book and do it. I did have an LLC in the states before and used this one, which was fantastic.

One of the reason that I want to do this is that I am looking at bringing one or more partners in, using the rules I set out in 6 simple rules for micro ventures. In particular I need a good designer and possibly an admin guy I think I hit my limits a while ago.

Why do we do it? We keep writing legal language to satisfy non existant lawyers that none of can afford anyway. I am not a lawyer (hmm I smell an evil recursive argument coming along), but I think a court (at least in common law countries) looks more at the intention than the language. This is why Click through licenses and the like are not normally worth the pixels on the screen. However if you write a straight forward agreement in straight forward English (or whatever language), you have a much better case in the future as it is harder to deny understanding the terms if it is spelled out clearly.

While they might not be perfect I try to not talk legalese. Here are excerpts from the Usage Agreement for WideWord

Intro

Here you need to try and persuade the reader to read the rest of the agreement:

The following is the no nonsense plain English agreement between you and me, Pelle Brændgaard the operator of WideWord. By creating a document in WideWord you agree to be bound by this agreement. I hate reading these things as much as you do, but please try and read it I will keep it very short and as fun as possible – I promise.

it may not be perfect. In particular the first paragraph still sounds to sterile to my liking.

What do you offer?

We provide you a service where you can collaboratively write and publish documents.

Be very clear and short here. I’ve managed to do it in a single paragraph.

Are you in a beta?

Then you should write about what your users can expect now and afterwards. I think it is alright to not know everything right now, just be honest about it.

You will be able to create as many documents as you want to without limits. During the beta period, it might be that you loose your documents because of some strange but. I have done extensive testing in my secret lab and feel that this probably wont happen, but you are warned.

Copyright and such

If your site includes content created by your users you need to talk about this. I would like to go into this in more detail than I have here, but I haven’t finished thinking it all through yet so I feel what I have here is sufficient for the time being:

Your own documents remain your copyright. It is also your responsibility to obey copyright law or it might become our responsibility whether we want it or not to enforce it.

Advertising

We all need to make a living and dont be scare about admitting that to yourself or your users. If you do put advertising on the site let them know upfront:

We reserve the right to place advertising on all the pages on this site. At the moment we only provide advertising on the public pages, but we might change this in the future if we can do it while retaining your security and privacy.

Security, Data Loss etc.

Seriously be honest here. You can’t always protect yourself against everything, so just be honest about it. With regards to security it is a good idea to write a separate little article about the security of your system. In particular the user is just as much responsible for maintaining the security of his data as you are. Write it.

During the beta period I aim to provide full uptime and no loss of data, but as nothing can break a system like thousands of people doing something you didn’t think they would do, we can not guarantee it. That is what the beta period is for.

Once we leave beta we do aim to have the system as secure as possible, 99% uptime and lots of backups and redundancy. With regards to security please read my Security Page for more info about security in WideWord.

Remember that your documents are only as secure as you keep the url’s are that are stored in the initial email. Keep this email safe and secure. If you forward it to someone he has access to your document.

Disagreements, courts, jurisdiction etc.

Be flexible and human about your service and I think you probably won’t get many problems. But specify this. Courts and Lawyers almost never benefit the parties involved.

If you have a problem please write me at [email protected] . I doubt that there would ever be anything we couldn’t work out. Lets leave the lawyers billing people other than us.

See the full Usage Agreement for WideWord for more.

Please feel free to use mine as a model, of course remember to change it to your circumstances. And don’t worry if it gets me in trouble I will blog about it here.

Jared wants to incorporate his CommunityWalk business. I have written about this before in Legal structures for bootstrappers which is one of my more popular articles in this blog. I expanded on it a little bit as a comment to Jared’s entry.

It would be great to hear what structure he picks and why. In particularly he is in California who recently started enforcing a requirement to register out of state companies locally. I would be interested to see if that means it is easier to just do a California INC or LLC or if there still are benefits with Delaware and Nevada corporations.