Incorporation

How Do I Know Which Type of Business is Best for Me?

Choosing the type of business that's right for you can be a difficult decision. There are tax and liability considerations, director and ownership concerns, as well as state and federal obligations that are different for almost every business.

The following is a brief explanation of the business entity you may be considering.

Corporation

The "Corporation" is the classical structure for providing personal liability protection to the owners of the business. Although a corporation is relatively easy to organize, it may not be the best choice of entity for conducting business.
Recent changes in corporate statutes have eased the paperwork burden of corporate operations, but businesses which operate under a corporate umbrella are faced with a variety of legal requirements including double taxation.
Corporation are taxed on their income at the corporate level and then, if they pay dividends to shareholders, the dividends are taxed at the shareholders' individual tax rate.
A corporation must have a board of directors (which may consist of one person; some states allow doing away with the board by forming a "Close Corporation"), must maintain books and, except for Close Corporations, hold meetings of shareholders.

Limited Liability Company (LLC)

Limited Liability Companies are relatively recent creations of statute. The LLC has some of the attributes of a sole proprietorship, a general partnership and a corporation. For tax purposes, it is treated as a partnership. The LLC has members rather than shareholders. It has a manager or managers instead of a board of directors. Management may be vested in the members or in the managers. It is essentially a business entity created by contract between the members, much as a general partnership. However, in order to be legally recognized, it must file Articles of Organization with the appropriate state entity. The members are protected from personal liability for the acts of the LLC, much like shareholders of a corporation. The LLC differs from an "S" corporation in that it is not restricted in the number or types of individuals or other entities which may be members. It also differs from a limited partnership by not imposing personal liability on members for participating in the management of the LLC.

Other Entities

There are a number of other legally recognized entities: Partnerships, Limited Partnerships, Limited Liability Partnerships, Limited Partnership Associations, and some special types of organizations recognized only in a few states. For most people, a corporation or LLC should take care of all of your needs.

Do I Need a Lawyer?

A lawyer is not required to set up a corporation or LLC. It is, however, an excellent idea to speak with one before you set something up. Lawyers can advise you about the proper language to use, contracts, licenses, agreements, minutes and generally how to operate a corporation or LLC. You should also speak with an accountant, since there are significant tax implications associated with forming a corporation or LLC.

Incorporating for eCommerce Business

If you're starting a business on the Web, there are important legal issues to consider. Making decisions about legal matters is about how comfortable you are with risk. If you make huge revenue with a high risk business, you could decide that the money is worth the risk. Or you might choose to do it for a short period of time, collect your money, and get out. Just because there is risk does not mean that it isn't a good business for you. Everything in life has risks -- and your business is no exception.

Incorporation of eCommerce Business

Why Incorporate? Incorporation means that your company is a separate legal and financial entity from yourself. It even has its own social security number for tax purposes, called a Federal Tax ID. Most people incorporate to limit their personal liability so that their personal assets are not at risk for debts of the corporation. For example, if your incorporated company was sued and lost the suit, the winner could not take your personal car or home.

Plus, of course, incorporating makes you look more professional, and often helps with your taxes. Also, if you plan to receive investment in your company, have employees, and grow to be more than a one-person show, incorporation is an important step that helps promote these future goals. While incorporation protects you in many regards, it does not protect you from any criminal charges by you or the corporation, which can come into play if, for instance, you run an adult or gambling business on the Internet.

Trademark

The trademark act, or "Lanham Act", 18 USC Sec. 1051 etc. is meant to ensure that consumers can correctly identify the sources of goods or services. A trademark is a word, phrase, symbol or design, or combination of words, phrases, symbols or designs, which identifies and distinguishes the source of particular goods. A service mark is the same as a trademark, except that it identifies and distinguishes the source of a service rather than a product.

Normally, a mark for goods appears on the product or its packaging, while a service mark appears in advertising for the services. A "tm" on a product indicates unregistered (common law) trademark rights, and an "®" indicates a registered mark. It is illegal to place an "®" on a mark that does not have national registration.

As your domain name and your branding is valuable, you should think in terms of trademark registration. This can be done later in the business process once you have more revenue available, but it is important to consider it upfront in choosing your domain name, company name, product and/or service name.

You don't want to use a name which is someone else's trademark, as they could sue you to stop your use, including taking the domain name. At the minimum, go to [Incorporation Link 1] and run a trademark search for the names you're considering -- at least to get an idea of how many other folks there are who could possibly have a claim to the mark you intend to use. Be aware that getting few or no results does not mean that you're in the clear, due to the complexities of trademark law, and the fact that the USPTO database runs a year behind. However, taking these steps will still lower your risk.

When trying to determine whether you've picked a good name in relation to others' marks, remember that the point of trademark law is to prevent consumer confusion about the source of goods or services. Ask yourself whether a consumer would confuse your name with that of another product, service or company.

For more information on trademark read the Intellectual Property Primer [Incorporation Link 2].

Copyright

Copyright can be important when you obtain content for your site, and in the protection of your site's content. The owner of a copyright has the exclusive right:

to copy the work
to modify the work (create "derivative works")
to distribute the work
to perform the work publicly
to display the work publicly

Copyright arises upon the creation of a copyrightable works (typically substantial text, images, music, etc.). Facts, titles, recipes, form designs, alphabetical lists and other items do not have the required "originality" to merit copyright protection. Your are not required to register works to have copyright protection, however if you do register your materials, you preserve the fact that they are yours as of the date of registration, and you gain more rights under Copyright law, such as being able to win attorneys' fees and, sometimes, higher damages.

The term "Public Domain" does not mean that everything in public or on the Internet is freely usable. It refers to items that either do not qualify for copyright protection under the law, or for which the protection has expired.

When you buy content for your Website or business, the best approach is to obtain a warranty from the seller or licensor stating that the seller owns all the rights in it and agrees to indemnify you (i.e. pay you for the costs) if someone else sues you for using the content. Large content providers should be willing to do this, and many small ones will be also. If not, you'll have to hope for the best and take the risk.

If you create content, be sure to have your creator sign a contractor agreement with the language required under the Copyright Act so that you own the work product. If you don't, the creator will own the copyrights to the works.

More information on copyright is available in the Intellectual Property Primer [Incorporation Link 3].

The Website

Clickwrap Agreement for Users: An agreement with your users as part of the purchase process gives you a legal remedy (for breach of contract) to ensure:

that you will be paid,
that you waive legal warranties that are implied by law into sales of products of goods,
that you may disclose users' identities to government authorities upon request (there have been law suits to prevent this, or as a result of this),
that the user is over 18 and a US citizen,
that the site may only be used as permitted,
that venue and jurisdiction for disputes are in whatever state you prefer,
that there are limits to your civil (anything other than criminal) liability, ...and more.

Historically, if the steps outlined in case law have been followed, these agreements have been upheld as binding. This can be very important as your merchant bank will issue credits for any disputed Internet transactions unless you have hand signed documents from your purchaser. While a clickwrap agreement will not change the merchant bank policy, it will give you a way to go after the purchaser and demand payment under the contract. For more information, see Site Use Agreements - Is Your Site Safe [Incorporation Link 4]?

Federal Trade Commission (FTC)

The FTC regulates trade and commerce with regard to consumers. The FTC monitors businesses to ensure:

truthful advertising,
that mail-order, catalog and Web product purchase guidelines are followed,
that sweepstakes and contest are conduct in compliance with the law, and
that collection of consumer data and privacy policy guidelines are followed.

All Websites that collect consumer data should have a privacy policy. If you ship physical products or conduct online auctions, you should familiarize yourself with other FTC regulations in these areas. You can find information [Incorporation Link 5].

With a little work, you can do a lot to lower your risks of doing business on the Web, and make your business profitable too.

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Incorporation