There is little doubt that an internet business represents a new paradigm in the world of commerce and a good one at that. Still, you face risks when launching an online business, as one does with any business. Given this, it is vital that you form a business entity to protect your personal assets from the dangers inherent in running any business.
Okay, so just what kind of risks are we talking about here? At this point, most lawyers would write about some bizarre scenario where your business ended up with a judgment award against it for many hundreds of millions of dollars. The likelihood of a party winning such a judgment is extremely unlikely. Unfortunately, the real world is just as scary.
Perhaps the most common lawsuit a site faces these days has to do with intellectual property violations. Let’s say that you put up a website that allows individuals to post on it, which is very common given the social explosion on the web. You do not follow the dictates of the Digital Millennium Copyright Act regarding safe harbor provisions. One of your members posts a clip of the latest summer blockbuster on your site. The next thing you know, a movie production company is suing you for copyright infringement.
Copyright infringement involves the copying of a “work” without the permission of the owner. The damage amounts a judge can award are as high as $150,000 per violation. To give you a real-world feel for what can happen, Playboy was once awarded $1.1 million in damages for 53 copyright infringements when another company published its pictures without the consent of Playboy. [Playboy Enterprises, Inc. v. Starware Publishing Corp. 900 F.Supp. 433]. Could you handle an award of $1.1 million or even $150,000? Most can’t. This type of risk is the reason for forming a business entity to protect your personal assets.
Business Entity Types
The law classifies certain business entities as “legal persons.” This legal fiction means the entity is separate from the owners. The corporation is one example. Bill Gates owns a large number of shares of Microsoft. If you sued Microsoft for a billion dollars and won, you would not be able to go after Gates personally. Microsoft is considered a separate “person” under the law, so successfully suing the company is not the same thing as suing Bill Gates personally. Your goal is to position your online business in the same manner.
Business owners typically use one of two entities to achieve this goal. They are the corporation and the limited liability company. Both provide a business owner with a “shield” that sits between the liability and debts of the business and his or her personal assets. The only thing the owner risks is the money invested in the company so long as the owner follows certain formalities such as enacting bylaws or operating agreements.
I could go on ad infinitum about business entities. For this article, the thing you need to understand is that it is usually advisable that you form one to protect yourself from lawsuits or a business failure. If you need to create an entity or have questions, feel free to contact me.
Richard A. Chapo, Esq.
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