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saifrahmed
08-23-2010, 07:31 AM
There are several threads already on the best structure for a business, however, my question specifically relates to online-only businesses.

I'm working on a start up which will operate solely online, though fulfillment and operations will occur in NY State. I'm curious what types of corporate entity setup you've seen others use for this type of firm (if you have seen any)? Some options are:
--> LLC (fairly common for real estate, but web start ups?)
--> LLP
--> S-CORP

Some entity locations are:
--> NY State Entity
--> Nevada Entity (often recommended for real estate, but web start ups?)
--> Nevada Entity w/ Foreign Registration in NY State

I understand that to even have liability protection, one needs to be incorporate in the state where they are doing business. Our primary goal here is liability limitation, secondary goals are having a proper entity for a potential sale down the road and tax efficiency.

I'd imagine this is a fairly common setup, but i've found *very* little online about this. Would you know of any white papers or resources for this sort of decision?

BTW, I have spoken to two lawyers who recommended one option or another but I wasn't convinced because they couldn't explain why they had prescribed that option (seemed almost arbitrary recommendations.)

vangogh
08-23-2010, 12:09 PM
Welcome to the forum saifrahmed. I'm not the expert on business entities, but we have a few who I'm sure will find their way in this thread before too long.

I don't see any reason why a web start up can't be an LLC. My business is entirely online and while I'm currently still a sole proprietor, I plan on sooner or later incorporating as an LLC. Many businesses beyond real estate are set up that way.

One of our members, David (Business Attorney (http://www.small-business-forum.net/members/business-attorney.html)) has created a great resource about LLCs (http://www.limitedliabilitycompanycenter.com/), which is worth reading. If you look under the article section he has one or two comparing an LLC to an S-Corp as well. Hopefully his content will hold you until he and some of our other experts find their way into this thread.

Harold Mansfield
08-23-2010, 02:47 PM
From what I have seen over the years, a web start up, (which could basically mean anything) isn't exactly carrying a whole lot of risk liability. Most times it is a product, service or some form of entertainment.
What exactly will you be doing ?

Evan
08-23-2010, 02:56 PM
If you're operating in NY, then incorporate there. You'll need to otherwise if you choose another state, so why subject yourself to even more fees.

Online businesses tend to be low-risk, though depends on what you're doing. LLC's are most common for many type of businesses, especially web start ups. LLPs require you have a partner, and I believe NYS requires that you be a professional (aka a licensed professional like a doctor, attorney, or accountant) to have that type of entity. S-Corp or C-Corp would be your other choices.

Do to the flexibility, an LLC tends to be a nice vehicle because it is easy to maintain.

If your sole reason for forming an entity is liability protection, you should really look into insurance first. An entity won't help you if it isn't properly capitalized and you don't maintain some formalities required of businesses. People often comingle their assets with an LLC figuring it's no different than a sole proprietorship (often happens with S-Corps too). Might as well have just stayed a sole proprietor at that rate.

Of course in order to be an S-Corp, there are a lot of requirements that must be complied with as well. If you do not meet the criteria, a C-Corp or LLC will be your only options.

Business Attorney
08-23-2010, 10:39 PM
I agree with everything Evan said with one slight nuance. I would say that online businesses tend to be lower-risk rather than low-risk. Even though I have pointed out many times that some people over-estimate the liability protection (http://www.limitedliabilitycompanycenter.com/how_limited_is_limited_liability.html), I still recommend that people use an entity to protect them against potential liabilities.

Let me share a recent experience. I had a client that, in 2002, formed a new LLC for a new line of business. The LLC set up a one or two page website but the business never got off the ground and the owners let the state dissolve the LLC a couple of years later. Even though the business was defunct and the LLC lapsed, my client continued to pay the annual renewal fee for the domain and never bothered to take the site down.

Two months ago my client received a letter from a stock photo house demanding $5,000, based on the use of a very small image on the site. I responded by pointing out that the owner of the site was a defunct LLC, not my client. We offered to pay them $200 as a way to avoid more legal fees and hassle, and they quickly accepted. This stock photo company has won a number of relatively large judgments against small businesses for uses similar to what my client's LLC did. I have no doubt that having the activities in a separate LLC saved my client a substantial sum.

Given the rampant use of images of unknown origins on many websites, the sophisticated image software that the copyright owners can use to track uses of their intellectual, and the substantial fees that both the stock houses and their attorneys can collect from even unaware infringers, I would not characterize online business as enough of a low-risk to forego the protection of a limited liability entity.

Evan
08-24-2010, 09:25 PM
Low risk doesn't mean no risk, but certainly your client was lucky. I am sure if they wanted to persist, they could have. Sounds like the company really just wanted to squeak a few bucks out of the client, but when they realized they did have legal counsel, they figured $5,000 wasn't worth the cost of litigation.

Business Attorney
08-24-2010, 10:53 PM
An LLC doesn't always need to be bullet-proof to do its job. Suing an individual directly is much easier than attempting to prove a piercing the corporate veil (http://www.illinoisbusinessattorney.com/articles/piercing_veil.html) case. The mere fact that you have an LLC may make a plaintiff think twice about the even bringing the suit in the first place.

Avoiding a lawsuit is much more cost-effective than successfully defending a lawsuit.:D

Evan
08-25-2010, 10:45 AM
Avoiding a lawsuit is much more cost-effective than successfully defending a lawsuit.:D

It isn't for you! :D

Paul Elliott
09-07-2010, 09:43 PM
There is some helpful information with some state-to-state comparisons at LegalZoom: Online Legal Document Services: LLC,Wills,Incorporation,Divorce & More (http://legalzoom.com).

It is interesting that the forum sw put in what must be Legal Zoom's title tag when all I entered was http:// legal zoom . com. Something to remember.

Paul