How Not to Set-up Your Internet Business

Previously I wrote a post on points of consideration when choosing a business structure to organize your internet business.  I mentioned several business structures that are adequate.  However, there are two business structures you should not consider.  They are Sole Proprietorships and Partnerships.

A Sole Proprietorship is a business structure that includes only one individual.  Characteristics of a Sole Proprietorship include:

• Low set-up cost.  There is no fee to pay and you may only need a fictitious name or business license;
• A social security number or an employment identification number may be used;
• All income derived from the business is personal income and is taxed at the owner’s personal income tax level.

But the not so good thing about Sole Proprietorships are:

• There is no protection from personal liability.  Essentially the Sole Proprietorship and owner are one and the same.  If the business is sued, the business owner can loose personal assets.
• No continuation of life for the business. So once the owner quits, the business is no more.
• There can only be one owner.
• Interest in the business can not be transferred.

The other type of business structure that is not a good choice is a Partnership.  A partnership is formed when a group of individuals go into business together.  Characteristics of a Partnership are:

• Partners can transfer interests in the business;
• Owners can determine how long a business will last and  under what circumstances it will end;
• No federal tax on the partnership, Taxation is passed through on each partner’s personal tax return.

However, Partnerships can become a liability because of the following characteristics:

• There is no personal liability protection.  Thus if the business is sued, the partners are personally liable with their own personal assets;
• All partners are jointly liable for any adverse actions committed by any partners.

If you are a sole owner or joint owner of an internet business and are in the beginning stages of establishing the business, operating as a sole proprietorship or a partnership may seem like the best option.  They are easy to set up and maintain and require very little up front costs.  However, as you begin to attract customers or audience, the potential for liability becomes greater.  For example, if you are selling a product and the product is defective, your company can become exposed to potential lawsuits.  Likewise if you are running an informational website and the site has technology that gathers users’ personal information and that information is collected without notifying the user, the company is exposed to Invasion of Privacy Claims.  Organizing your internet business in a structure that protects all owners form personal liability is the best solution in asset protection even if you think you don’t have any assets to protect.

If you are advised to enter into any of these business structures, get a second opinion.

About the Author
Latoicha Givens is the founder and a member of the firm Phillips Givens, LLC. Ms. Givens practice includes represention of start-ups, small, and mid-sized businesses in intellectual property matters, specficially, trademarks, copyrights, and licensing issues. She is the author of IPLAW101.com, a blog covering Intellectual Property issues specifically trademark law - trademark registration and infringement; Domain Name Disputes: Cybersquatting; Licensing and Intellectual Property issues in New Media.
See all posts by Latoicha Givens.