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    Highlights from the CMLP Legal Guide: Choosing a Business Form

    by David Ardia
    February 6, 2008

    This is the first in a series of posts calling attention to some of the topics covered in the recently launched Citizen Media Law Project Legal Guide. The first topic I’ll take up is choosing a business form
    for your online publishing activities. There is increasing awareness that,
    especially if you publish content in collaboration with others, it may
    not be smart to simply leave the relationship “natural” or informal.
    But this realization raises other questions: What are your options? What
    are the benefits of legal formality? Will it be expensive to obtain
    these benefits? Will you have to sacrifice control?

    I’ve pasted an excerpt below from the legal guide that provides a brief introduction to
    some of the most commonly adopted business structures and points out
    some of their most salient advantages and disadvantages. This page in
    the guide is just a jumping-off point for in-depth discussions on each
    of the business forms that you can find in the guide. In the end, the
    choice between business forms is a personal one. Our hope is that the
    legal guide will help you understand the issues and make a
    better-informed decision.

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    Whether you’re already publishing material on your website or just
    getting started, the question of what business structure to operate
    under is an important one. Depending on whether you work alone or in
    conjunction with other content creators, you may face hard questions
    about ownership of assets, management structure, payment of taxes,
    splitting up of profits (if any), transfer of ownership, and
    dissolution of your working relationship. Additionally, as we address
    in detail in other parts of this guide, publishing material online
    exposes you to the risk of liability for defamation, invasion of
    privacy, copyright infringement, and other legal claims. What kind of
    business structure you choose to adopt can have a significant impact on
    these and other issues.

    Before proceeding, a word or two of caution is in order.
    There is no magic business structure that will make all legal risks and
    problems go away. Each person or group of people must make the choice
    based on their goals and personal preferences. What’s more, there is a
    great deal of uncertainty about how old-school business law applies to
    the online publishing context, so the guidance found here should be
    taken with a grain of salt.

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    So what are your options?

    • Sole Proprietor: You
      can carry on your online publishing activities, alone or in conjunction
      with employees, as a “sole proprietor.” This form is only
      appropriate if you contemplate being the only owner of the business.
      There are some adverse liability consequences of this choice (which
      we’ll discuss), but this form gives you direct control over management
      of your business and its assets, generally involves less up-front,
      out-of-pocket cost and hassle than the limited liability entities
      below, and is generally easier from a tax filing perspective because no separate income tax return is required.

    • Informal Group: You
      can carry on your online publishing activities in conjunction with
      others without a formal agreement or entity structure governing the
      terms of your relationship. In this case, your legal status is
      uncertain, and a court might view you and your collaborators as
      partners, as employers and employees, or as independent contractors.
      This may feel like the natural form for collaborators to adopt, and it
      is low on hassle and up-front, out-of-pocket costs, but it has
      potentially serious negative consequences in terms of liability and tax implications and can
      lead to major complications in managing and/or dissolving the
      enterprise. Under this section, we will discuss the usefulness of
      so-called “co-publishing” or “co-blogging” agreements as a mechanism
      for bringing some clarity to your group endeavor.

    • Partnership: You
      can carry on your online publishing activities in conjunction with
      others under the auspices of a formal partnership agreement. This
      choice generally only makes sense if you are carrying on your business
      for profit. There are some adverse liability consequences of this
      choice (which we’ll discuss), but this form lets you order your group
      affairs contractually and generally involves less up-front,
      out-of-pocket cost and hassle than the limited liability entities
      below. In addition, this form can be advantageous for tax reasons
      because it allows for pass-through tax treatment (that is, there is
      generally no entity-level taxation).

    • Limited Liability Company: You
      can carry on your online publishing activities, alone or in conjunction
      with others, as a limited liability company. Limited liability
      companies (LLCs) offer limited liability for the debts and obligations of the company, with somewhat fewer operating formalities than corporations.
      LLCs are also advantageous because they combine the potential tax benefits of a partnership with the limited liability of a corporation. That said, they generally involve more up-front, out-of-pocket cost and
      hassle than getting started as and running a sole proprietorship,
      informal group, or partnership.

    • Corporation: You
      can carry on your online publishing activities, alone or in conjunction
      with others, as a corporation. Most big, publicly traded companies
      that are “household names” are corporations. This form of business has
      the benefit of limited liability,
      but forming and operating a corporation involves costly and burdensome
      filing and record-keeping requirements and observation of “corporate
      formalities.” Forming a corporation can also have potentially adverse tax
      consequences because the corporation is taxed on its income at the entity level and the shareholders are also taxed on any dividends that are distributed (see the section on “double taxation“ for more information) in the case of a corporation classified under subchapter C of the Internal Revenue Code (a “C Corporation”).

    • Nonprofit Organization:
      You can carry on your online publishing activities in conjunction with
      others as a nonprofit corporation. Those who operate a nonprofit
      corporation enjoy limited liability
      for the debts and obligations of the organization, and the organization
      is not subject to income tax on the federal
      and (usually) the state level. There are important restrictions
      involved in operating a nonprofit, however, including limits on the
      purposes of the organization’s activities, a ban on personal benefit
      from those activities, and restrictions on political and lobbying
      activities, and the process of filing for tax-exempt status can be time
      consuming in contrast to the obligations imposed on other business
      forms discussed above. Also, keep in mind that a nonprofit has no
      owner(s) in the ordinary sense, and therefore creating one involves
      relinquishing control. In addition, nonprofits have strict dissolution
      requirements, they cannot pay dividends, and employees can only receive
      reasonable salaries. Nevertheless, this may be a good option for
      members of a collaborative venture that does not aim at making a
      profit, who want increased legal certainty about their status, and to
      enjoy limited liability and tax benefits.

    For a chart synthesizing the major points identified above, please see our Business Form Comparison Chart.

    Keep in mind that operating as a business (as opposed to as an
    individual or as part of an informal group) may provide certain legal
    and non-legal benefits. For example, operating as a business can give
    your enterprise an air of legitimacy, which may influence the reception
    of your work or make it easier for you to raise capital or obtain
    grants (some granting organizations only give money to qualified
    501©(3) nonprofit organizations). It may also help you get press
    credentials.

    Importantly, you may have a better argument for inclusion
    under some state shield laws
    if you are affiliated with a business, and you may have a better chance
    of invoking the reporter’s privilege to avoid having to testify in a
    legal proceeding regarding your sources and/or information gathered in
    the course of your news gathering activities.  You can refer to the State Shield Laws page for more information, and we will be dealing with the reporter’s privilege in forthcoming sections of this guide.

    Tagged: cmlp forming a business legal guide nonprofit
    • Hi David, I’m glad you posted this section in particular, because it’s the first one I wanted to comment on.

      Fantastic work all around, and this isn’t a criticism of the information you put together–

      As the Agaric Design Collective, we’re naturally interested in a form of organization is none of and can fit in some of the structures outlined: that of a worker cooperative.

      The chief distinction is that a collective business will adopt one of the legal forms you describe, because there aren’t any other choices, and adopt internal rules and/or bylaws to adapt the usual structure to be nonhierarchical.

      Did CMLP come across this issues and, on the off chance the answer is yes, are there any special legal considerations for cooperatives?

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