Highlights from the CMLP Legal Guide: Choosing a Business Form

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.

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.

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.