Business Formation

Attention Entrepreneurial Bloggers: A Model Blog Operating Agreement for an LLC

Jason Crow — Fri, 18 Jul 2008 13:04:58 -0400

Imagine the following hypothetical: I've joined forces with a few friends and some Internet affiliates (you know, the folks you meet at conferences) to build what we now call a "team blog." The website aims at building a web community of video producers and community TV stations looking to share broadcast quality video. At first, we did it for the love, hacking together code, creating buzz for the service -- there were no real legal or business issues to complicate matters. However, when interest in the website grew, and organizations and government bodies started to show interest in using the service, problems grew like dandelions in a unkempt field. We had copyright issues concerning the video content, profit-sharing issues based on who contributed most to the code development, governance and decision-making issues, and trouble entering into contracts on behalf of the group. We needed to formalize our relationship, but didn't know where to begin. Should we be a non-profit, LLC, or a corporation?

The CMLP legal guide deals at length with the various business structures you can use to carry out online publishing activities (see the Creating A Business section). Probably the most promising structure for an informal co-blogging enterprise with minimal resources is an LLC, which combines some of the tax benefits of a partnership with the limited liability of a corporation, while allowing for a (relatively) flexible management structure. A primary reason for this flexibility is that state LLC statutes tend to defer to the LLC members' operating agreement on most governance issues. Drafting an effective operating agreement thus is an important and often challenging task for those seeking to form an LLC.

This week, Professor Hoffman at Concurring Opinions posted a potentially useful model blog operating agreement for an LLC, drafted by Professor Dave Johnson of the Institute for Information Law and Policy at New York Law School. This model agreement is especially interesting because Professor Johnson tailored it to an Internet-based, peer-production business model, instead of the traditional/hierarchical/top-down/brick-and-mortar model. What's more, he contemplates its use in connection with a new Vermont corporate law statute, signed into law on June 6, 2008, which enables electronic filing of formation documents, eliminates requirements for in-person meetings and physical headquarters, and allows for agreements among members to be embodied in electronic form. As Johnson explains in his fascinating paper, Virtual Companies, "[b]ecause limited liability company law is flexible, deferring in most cases to the terms of an operating agreement, these enabling provisions of Vermont law can be used to set up a new kind of legal entity." He elaborates:

While authority can be delegated to individuals to act as agents on behalf of the company when necessary, most decisions can be reserved for participatory voting by a transient, self-selected membership. A founder can articulate the goals of the company and recruit others to fill various pre-defined roles, conditioning or limiting participation on whatever basis seems appropriate.

Professor Johnson's model and article are well worth a look, both for those interested in establishing an LLC and for lawyers interested in adapting their practice or academic work to innovative online business models. That said, the model agreement is still a work in progress -- the Concurring Opinions post encourages readers to offer constructive feedback and suggestions on how Professor Johnson can improve it. Who knows? Maybe the next group of online publishers looking to formalize their relationship won't struggle as much as my group did.

(Jason Crow is second-year law student at Boston College Law School and a CMLP legal intern.)

Highlights from the Legal Guide: Choosing a Business Form

CMLP Staff — Tue, 05 Feb 2008 12:22:13 -0500

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 we'll take up is choosing a business form for 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 my options? What are the benefits of legal formality? Will it be expensive to obtain these benefits? Will I have to sacrifice control?

Below is an excerpt from the legal guide giving a brief introduction to some of the most commonly adopted business structures and pointing 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.

Choosing a Business Form

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 are 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 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(c)(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.

Citizen Media Law Podcast #1: Federal Shield Bill; Co-Blogging and Legal Threats; Phoenix New Times Arrests

Citizen Media Law Podcast — Fri, 26 Oct 2007 09:00:40 -0400

Welcome to the first episode of the Citizen Media Law Podcast, providing practical knowledge and tools for citizen journalists. This week, David Ardia responds to the federal shield bill passed in the U.S. House of Representatives, Colin Rhinesmith talks about legal threats to co-bloggers, and Sam Bayard reflects on the Phoenix New Times arrests.

Download the MP3 (time: 7:00)

Music used in this podcast was sampled and remixed from a track titled "Jazz House" by the Wicked Allstars, available on Magnatune.

To subscribe to the Citizen Media Law Podcast, visit our Subscriptions page or go directly to the podcast feed.

Center for Citizen Media Examines Business Aspects of Citizen Media

David Ardia — Mon, 22 Oct 2007 14:09:59 -0400

The Center for Citizen Media is in the midst of a series of posts exploring possible business models for citizen journalism and the processes surrounding the creation of a website. The series is primarily the work of Ryan McGrady, a new media graduate student at Emerson College, who was an intern here at the CMLP this past summer.

The series, which the Center for Citizen Media plans to turn into a comprehensive online guide, began with an introduction on September 24, but has now progressed to cover the following topics:

General Business Issues
Affiliate Programs
Memberships and Subscriptions

It's an excellent series and well worth following.

(Note: Dan Gillmor, who is the director of the Center for Citizen Media, is also a founder of the CMLP.)

Co-Blogging and Cease-and-Desist Letters

Sam Bayard — Tue, 16 Oct 2007 14:13:55 -0400

Mike Madison published a thoughtful and thought-provoking post the other day on his madisonian.net blog about the effect that a cease-and-desist letter can have on a collaborative blogging (or "co-blogging") relationship. Madison publishes on a number of blogs, one of which is Blog-Lebo, which covers matters of local interest in Mt. Lebanon, Pennsylvania. Madison used to co-run the blog with two other bloggers, but when they got a cease-and-desist letter from a local lawyer, things went slightly pear-shaped. Here's a rough version of the story:

Several weeks ago, Madison posted about a neighborhood dispute that arose when a local homeowner re-landscaped his backyard and blocked (or threatened to block) a stone path that was popularly understood to be protected by a recorded easement. Many readers commented on the post. One commenter identified the homeowner by name and another (apparently one of Madison's co-bloggers) commented that the owner, who is a lawyer, should have known better than to buy real estate without checking the record for easements.

Days later, Madison and his co-bloggers received a letter from the lawyer/homeowner demanding that they remove the post or face a lawsuit for defamation. Madison, a lawyer and law professor experienced in Internet law, was understandably peeved but willing to stand up against what he saw as legally and factually baseless claims. His co-bloggers had a different reaction altogether -- one wanted to take the post down immediately, and the other withdrew from the blog. (It looks like the second co-blogger also withdrew at some point later.) Madison sums up the dilemma he faced as follows:

Blogging lesson number one: All of the noblest rhetoric from Chilling Effects and the EFF and law faculty colleagues is terrific, but it doesn’t mean a lot when your co-blogger turns to jelly. Should lawyers blog with non-lawyers? Maybe not; maybe lawyers simply see the world in a different light. My co-bloggers and I didn’t (and don’t) have a formal co-blogging agreement or liability-shielding arrangement, but even if we had, it’s clear that the dynamic would have played out essentially as it did. We had discussed dealing with hypothetical defamation claims, and I had walked through the immunity analysis under Section 230 of the CDA. All seemed well. But when push came to shove, the non-lawyers got extremely nervous. There was no trust. At that moment, our relative aversion to risk was quite different, and I felt that I couldn’t leave the post up if it meant that my co-blogger would remain frightened.
So down the post came.

Madison not only took down the "offending" post, but ended up suspending Blog-Lebo entirely (see his explanation for the suspension on Pittsblog). The surprise happy ending to the story is that Blog-Lebo's readers clamored for the blog to return, one of Madison's co-bloggers rethought the situation, and the blog is back up. But you can easily envision a less satisfactory conclusion.

The problem identified in Madison's post is not limited to the rare situation where lawyers blog with non-lawyers. It could come up any time collaborating bloggers have different sensitivities to risk, different attitudes toward litigation, or even different time or financial commitments. In the face of a lawsuit, maybe blogger #1 wants to make a statement, and she's ready to go to the wall to stand up for free speech rights. But blogger #2 has a busy schedule and some serious financial obligations. Blogger #3 doesn't like conflict. You get the picture.

I started this post with the intention of giving some pithy advice about how to reduce the likelihood of this kind of problem occuring, but I've reconsidered this approach. There is no legal silver bullet, no magical piece of advice to make this problem go away because its a problem of human difference and personal preference. At best, I can say that bloggers and other creators of citizen media should think about this dilemma before entering into a collaborative arrangement. Are you ready to deal with multiple perspectives when it is your post that is going to be taken down? Are you ready to stand and fight if someone complains about your co-blogger's work?

And if you decide to join forces with others, then there are a host of real legal issues that you need to consider. As Madison points out, Eric Goldman has done some excellent work on the legal aspects of co-blogging (here and here). Some of the key questions include whether you want to form a limited liability entity, whether you should enter into a formal co-blogging agreement, and what effect revenue generation (from advertising, for instance) has on your and your co-bloggers' status as general partners or independent contractors. These are topics that we intend to take up in detail in our forthcoming Legal Guide.