At some point as a business owner, you will consider when to form a business entity. You'll also wonder if you should create it right away and whether an online business even needs one.
Online entrepreneurs often hesitate when it comes to formalizing the business side of their operations. Questions such as, why do I need an LLC for my online store, consulting or services business come up frequently.
Let’s look at some reasons in favor of forming an LLC.
Online businesses whether seasoned or just starting out are susceptible to claims just like brick and mortar businesses. They may be of a different sort (ex. copyright infringement vs a slip and fall) but the need to respond to a court when there is a claim is the same.
What does an LLC do?
It limits liability of the company’s debts so that in most cases the owner is not responsible. It creates separation between the member (owner) of the LLC and the business. This protects the member’s personal assets from the reach of the LLC’s creditors.
If an online business is operated without protection from an entity such as an LLC or corporation, the owner risks being held personally responsible for all debts and obligations of the business. This is true for sole proprietors who open shop using just their name or a DBA.
Ok, that’s makes sense you think, but what trouble could my online shop or freelance business get into? I’m just starting out.
Good question! Let’s consider…
Aaah…pictures. Who doesn’t love a good photo! All types of businesses use them in social media marketing and access to royalty-free images is endless. Typically, using a reputable company to purchase or license “free” photos is less risky.
But, unless you own the copyright, be aware of the risk of not having the proper license to use an image you find. Keep in mind that copyright infringement claims can run up to $150,000.
Copyright infringement also covers using someone else’s written or audio-visual work without permission, even inadvertently. Cease and desist letters are common in online business due to the speed and reach of social media.
If you sell products online that could cause someone physical harm, you could be sued under for product liability. Even if you make products from your home, you can be found liable. The law doesn’t distinguish between big box manufacturers and small shops when it comes to these types of damages.
Breach of Contract
Provide services to clients? Then consider disagreements that may occur about the terms of the services you offer. Disputes can progress to breach of contractclaims. Contract claims also extend to work with business associates, brands, vendors and contractors.
And then there are other liabilities like defamation, such as writing or saying something considered damaging about another (libel/slander). This includes maligning another brand in a product review that they find unfair.
There are also website and privacy data issues to be aware of when handling personal information given by visitors and users of your business website. Large companies get hacked frequently and this can extend to your online business too if you handle lots of data.
When Does Your Online Business Need an LLC?
Now that we’ve covered some of whys, let’s get into whenyou should form an LLC for your online business. To do so, answer this:
Do I sell products or services?
Do I frequently use copyrighted material?
Do I contract with other companies, business associates and clients?
If you’ve answered yes to some or all of these questions then you may want to form an entity to protect your assets sooner than later.
But what if I haven’t made any money yet?
Unfortunately, lawsuits occur regardless of whether your business is new or old, profitable or not. In most states, forming an LLC is fairly simple and cost-effective in the long run.
An LLC is just one type of entity you can form as a business owner. You’ll have to consider which entity works best for your situation. When running a business whether in person or online, limiting your risk is key.
This blog posting is provided for general informational and educational purposes only and is not provided for specific, individual legal advice.