Ask HN: What is legally required to run a small service-based web application?
I am gearing up for releasing a web application, targeted at a small audience where I'd like to sell monthly/yearly subscriptions. I am wondering what kind of a legal structure do I need to have in place in order to do this properly. Specifically, I want to (1) limit my liability and (2) make sure that customers trust it enough to sign up. And of course, I'd like for it to not cost an exorbitant amount to set up.
Also, I am deciding between PayPal and Google Checkout for the payment processor. I have little experience with integrating either, and while PayPal is more widespread, Google's documentation seems to be clearer. Any recommendations?
Not sure if this matters, but I am doing all of this as a side-project, and have a full-time job.
Thank you.
EDIT: I am in North Carolina, US. There is nothing about this service that's region specific. Ideally, I'd be able to have international sign-ups. So far, I have had as many hits from Europe + Asia as from the US.
62 comments
[ 3.8 ms ] story [ 134 ms ] threadRegarding payments, there are nothing but horror stories regarding Paypal, and Google doesn't sound that much better. Look carefully concerning this..it could kill your business
and also read this: http://news.ycombinator.com/item?id=2169870
The process only took a few weeks from start to finish, which was a nice surprise.
Getting an EIN from IRS is free and took about 10 minutes.
Not sure about any local paperwork you'd need to file in NC - I didn't have to file any in Franklin county.
You will probably find that no B2C customer actually cares about the structure of your business, legally. Your website design matters 10,000 times more in terms of trust gained. Your mileage may vary if you sell B2B, particular B2BigFreakingEnterprise.
With regards to liability: your main defense against liability is not your corporate structure or your terms of service. It is not pissing anyone off so bad that they decide to sue you.
You can, if you choose, get an LLC and create a Terms of Service. These are more to allow you to sleep better at night than insurance against catastrophe: no matter what you do right now, if you get sued, life is going to suck.
You want to sell subscriptions? Paypal Website Payments Pro + Spreedly. You can do it in two hours of coding and about two days or so in time it takes Paypal to review your business. I do not recommend doing yearly subscriptions until you have history: doing so increases your risk profile.
Your main regulatory issue for the typical SaaS app is simple: you owe income taxes on it, both to the US and to North Carolina. Luckily, you will have very good records of sales (because you'll be able to grab them from Paypal). If you want to deduct expenses, make sure to record them and keep proof of them (generally, receipts work fine -- for e-receipts, print to PDF and put it in your Dropbox so that you don't lose it).
PS> I am thinking of doing something similar to the OP, and not sure if this complicates things, I am on a H1 visa.
Sole propretorship == doing it as an individual.
This is not legal advice: if you're physically in America when doing the work, the IRS probably doesn't care about your citizenship, you owe it money on your sideline income. It may not be, strictly speaking, legal to work for someone other than your employer (yes, including yourself) while you are on a H1. In practice I'd bet you that this is commonly overlooked.
* If you accept payments in any name besides your own (e.g., a website name), and you don't have an LLC/corporation/partnership, you probably need to apply (and pay) for a DBA (no, not that kind of DBA - a "Doing Business As"). Accepting payments in a name other than your own without this could result in prosecution for fraud.
In my personal IANAL opinion, the LLC (Limited Liability Company) is the best "side projects for profit" option. Relatively simple and inexpensive formation (order of $100 w/o lawyer), limited liability (how limited? courts will tell), no "double taxation" from a corporate structure.
But do your own research beyond asking on forums.
kb
If you pay a lawyer $1,000 to draft terms of service, your lawyer will have $1,000 more in his pocket than he otherwise would.
The one area that I recommend you learn about is enforceability of online terms. Make sure you understand concepts like unconscionable terms, conspicuous notice, valid assent, and so on. These are big, ugly words, but the concepts behind them are not difficult to grasp. Every online transaction is a balance between disclosing important terms to users on the one hand, and not being obnoxious about it on the other hand.
Same advise applies to privacy policies, although it's worth noting that those are typically just plain language disclosures of your practices (at least in the U.S.)
Anyway, I'm curious because I'm considering offering review/preparation of website terms and privacy policies as a fixed fee service: what would you say is a fair price for that?
(Obligatory: My comments above aren't intended as legal advice and I don't represent anyone on HN.)
sol at yusonirvine.com
It's not difficult stuff, but if you're going to do it (and I would), do it right.
It's worth it to hire an accountant to make sure your business is crystal clean, and that you're not penalizing yourself unnecessarily.
Not deductible in the US. It isn't a close question, either.
This might sound like paranoia, but I'm living it, and you're right about another thing. It sucks. We have a corporation, one person in the organization did something none of the other members were aware of, and now we're being sued. The plaintiff even went so far as to try and sue all of the partners personally. Fortunately, the courts set the bar really high for breaching the corporate firewall. Being sued personally is no joke. If someone gets a judgement against you for some exorbitant sum of money, it's hard to resolve. It can follow you around for a long time.
Setting up a corporation is so simple, and so inexpensive that I don't understand why anyone wouldn't do it. I respect the fact that you've built a very successful business entirely on your own, and entirely organically, but operating without a corporation seems like flying trapeze without a net.
Fortunately the case was completely groundless - but it still took months of time and quite a bit of money paid to lawyers to make it go away. That's the thing that really sucks about being sued - the chances are that even if you are completely in the right you may well still end up having to spend a chunk of money on lawyers.
I would certainly get something formal if I had partners, like you did. I sincerely hope it works out for you.
BTW, I'm not suggesting that you should form a corp. Just to be clear on that. I do think this conversation is beneficial for the topic starter though.
I hear the "weak corporations are worthless" argument a lot. I will say that our simple little corporation is holding up really well, and we didn't spend a bunch of money forming it. We did not use one of those insta-corporation sites though. We paid a local attorney, with whom we sat down and met with, to establish our corporation and provide guidelines for maintaining it. It cost us less than $1000.
IMO, the bottom line with litigation is that it comes down to who has a bigger war chest. A weak corporate structure doesn't appear to be the shot that will sink our ship. Being unable to sustain the fight is the top threat.
When the personal lawsuit hit the door, the first thing I did was investigate bankruptcy. It is possible to discharge debt resulting from a judgement, but it depends on your circumstances. I definitely lack the depth of understanding required to explain it fully, but the gist of it is that receiving a discharge for a judgement isn't always as straight forward as something like credit card debt. Anyone engaged in a business with non-trivial risk of legal exposure should understand the implications before dismissing the benefits of having a corporation.
If you are by yourself, Sole Proprietor is easier and simpler for taxes and the like. LLC is more complex and may offer NO extra liability protection.
As far as taxes, a single member LLC can be classified as a "disregarded entity". In that case, the taxes are treated exactly as they would be for a sole proprietorship. The additional complexity of an LLC is just the state franchise taxes (which are usually quite low or zero at first) and a couple of documents - it's not a big deal.
In our case, the impression I have developed is that if you're acting in the course of business, and you're acting in good faith, your corporation stands a good chance of protecting you. If you set up a corporation for the purposes of protecting yourself while screwing people over, your corporation probably will not protect you. The possible number of scenarios is far to broad to express as a "protection/no protection" dichotomy.
Having a corporation actually simplified my situation, even when I was a one-man consultant shop. I've always maintained separate bank accounts for my businesses, which gives me a clearer picture of my business performance by isolating my personal finances from the picture. I find the required filing to be minimal in contrast to the added clarity.
I can't make the argument that it requires less paperwork, but IMO, it does make the paperwork simpler.
It gives you a chip to play if you are sued. You can say to the plaintiff, "I have insurance that may allow us to reach a settlement without going to trial." Then you and the plaintiff engage in a settlement negotiation that may or may not be successful. You can further strengthen your position by limiting your liability to your corporation. I can tell you from my experience that you feel much more exposed when it looks like the lawsuit is coming at your personally than you do when it is your business.
[1] - https://www.wellsfargo.com/biz/insurance/property_liability/...
The great thing about technology/web based businesses is that they don't take much capital to start.
Unfortunately probably the single most important factor in determining whether a legal entity will be respected when it comes to liability is whether the entity has sufficient assets given the character and nature of the business.
So, for a business that is started with say $100K and maintains some assets thereafter, pretty straightforward that shareholders, limited partners, members, etc. will not be personally liable. However, if it starts with $1 and you keep a few hundred to a few thousand in cash or other assets in the business, it's not going to shield you personally. (Of course, you also need to respect all the other formalities, accounting, regular meetings, authorizations to act, etc.)
Probably the best thing about using some type of legal entity is (as you mentioned) is that it makes it easier and provides more clarity to "who owns what" when there is more than one person involved in the company.
I agree that "doing good" is necessary but unfortunately, not sufficient legal protection.
You're overlooking those whose business model is "revenue by lawyer". There are scumbags out there who haven't figured out how to make money legitimately, so they just sue the most likely target. Paying them off is often more cost effective than prevailing in court, regardless of the merits of their case. I know one who kept his small business alive for 3 years with a settlement from a large corporation who just wanted him to go away.
If may not matter now, but once you're big enough, they will find you. Make sure your legal moat is in place ahead of time.
If anything, using Braintree removed all sorts of restrictions. They keep all the credit card information. Let them worry about PCI Compliance, not me.
If PayPal really enhanced customer trust, I'd expect to see more large retail corporations using it as a payment option.
There's a whole class of people who can't get a credit card in the first place, but they can use paypal tied to their bank and move money in.
Paypal is more universal around the world than most other cards. Someone may have a JCB card or a Switch card - my standard merchant account gives me a harder time with those, and charges me a heftier fee, and in some cases I can't take 'overseas'-based cards at all (Solo cards, for example) - but those people in those countries can use PayPal - and they do with me.
EDIT: Ahh... you're in Durham. I've got to be in Durham this afternoon. If you'd like to get together, ping mgkimsal@gmail.com. Also, I'll be at the tripug PHP meeting in Carrboro next Wed evening at 6:30 if you'd care to meet up and review stuff in more detail.
Good luck.
In the long run you're better off with either Braintree (which is fine all by itself) or Auth.net + Chargify/Spreedly/etc. I would switch to one of those options as soon as you validate the business, as the cost is significant early on.
I live in Europe and suggest using paypal if you are targeting Europeans. Many Europeans do not have credit cards and need to do bank transfers to pay for things online which is why they use paypal.