What do I need to do to legally set up an online social networking business?

QUESTION:

I’m entering the beginning stages for creating a new social networking website. It’s similar to Facebook and MySpace. What legal aspects of a traditional business would I need to make sure to handle properly  (e.g, fictitious business name statement, business license, form of ownership, etc.)?

ANSWER:

Antone Johnson

Antone Johnson

by Antone Johnson at Bottom Line Law Group

Start by forming a limited liability legal entity to operate the business: either a corporation or an LLC. A corporation makes sense if you’re planning to raise capital at any point from venture capital or angel investors; it also makes it much easier to issue stock options to employees, which is an expected part of the compensation package at most tech startups.

A fictitious business name statement (also known as a DBA) is only necessary for a sole proprietorship “doing business as” some other name. A sole proprietorship (or a partnership, for that matter) would be a very bad idea for this kind of business because it exposes the owner(s) to unlimited personal liability. That’s why a corporation or LLC is the way to go. It’s important to observe corporate formalities (keeping minutes of Board meetings, separate bank accounts, etc.) to preserve the protection against liabilities afforded by these business entities. Make sure to enter into contracts in the name of the corporation, not your own name, and assign ownership of domain names, trademarks, etc. to the corporation.

Business licenses are a matter of local law. Check with the city you live in (or where your office will be located, if not at home) to see if a license is required for a purely online business. You’ll likely also need to file a Form SS-4 with the IRS at some point to obtain an EIN if you’re planning to hire any employees. Finally, if you incorporate out of state (Delaware is a popular choice for many reasons), you’ll need to qualify the company to do business as a “foreign corporation” in the state where you live.

For any type of user-generated content (UGC) website, it’s crucial to have a good Terms of Use and Privacy Policy in place before opening to the public. In particular, having a notice-and-takedown policy in place under Section 512 of the Digital Millennium Copyright Act (DMCA) is essential to avoid potentially ruinous liability for copyright infringement. Your users WILL upload copyrighted material (thousands of times a day if the site gets popular); it’s impossible to find and remove all of it; and the DMCA provides iron-clad immunity for the site against any suits by content owners as long as you create and live by a solid notice-and-takedown policy. It’s also important to have a policy against collecting personal information from users under age 13 (to comply with COPPA) and define what sort of content and behavior is prohibited.

Comments & Advice:
  1. Ramesh says:

    Hi Mr. johnson,

    Thankyou very much for this little informantion which is very much helpful to young entrepreuners with great and innovative idea.

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