Even though John is a lawyer, he is probably not your lawyer (if he is, then that’s cool!), so before you decide to take action based on the information presented in this post, it is recommended that you first consult with your own attorney.
I, of course, am not a lawyer.
Cheers, and here’s John:
Pat recently wrote a post on The Dark Side of Successful Blogging in which he explained the many negatives he has had to deal with as SPI has experienced explosive growth over the past less than three years.
Just like any successful business, successful bloggers experience growing pains as they begin to gain a following. Usually success means outgrowing an original hosting provider or email marketing provider, as well as countless themes, plugins, affiliates, and maybe even phone systems or office space.
What successful bloggers usually don’t realize as they are building a following and watching their income grow each day is that along the way, they’ve built some major assets which need guarding and protection. The domain, the blog itself, the brand, even a Twitter account with substantial followers can all quickly become extremely valuable assets. And on the list of “to do” items, I’m willing to bet that setting up legal protections to guard blog assets falls pretty far down on the list.
If you haven’t already, you should be thinking now about how you can legally protect yourself and the valuable assets you have created.
You could be sued by an affiliate who claims they are owed thousands in unpaid commissions, or by another blogger who claims you stole their “idea.” No matter the dispute, if you leave yourself exposed, your hard work could go down in flames.
You wouldn’t buy a $100,000 condo without really protecting yourself from losing it (such as by purchasing insurance), yet some bloggers build a $100,000 blog without building adequate protections. Personally, I think that’s nuts.
Of course, every blogger’s life situation is different, and the laws will be different depending on where you live. But there are certain similarities and principles which are universal when it comes to setting up a legal structure to protect your interests wherever you live.
You will also need to decide when your growth is significant enough to justify the significant contribution of time, energy and money to separate all of the business of your blog into a new separate legal entity.
How to Form a Legal Business for Your Blog
The first step is you should form a separate legal entity, owned by you, which “houses” all of your blog’s assets. Every state and country has different laws and names for this particular legal entity, but in California, where I practice law, the best entity is a Limited Liability Company (LLC). The LLC may go by another name depending on where you live.
Why should you choose to form a LLC instead of a corporation?
A LLC is a highly flexible and customizable legal entity that gives you the peace of mind of knowing you are protecting your assets without throwing up burdensome legal barriers and maintenance requirements. A LLC is generally easier to set up, cheaper, and more flexible with fewer formal requirements than a corporation. On the other hand, a corporation does have certain advantages, namely that it can take on investors (shareholders) who have limited liability for the corporation’s debts or actions. In most cases, the advantages of forming a corporation are outweighed by the increased burdens which corporate formalities bring — especially given that most bloggers don’t need to bring on investors.
Pat previously wrote a guide on how he set up the LLC for his blog which you can follow.
If you have business partners for your blog, then you will also need to prepare an Operating Agreement. The Operating Agreement spells out the nuts and bolts of the business; it is the “Constitution” which guides the business.
If one of you is going to handle 90% of the writing and the other is going to handle 100% of the affiliate programs but you’re going to split the profits 50/50, then you should put that in the Operating Agreement.
If you are a single blogger and don’t have any partners for your LLC, then you do not absolutely have to have an Operating Agreement. However, if you have one or more partner, you should definitely have an Operating Agreement, and I recommend you spend some time hammering out the details. Although companies like LegalZoom will provide you with a boilerplate Operating Agreement, you and your partners should consider customizing it or hiring an attorney to do so.
Use the Legal Entity For All Business Matters
The second step is you need to use the legal entity of your choice religiously for transacting all business related to your blog. Simply creating the LLC doesn’t waive a magic wand which will protect you and your assets from any harm.
The number one problem with LLCs isn’t that people don’t set up a LLC to begin with; it’s that people set up an LLC and then don’t use it. They commingle their business funds with their personal funds in one checking account. They don’t sign contracts in the name of the LLC. They don’t purchase goods in the name of the LLC.
They might as well have never formed the LLC, because the LLC can’t protect you from liability if you use your own personal name to conduct business.
It’s like buying a bulletproof vest and then leaving it hung up in your closet. It can’t do you any good unless you use it.
You need to transfer all blog business-related assets like domain names and hosting accounts into the name of the LLC. The new legal entity will become the actual owner of the blog, but don’t worry – you will own the LLC so it won’t change your income or ownership rights. Your affiliate and sales income is treated the same way as it was previously – it is passed through to you.
You can change your domain name’s ownership registration with whoever you used to register your domain.
Open a LLC Bank Account
The next step is to set up a separate bank account in the name of the LLC. One of the most common problems with small business owners is that they commingle personal assets and business assets in one shared bank account. When you do that, you put yourself at risk that the LLC will be treated as if it was not a separate legal entity.
To avoid this problem, you should open a separate bank account in the name of the LLC and use it exclusively to pay bills such as for your hosting provider and to receive affiliate income and/or sales income. You can then transfer the funds from the LLC’s account to your own personal account.
This extra step is crucial if you want to keep the LLC treated as a separate legal entity. If the blog is later sued for whatever reason, and you did commingle funds, your other personal assets could be at risk because a court might treat the LLC as just an extension of you personally.
Get a Federal Tax Identification Number (EIN)
If you are a resident of the U.S., the next step is to get yourself a state and federal Employer Identification Number (EIN). You can get your EIN electronically directly on the IRS website.
Set Aside Enough Money for Taxes
Finally, don’t forget to set aside enough money for taxes. Because LLCs pass through all income to its owners, it is the owner’s responsibility to pay income tax.
I hope the above tips don’t take too much of the “fun” out of building a successful blog, but I believe it’s much better to take a few hours to get all legal matters in order than to pay the consequences in the long run.
John Corcoran is a lawyer and blogger with California Law Report (www.calawreport.com). He lives in the San Francisco Bay Area. You can sign up for John Corcoran’s 10-part series on how to set up a business at his blog.