Volume Number: 21 (2005)
Issue Number: 1
Column Tag: Marketing

Starting An On-Line Business

by Bradley M. Sniderman

Keeping It Legal

Many people dream of starting a business, a company of their own to sell the products or services they've created. The Internet has greatly reduced the barriers of entry to starting a small business, typically making it much easier and less expensive to get started. With the ubiquity of high-speed, broadband connections, many people choose to run their business right out of their home. Throw in a telephone and many people would never have to leave their house. If you are one of those people who are looking to start your own on-line business, good for you. Before you do, there are many issues that you must address before you put out that electronic shingle.

This article is about the legal issues that abound when opening and operating an on-line business. If you are not careful, you can run into many pitfalls that could stop your enterprise before it has a chance to take off. Even though these topics can be very detailed, I will only be touching on them in an attempt to make the on-line business owner (or anyone contemplating ownership) aware of their existence.

I do have to mention this, since I am a lawyer. This article is designed to introduce you to some of the legal issues surrounding the start up and maintenance of an on-line business. I should not be considered your attorney and under no circumstances should you consider this article as legal advice from me.

So you're ready to open that on-line business. Maybe you created a product that you want to sell, or are just a re-seller. Either way, you need to know the legal issues that are associated with running a business, on-line or not. While some of the issues are the same for both brick and mortar and cyberspace business, there are many unique concerns that are found only via the Internet.

Personal Liability

The very first thing any entrepreneur should do is make sure they are not going to be personally liable for any company failings. These fallouts could be anything from declaring bankruptcy to being sued. Avoiding this is accomplished by creating a corporation or Limited Liability Company, LLC, before you open your doors. Just because you are on on-line store does not mean you will be shielded from any liability. These types of businesses have the same potential for culpability as a brick and mortar business. The corporation or LLC will protect your personal assets in the event there are any legal actions against your company. Without forming a business entity, you will be held personally liable for the debts and obligations of your company.

There are other forms of business entities, such as partnerships, (or limited liability partnerships), that may or may not keep your assets out of hands of judgment creditors. For this article, I will discuss the corporation and LLC, since they are the most used and safest.

The corporation is the older form of business entity. Therefore, it has the most history, which could be important when looking at case law and how courts will determine the law (such as with Delaware). The fees for this vary by state, and the amount of record keeping and paperwork will be higher than that of the LLC. The LLC is a newer form of business entity and was designed partly for its ease of use and its simplified tax structure. Since it is new, there is a limited case history regarding actions taken against this type of entity and therefore is not always easy to predict the outcome of a court action. That alone is not a reason to shy away from an LLC, it is an easier entity to run day to day (for example, LLCs do not require that minutes be drafted and maintained). The fees for this again vary from state to state. In some cases, the LLC will cost more than the corporation because state taxes are due immediately upon its formation.

Determining where to file is also important. If you have a brick and mortar store that goes with your online presence, or you conduct most of your business from one particular state, then it may be best to form your entity in that state, since state law may require you to do so anyway (which could lead to double filing fees). It's more lenient when you are just run an on-line store. Before deciding, check the state laws in the state where you live to find out their requirements, or just consult an attorney.

If you decide to use another name for your business other than what you registered as, then be sure you get a fictitious business name license (if required), at least in the county of the state you formed your entity in. If not, then your business can't file a lawsuit on its own behalf if it ever needed to.

Regardless of which entity you form, do this before you start selling. You need to be protected personally before it's too late.

Domain Name Registration

One of your initial steps should of course be selecting a domain name for your business. As you may be aware, that is not always as easy as it sounds. First of all, the name(s) you want may already be taken. If they are, contact the owner to see if they would part (sell/transfer) it to you may work, but not don't count on it being easy or inexpensive, if it happens at all.

Assuming you can't get a domain name already in use by another owner, you must look for one still available. Once you have chosen a name and found it to be available, you still are not in the clear. There are trademark and competition issues, as well as other concerns. For example, you should make sure that the company registering your domain name is legitimate and well grounded. If the company you register with should go out of business, you may lose (even temporarily) your use of the domain name.

One of the biggest areas involving domain names is trademark infringement. Even if you have found a name available, it may conflict with a company that has been in business longer than you. If that is the case, that company may try to block your use of the domain name, even if it's not identical to their business name. The issue here is whether there would be any confusion among consumers in that particular market as to the source of goods or services being offered. If the complaining company is not too big and well known, there is a good chance you can keep the domain name. However, if they are well known, then your use of that domain name may dilute the other company's mark, which would make it easier for them to force you to transfer that domain name to them. If you are in competition with another company that wants your domain name, the courts will look at many factors, such as who has been around longer and where the business has been operating, just to name a few. This type of fight is time consuming and expensive, even if you win.

When looking for a domain name, you should never purposely register a name with the intent of trying to sell it to the company that would have a stronger position in keeping the domain name. This is cyber squatting and there are laws, such as the Anti-cyber squatting Consumer Protection Act, designed to prevent that type of action. If its determined that you intentionally attempted to "squat" on a domain name, you will lose that registration and maybe face fines as well. If you run into a cyber squatter while getting your domain name, remember that you can use these laws for your protection too.

It's also possible that another company will have the same right to a domain name as you. Then, you will have to fight them for the right to use, which would involve, among other things, showing evidence of prior use over the other company. This could be another expense you may not want to incur when getting started.

As you can see, there are many issues involved in getting a domain name. Your best action is to do your research before settling on a domain name. This way, you can hopefully avoid these (and other) barriers to getting the name you want.

Opening Doors: Going online with your business

You've cleared all the hurdles we've discussed and now you think you're ready to go live with your on-line business. Nope. Not yet. Before you can open your doors, there are many legal issues that must be addressed to make sure the running of your site remains smooth.

First of all, you need to make sure that your users (customers) know how your site will work and be run. To do this, you need to have a terms and conditions page, as well as a privacy statement. Make sure you take the time to really develop these pages, since they will be vitally important to you and your business.

The terms and conditions page is where you inform your users what they can expect from your site, such as content, purpose and what they can and cannot do while visiting your site. This page is very important, since it removes most if not all possible misunderstandings about the proper use of your site. Issues (but not all) you should have on this terms and conditions page are a) permitted uses of your site, b) uses that won't be permitted, such as posting false information on the site or copying portions of your site, c) fees that may be associated with the use of your site, d) password use and other registration information. There can be many more issues, and this is determined by what your site has to offer.

The privacy statement will be one of your most important documents to include on your site. There are many laws, from the state level to internationally that are designed to protect privacy rights. The government, namely the FTC, will enforce the rights afforded to people's privacy. Failure to guard your users privacy rights can bring fines, a shut down of your site, or both. Therefore, its imperative that you draft a well thought out privacy policy, which should state exactly what information you will collect from your users and exactly what you will do, and not do, with that information. For example, if you intend to collect users name and address and then sell it to third parties, you must mention this in your privacy policy. You will also need to be specific as to whom you plan on giving this information to (such as third party marketing companies). Other (but not all) issues you should have in your policy are a) how you store personal information, b) how you collect it, and c) how this information is used on your site. Furthermore, you must include opt-out instructions so your users can choose to keep their information private, and can make this decision easily. They must be given a choice on how their information is used.

There are many more ramifications for not keeping your user's information private, which are beyond the scope of this article. Suffice it to say you need to stay on top of how you gather this information and how you use it.

Both the terms and conditions must be placed on your site where they can be easily located. Most current sites have links to these terms on its home page and may have these links on every page, which is a much better approach, since it helps alleviate any possible claims of false and deceptive business practices.

Your site should also include other legal notices, when applicable. Notices would include a copyright notice, and most likely a trademark notice as well. This will inform your users that you intend to protect the intellectual property rights that are found on your web site, even if third parties own those rights (which you got permission to use).

Regardless of what your web site is about, the content of your site needs to be monitored as well. Make sure that nothing illegal is included in your content, such as trade secrets, unlicensed images and text, as well as private information about your users. If you discover any illegal contact, quickly remove it and make a point to find out how that content got there in the first place.

If you create your own content, then you may not have to worry about infringement issues as much (although you should still be aware of accidentally infringing on someone else's work). If you are using content created by another, then you need to be aware of copyright, trademark and licensing issues, to name a few. If you use content created by someone else, then you must make sure you are legally allowed to use it. Get a license or an assignment of rights from the owner of the copyright (the written text and images) and the trademark (the distinctive words/images used as part of trade name), or you may run into a very expensive problem that could shut down your business. This holds true for any patentable processes and trade secret you use with your site, so make sure you are legally allowed to use them.

Chat rooms have their own unique issues

Some web sites create chat rooms, a place where users can log on to the site and carry on conversations with other users. These sites can be a great place to learn new about information or to just speak your mind. However, with this comes legal concerns that all web sites with chat rooms must be aware of. As the proprietor of a chat room, you can be held liable for the actions of your users, so its important that you include language in your terms and conditions regarding what can and cannot be said in these rooms. Make sure you clearly state that your users will be solely liable for the content they submit. While this is no guarantee that you will escape liability, it's a good start, and will certainly reduce your risk of potential liability. You should also remove content that turns out to be offensive or illegal. What is offensive can be subjective, but a little common sense can go a long way. Also look out for defamation and slanderous statements made on your site, this can be another trouble spot. You do need to have some control over the chat room to help maintain its intent, to keep people coming back and to avoid any legal backlash.

Another serious concern about operating a chat room is its potential use by children. While children should not use most chat rooms, its really impossible to keep them out. With that said, we all know there are individuals who will take advantage of the presence of a child and possibly exploit them for reasons that children should not be involved in. The last thing you need is to have your web site associated with that, so keep an eye out for user content that is suspicious.

e-Commerce: Selling your goods or services

Lets move on to when you actually sell your goods or services on line. With either goods or services, its not a bad idea to have some sort of liability insurance in the event a customer of yours gets injured or worse from a product or service you offer. While the forming of your corporation or LLC protects from personal liability, you still don't want your business to file bankruptcy or just fold up because you were not covered with enough insurance. Getting this insurance is up to you and it will depend on what you sell or provide as a service in determining how much to have. Even if you don't actually make the product, you can still find yourself as a defendant in a lawsuit, so get the coverage you need.

When you sell your goods or services, its important that you explain to your customers the policies on such things as shipping charges, taxes, and sales or special offers you may run. While shipping charges are based on your actual costs to ship (and nothing else), your taxes are not always going to be the same for each customer. States that want to tax Internet sales and services must follow the same laws for its brick and mortar purchases. So, a sale of goods (and maybe services) sold to a user in the same state that the Internet business is located in can charge a sales tax. While these laws are changing, the basic thing to remember is that if your business has a connection to a certain state and you sell goods in that state, you will most likely have to collect state tax. Before you start your business, learn about the sales tax laws for the state your business is located in (usually where you are incorporated or became an LLC). This is just a general overview of tax laws, since they can be complicated and are always changing, so talk to an expert in tax laws to make sure you are complying with the current laws associated with your business. With sales you may run, just make sure you fully disclose the details of the sale (what's on sale and for how long).

If you plan on selling goods, you may decide to accept returns. Whether you do or not, its still very important you have a refund policy that is straightforward and prominently displayed for your users. Just as with a privacy policy, you must do as you say with your return policy. For example, how much time will you allow for returns, what can be returned, will you pay for shipping on returns and so on. Failing to abide by your written policy or making it hard to find can lead to complaints filed against you, loss of business or maybe charges brought up against you. So make sure you let your customers know about your return policy before they purchase anything by including a link to this policy on one or more of your pages leading up to the final sale. Better yet, have a window pop-up containing all the terms and conditions of your sale, and require them to click an "Agree" button confirming they agree with these Ts & Cs before the sale can be completed.

Getting paid: Merchant accounts and other considerations

Payment is another area to be concerned with, especially if you plan on accepting credit cards. First you will need to either apply for bank merchant accounts that allow you to directly process credit card transactions, or you can choose to hire a 3rd party company to process these transactions for you. If you are a new business with limited operating history, you may find the escrow requirements your bank will impose on to protect against bad debt prohibitive. This may lead you to a company that specializes in processing Internet based credit card transactions. The web is an excellent source for locating such companies.

As you can imagine, its imperative that you make sure your customer's credit card information is always secure, from the transfer to your servers, the transfer to the credit card authorization service, to the storage of this information. You may be liable for credit card losses if you fail to properly take precautions in securing this information. There are various types of software to help protect confidential information as well as some companies that will do the same, so do your homework.

Warranties

Yet another issue is that of warranties. Regardless of whether you sell goods or services, you may have warranties associated with them, even if that was not your intention. There are various types of warranties to keep in mind. First, there are express warranties. These are easy to recognize because its based on what can be found on your site. For example, what you draft as a description of the goods/services you offer is an express warranty. So if you describe your product as being round, it better be round or you will be in breach of an express warranty. These warranties apply even if you did not intend to offer one, so draft your website carefully. There are also implied warranties usually associated with goods. These would be based, for example on a certain product performing in a certain way, such as a tire performing as a tire should. It does not matter if its written on your web pages or not, it will be still be a warranty and can lead to a breach of an implied warranty if your product does not do what it should do. These warranties can be limited if you expressly disclaim them on your web site, and of course make these disclaimers very conspicuous. If you want to avoid these warranty traps, then make sure you disclaim them.

There are other warranties, such as product liability issues, that you should be aware of. These are based on what the product is, and it could be considered strict liability (where you are liable regardless of any disclaimers of warranties or any other possible defense). They can apply if you make the product and even if you just sell it (although that may require other findings). This is a complicated area that should be reviewed by you and an expert (if you are not one) before you sell your products.

Shareware, license and usage issues

How about shareware or other software? If you produce shareware, you should keep in mind that there are legal issues involved, even though you are being generous by sharing your work. First of all, you need to have a license agreement that your users must agree to in order to use your software. A license agreement is how you maintain, or at least attempt to maintain the control as to how your software can be used. For example, your license agreement will tell your users if they can make copies of the share ware, if they can change your software, sell it, share it with others, and so on. Not having a license agreement means you can lose control over your work, which can be very costly to you. With shareware, if you want to eventually charge your users to use your work, then you must mention that before they download anything. Its very important that you fully disclose the costs involved to your users, since its always possible someone could refuse to pay you on the grounds that no notice was provided, or was just not placed in an area that is easily identifiable. To avoid this, just place your notices and license agreement in a place that can be seen easily by your users before they download your products. A good idea is to make your users click an agreement button, acknowledging that they have seen and agree to your terms, before they download any software. One other point to consider is your liability. Please make sure your software, even if its free, works as intended. Put the time in to make sure its been tested and that it works properly. The last thing you need is to find out that your work caused damage to another's software or hardware, which could lead to some serious liability issues, especially if the problem is wide spread. To help avoid this, your license agreement should also spell out all warranties, notices and disclaimers associated with the work in question. This section also applies to software you sell as well. Make sure you use a well thought out license agreement, since that is one of your best defenses to avoiding liability as well as controlling the distribution of your work.

Briefly, with all software you make and sell or give away, please make sure you own the entire software program. If you have help in developing the software, make sure that party does not have a claim of ownership in it. Fights for ownership, based on issues such as copyright, can be very time consuming and costly, but can be avoided with a little due diligence. Make sure you document the ownership of all your work and that its an accurate reflection of the true ownership of the software. Work for hire agreements are one way to help identify the true owners of your software, so make sure these and other agreements are in place showing the chain of ownership.

Linking with 3rd parties

If you are considering having links to third parties, such as advertisements linked on your web site, then you need to be aware of the liability you expose yourself to when working with these companies. For starters, make sure the company you allow a link on your site is legitimate and in a business you want associated with yours. Any goodwill you have developed will disappear real fast if links on your site are with companies selling goods or services that are illegal or immoral (to the general public). Something to consider when working with companies that you may not feel totally comfortable with is to add a notice stating that you don't endorse the products or services offered by the linked companies. If for no other reason, it helps reduce any liability you may have in the event someone has problems with a linked company found on your site (by showing you have no association with that company). Lastly, make sure you have an agreement with the third party advertiser in regards to what they can and can not post as a link on your site, as well as any compensation that is involved with each click through (and other terms needed to avoid any conflicts later on). This agreement is a very good idea even when you link to another site as the third party advertiser (avoid those pitfalls).

Issues related to promoting your business

A great way of drawing business to your site is having a sweepstakes. This can bring much needed attention to your site, and that in turn can lead to an increase in traffic and in the goodwill your name provides. Before you venture into this area, there are some points to consider. First of all, there are laws, both federal and state, that may apply. State laws will be based on where you are located at (where your business entity is located), and may extend to other states as well, since states have an interest in protecting its citizens. So make sure you look into the laws of the state your business is registered in before you proceed. With contests, as you may already be aware, its necessary to have rules that are written and can be easily found. Your rules will need to include the prizes to be won, the dates the game(s) end (make sure you include what time zone as well, since internet entries can be received instantly and will need a solid cut off time), who can and cannot play, who will act as judge and choose the winners, where participants can write to get a winners list and so on. Probably the most important verbiage to include is that your players do not have to purchase anything in order to play, since a purchase can make this a form of gambling, which will most likely be illegal. Make sure to include a way for people to play your game without having to buy anything. Your goal here is to bring traffic to your site, so play by the rules by having proper rules.

Protecting children (and yourself) from their potential use

Children can be and should be a concern when operating a web site (as mentioned earlier). Even if your site is designed for children, make sure you have it reviewed by someone to make sure its designed for the level of a child (based on the age of the children you are attempted to reach). Even if you accidentally include some text or image that can be seen as offensive, it can lead to criminal investigations and a complete loss of any goodwill you have established (and ultimately the end of your business). If your site is not designed for minors, then make sure a clause is included in your terms and conditions page. Minors are not legally allowed to contract, so anything they might purchase off your site can be withdrawn by them or their parents/guardians. Depending on what you offer to sell, it might be a good idea to include a click button denoting that your user is at least 18 years of age on page before a sale is completed.

SPAM: Fortunately, it really is against the law

Lastly, this article would not be complete if it did not include something about mass mailings and SPAM. Almost every state and the federal government have some laws in place to prevent SPAM. Most of these laws require certain language to be included in the e-mail informing the recipient of that e-mail that it is an advertisement and what they can do to opt out of that particular e-mail list, as well as making sure they are sent only to parties that have asked to be included in these lists. These laws are designed to protect the citizens of the state where they live, so every state may have a different version of SPAM laws. While sometimes these laws are hard to enforce, the penalties can get rather large, since it may be based on a penalty for each SPAM sent. Most people don't like to get unsolicited e-mails, and it can leave a bad mark on your company if you do send them. If you are planning on doing mass e-mail campaigns, then avoid these issues by only sending e-mails to parties that have requested them. Make sure you use a reputable mass e-mail company before you start sending them out.

Conclusion

Opening a web-based business can be very rewarding and fulfilling as well. Working for yourself, maybe even out of your house are all benefits. In order to achieve this level of contentment (or whatever your reasons may be), you need to be aware of many issues, including the legal ones. Failure to follow the laws, or even to be aware of them, can lead to serious liability problems, penalties or worse. What you sell will have its own unique set of laws, and these laws pertaining to your Internet business are designed not only to protect consumers, but your business as well. So while you are getting that business off the ground, don't forget that there is more to running a business than just your bottom line, and having the right professionals to assist you is one way of making sure your business is just as successful as you thought it would be.

Bradley M. Sniderman is an attorney practicing business law (including e-commerce), as well as intellectual property. He works out of Southern California and can be reached at: brad@sniderman.com.