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There have been a number of comments about how effective incorporation is at protecting you from suit, etc. They're all guesses: Sarbanes Oxley changes all the

by rfrey 19y ago

There have been a number of comments about how effective incorporation is at protecting you from suit, etc. They're all guesses: Sarbanes Oxley changes all the rules, and the old rules concerning the corporate veil no longer apply. (Anticipating an objection, no, SarbOx does not apply solely to public companies.) The problem is that nobody knows exactly what the new rules are. There is no case law yet surrounding SarbOx IT compliance that I'm aware of. That doesn't really matter, though. nickb said that not incorporating is "just dumb": if that's the case, there are an awful lot of really dumb entrepreneurs out there, and really dumb business advisors, too. The cost of incorporation is more than the couple of hundred bucks to file the paperwork: there's ongoing compliance which costs both money and mindshare. It's probably not worth it until you require the different tax regime or have a specific need for the limited liability. The bottom line is that you won't get sued until you have substantial revenue, and then you'll get sued no matter what you do. Lawsuits follow the money. Nobody is going to sue you to get your house because it would cost more in legal fees than your house is worth. A website is different than a business with a storefront, which has to deal with the possibility of personal injury claims, and which invariably has an insurance policy to provide the honeypot for suits.

epi0Bauqu 19y ago
Can you give some specific examples how SarbOx "changes all the rules" for web startups like those that people are generally making on this forum? In other words, I think this is an extreme overstatement. For most situations that people here will be concerned with, the case law regarding corporate veils that has been developed over the past several hundred years will still apply. And regardless, you still want to be protected as much as possible, which results in the same advice of creating a legal entity with some sort of liability protection. Also, regarding getting sued. If you personally have a decent amount of money, you are a target for frivolous lawsuits regardless of how well your business is doing. And it doesn't cost that much to file a suit and fish for a settlement. Finally, regarding the fact that many people operate outside a corporate veil. They most likely do it because it is the path of least resistance. This doesn't make it right though. Like anything, it is a cost/benefit scenario. Since the costs are so low, and the benefits are so high (protection from low probability but high impact events), it just makes sense in many cases where you are trying to build a big business, like most people on this forum.
- rfrey 19y ago
  Can you give an example of web startups like those that people are generally making on this forum that have been sued? To answer your question: no I can't give an example. I don't think there are any examples: that's why I said nobody knows the effect. My point is that simple statements about limited liability might be correct, but might not be. I agree that case law surrounding corporate liability has been developed over hundreds of years. That's one reason why SarbOx is so widely reviled: it was a reactionary, hasty rollback of much of that law. Problems are already emerging and the provisos, exemptions, etc. are starting to be catalogued. Should keep government lawyers and bureaucrats in steak and ice cream for years to come. I totally disagree that most people choose sole proprietorship or partnership because it is the path of least resistance (and by implication, because they are simpletons). I think they do it because it is the best choice for their business. I didn't mean to make extreme statements: quite the opposite, what I meant to say was the incorporation is complex and highly dependent on individual circumstances, and blanket rules are unhelpful. That seems to me to be pretty middle path, although all extremists believe they are middle path, I suppose. I stand by what I said about getting sued. I know a couple of lawyers who do not carry liability insurance on their side business for just this reason. If you are worth several millions, you are worth suing, otherwise, not. Any suits against a website are likely to be class action suits, so you would have to be personally worth tens of millions at least to make it worth a lawyer's time.
  - epi0Bauqu 19y ago
    I was not implying that anyone was a simpleton. And I was not talking about the millions of sole proprietors out there that operate small businesses out of their homes for their neighbors. I was talking about the situation posed in the post, i.e. a Web site available to the whole world where personal information will be collected by users and shared with other users. In that case, I think it makes sense to get legal entity protection and protect your personal assets. I also don't think at all that "any suits against a website are likely to be class action suits." Those are just the suits you hear about. Individuals can sue for almost anything and do. Most of these suits will likely be frivolous. But just to deal with them takes time and money. It adds much more stress if you are also personally named and liable because you don't have a corporate veil behind you. Any trial lawyer will tell you that even if you have a rock solid case, i.e. the case against you is completely frivolous, there is still a non-negligible probability you will lose. And now that I reflect further, I still think the best advice is to at least become an LLC, even for all those small sole proprietors out there. It is just so quick and simple to set up. And if you have any kind of assets, e.g. a house, it just isn't worth the risk. One disgruntled customer with lots of time can cause you a lot of damage. And in the case where you have a really small business that just got started, you don't want to have the possibility for it to sink all your personal assets. If it really did cost thousands and took lots of time to set up, I think the balance would be different. But it just doesn't. You can do the whole thing in under an hour. Given that, I just don't see how it "is the best choice for their business." They spend more time and money on car, health, and home insurance. Why stop there? I guess we'll just have to agree to disagree :)
nickb 19y ago
SOX rules apply ONLY to PUBLIC companies. http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act If you're a startup and you worry about SOX, you have nothing to worry about then since you can pay for real accountants anyway ;).

by rfrey 19y ago

epi0Bauqu 19y ago

Can you give some specific examples how SarbOx "changes all the rules" for web startups like those that people are generally making on this forum? In other words, I think this is an extreme overstatement. For most situations that people here will be concerned with, the case law regarding corporate veils that has been developed over the past several hundred years will still apply. And regardless, you still want to be protected as much as possible, which results in the same advice of creating a legal entity with some sort of liability protection. Also, regarding getting sued. If you personally have a decent amount of money, you are a target for frivolous lawsuits regardless of how well your business is doing. And it doesn't cost that much to file a suit and fish for a settlement. Finally, regarding the fact that many people operate outside a corporate veil. They most likely do it because it is the path of least resistance. This doesn't make it right though. Like anything, it is a cost/benefit scenario. Since the costs are so low, and the benefits are so high (protection from low probability but high impact events), it just makes sense in many cases where you are trying to build a big business, like most people on this forum.

rfrey 19y ago
Can you give an example of web startups like those that people are generally making on this forum that have been sued? To answer your question: no I can't give an example. I don't think there are any examples: that's why I said nobody knows the effect. My point is that simple statements about limited liability might be correct, but might not be. I agree that case law surrounding corporate liability has been developed over hundreds of years. That's one reason why SarbOx is so widely reviled: it was a reactionary, hasty rollback of much of that law. Problems are already emerging and the provisos, exemptions, etc. are starting to be catalogued. Should keep government lawyers and bureaucrats in steak and ice cream for years to come. I totally disagree that most people choose sole proprietorship or partnership because it is the path of least resistance (and by implication, because they are simpletons). I think they do it because it is the best choice for their business. I didn't mean to make extreme statements: quite the opposite, what I meant to say was the incorporation is complex and highly dependent on individual circumstances, and blanket rules are unhelpful. That seems to me to be pretty middle path, although all extremists believe they are middle path, I suppose. I stand by what I said about getting sued. I know a couple of lawyers who do not carry liability insurance on their side business for just this reason. If you are worth several millions, you are worth suing, otherwise, not. Any suits against a website are likely to be class action suits, so you would have to be personally worth tens of millions at least to make it worth a lawyer's time.
- epi0Bauqu 19y ago
  I was not implying that anyone was a simpleton. And I was not talking about the millions of sole proprietors out there that operate small businesses out of their homes for their neighbors. I was talking about the situation posed in the post, i.e. a Web site available to the whole world where personal information will be collected by users and shared with other users. In that case, I think it makes sense to get legal entity protection and protect your personal assets. I also don't think at all that "any suits against a website are likely to be class action suits." Those are just the suits you hear about. Individuals can sue for almost anything and do. Most of these suits will likely be frivolous. But just to deal with them takes time and money. It adds much more stress if you are also personally named and liable because you don't have a corporate veil behind you. Any trial lawyer will tell you that even if you have a rock solid case, i.e. the case against you is completely frivolous, there is still a non-negligible probability you will lose. And now that I reflect further, I still think the best advice is to at least become an LLC, even for all those small sole proprietors out there. It is just so quick and simple to set up. And if you have any kind of assets, e.g. a house, it just isn't worth the risk. One disgruntled customer with lots of time can cause you a lot of damage. And in the case where you have a really small business that just got started, you don't want to have the possibility for it to sink all your personal assets. If it really did cost thousands and took lots of time to set up, I think the balance would be different. But it just doesn't. You can do the whole thing in under an hour. Given that, I just don't see how it "is the best choice for their business." They spend more time and money on car, health, and home insurance. Why stop there? I guess we'll just have to agree to disagree :)

nickb 19y ago

SOX rules apply ONLY to PUBLIC companies. http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act If you're a startup and you worry about SOX, you have nothing to worry about then since you can pay for real accountants anyway ;).