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Launching Your Web Based Business Part One

Considerations at the Start-Up Phase

After long and careful thought, you are finally ready to bring your website or Internet business idea to fruition. And while you may have a great idea, you may be too focused on that great idea to think about some of the details that are key to proper start up and execution.

In the first of a three-part series on creating your Internet business, we will discuss some initial considerations you may have overlooked before you decided to launch your business.

First off, is your business legit? As obvious as it may sound, first make sure that what you are planning to do is legal before you spend money designing and launching your website. If what you want to do resembles gambling, for example, it might be gambling. Check with an attorney.

Create an Operating Agreement. An operating agreement establishes the corporate structure of your business and sets the rules, rights and responsibilities of running it. It should also address percentage of ownership and rules governing profits and losses. It is important to have an operating agreement even if you are the only owner of the business. In the absence of an operating agreement, the business will be governed by the default rules set forth by state law, which may not be the most advantageous rules for your specific business. If you are the only owner of a limited liability company (LLC), the existence of an operating agreement can also help protect your limited liability status and show the courts that you were indeed running your business as an LLC rather than a sole proprietorship (sometimes in this context called an “alter ego business.” Not only can this significantly affect your personal liability in a lawsuit, many banks will require a business to have an operating agreement prior to opening a corporate bank account. Some states, such as New York, do require a written operating agreement even if they do not ask that it be filed with the state.

The above are considerations for any on- or off-line business. Below we deal more specifically with some concerns of Internet business owners.

Who Owns the Stuff? Who is designing and creating your actual website? Who is contributing content to your website? If it’s not you, then you need a work for hire agreement. A work for hire agreement establishes that the owner of the website owns the content. This ensures that the website owner can use the content for unlimited purposes. The designers and writers will have to ask you as the website owner for permission in order to use any of the work they themselves created. This is why you pay them.

In the absence of a work for hire agreement, there may be confusion about how each party can use the work that was created. This confusion can create significant legal and financial problems for both parties. Every writer and designer should sign an agreement before commencing any work.

The drafting of a proper independent contractor or work-for-hire agreement should be left to a professional as they are not as straight forward as they may seem and there is certain critical language that must be implemented in order to protect your interest among any number of contingencies.

Does Your Indemnity Agreement Have Teeth? An indemnity provision is also known as a “hold harmless” clause in a contract. You will want an indemnity clause in the contracts between you and your web designer and content contributors in order to protect you from liability in the event a third party claims ownership of material used on your website. But you will also want to ensure that the indemnity agreement is valid and enforceable. For example, one state found the indemnity agreement invalid where the requested coverage was for "any and all claims of any kind or nature whatsoever."

When disputed, a contract is typically interpreted in favor of the party that did not draft the contract, so careful wording is important. As the business owner, you are in a position to control the language of the contract, which can help or harm you if not properly drafted. On the other hand, if you choose to accept the other party’s contract, make sure that what that person is promising to hold you harmless from is something he or she can in fact hold you harmless from. That cut-rate designer from a faraway land may not save you money in the end if you end up defending a copyright infringement action.

These are some of the initial considerations in starting your Internet business.

This article is Part I in a series of three articles. The next article explains the importance of Terms of Use Agreements, Privacy Policies and dealing with Third-Party User Generated Content and can be found in our Reading Room.

As is the case with all important legal matters, you should consult an attorney to make sure your interests are protected. We always welcome your inquiries and offer a free phone consultation.