Five Things to Know Before Starting an Internet Business

Guest post by Dave Owens, an attorney in the San Francisco Bay Area.

We are fully entrenched in the digital age. The age of innovation is here. Some businesses, like video rental businesses, seem like they will eventually be found exclusively online. Upon seeing this economic trend, you may think that starting an Internet business is a sound strategy. But before starting an Internet business, you should be aware of the following legal issues.

INCORPORATE YOUR BUSINESS

When starting any business, it’s usually recommended that you incorporate. Meaning that you form a legally recognized corporation.

There are several benefits to do this, including:

  • The corporation will be taxed at a lower rate than if you were operating the business as an individual;
  • The business will continue even if a partner dies or leaves the business;
  • You can freely transfer your ownership interests.

But probably the most important benefit is that it protects your personal assets. Meaning that if the business fails, creditors can only come after the business, not after you.

To incorporate you must file an Article of Incorporation — basically the rules that govern the management structure of the corporation — with your Secretary of State. Some states also require you to file corporate bylaws, which set out how the company shall be run. To incorporate in your state you will also have to pay a fee, which varies state by state.

Corporate law is one of the most complex areas of law. Before moving forward, you should consult your state laws to determine what type of corporation you should enter into (most decide to form a Limited Liability Corporation), the available benefits, situations where a creditor may still hold you liable, and any other issues that may be particular to your business.

DOMAIN NAME ISSUES

Once you have a business name in place, you should register a domain name. There are several websites that allow you to do this for a reasonable price. But be careful. Make sure the website is ICANN approved before proceeding. Network Solutions and GoDaddy.com (which will provide free domain privacy with domain purchases) are two of the most popular ICANN approved registrars.

But there are also some other legal issues concerning domain names that you should be aware of.

When the Internet started to gain popularity with the general public, people started registering domain names of famous companies in an attempt to sell the domain name back to the famous company. Congress quickly responded with the Anticybersquatting Protection Act, which gives companies with famous trademarks a remedy if someone registers a domain name using their trademark. So, the key here is to just to make sure that your domain name isn’t confusingly similar to a famous trademark.

Trademark holders still have a remedy even if their trademark is not famous. Courts have held that diverting consumers to your website with a confusingly similar trademark can still be considered an infringement.

So before you attempt to register your domain name, you should do a couple of searches. Websites like GoDaddy.com allow you to search what domain names are currently in use. You should also do a search on the United States Patent and Trademark Office website to see if your proposed domain name is being used as a trademark.

But just because someone has the same or similar trademark does not mean that an infringement would occur. You have to assess whether consumers would likely be confused by your use of the domain name (e.g., misspelling Tiffany Jewelry as TiffaniJewelry.com would likely be confusing; TiffanyJewelrySucks.com would likely not be confusing).

COMMUNICATIONS DECENCY ACT

A lot of websites are now dependent upon user generated material. Users of the websites are encouraged to upload their own material on the website. Of course, the users may be posting material that is defaming another person or the material may be in violation of other laws.

Luckily, for service providers, the Communications Decency Act immunizes them from material posted by their users. So, just because one of your users defames someone on your website does not make you liable for defamation. Congress felt that holding service providers liable would burden service providers and thus stifle innovation.

But the CDA doesn’t provide absolute immunity. The design of your website can have a profound impact on whether or not you receive immunity. For instance, if you designed a website that allowed the users to select categories for potential roommates and the categories were in violation of the Federal Housing Act, then you would not be protected under the CDA. But if you had the same website, but did not include the aforementioned categories, and the user included the discriminatory information in a comments section, you would be protected under the CDA.

DIGITAL MILLENNIUM COPYRIGHT ACT

The Communications Decency Act does not apply to intellectual property, which is governed by the Digital Millennium Copyright Act. The DMCA does provide immunity for service providers if they follow certain guidelines. But you only receive protection if:

  • You have no knowledge of, or financial benefit from, infringing activity;
  • You have a copyright policy and provide proper notification of your policy to your subscribers;
  • You list an agent to deal with copyright complaints. This information must be included on the website and with the Copyright Office. The agent must include his or her name, address, phone number, and email address;
  • You must expeditiously remove the infringing material upon receiving notice of infringement;
  • You must terminate the memberships of any repeat infringers. A lot of websites, like Youtube, have adopted a three strikes policy.

A lot of these legal issues can be avoided if you code your website appropriately. You want to make sure that your website has an automatic technical process that filters the material rather having an individual do so. That way you can honestly claim that you did not have knowledge of infringement when it occurred. But remember that you will only receive protection if you comply with the DMCA requirements.

INDUSTRY AND STATE REGULATIONS

The industry you choose to work in may have its own unique set of regulations. For instance, if your website contains sexually explicit conduct, you are required to keep records, which shall be available to the Attorney General for inspection at all reasonable times. This law is intended to prevent and prosecute child pornography. Failure to comply with this law can result in imprisonment up to five years and monetary fines.

The Internet also makes interstate commerce much easier. You will probably want to sell items or make your services available to anyone who can access the website. If you are doing business in another state, you will need to familiarize yourself with that state’s laws. They may have different regulations, taxes, or restrictions than your state.

Dave Owens is an attorney based in the San Francisco Bay Area.  He can be reached at dao1282@gmail.com.

Photo credit: Flicker/Bryan Gosline

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