

Ask HN: What is legally required to run a small service-based web application? - IgorPartola

I am gearing up for releasing a web application, targeted at a small audience where I'd like to sell monthly/yearly subscriptions. I am wondering what kind of a legal structure do I need to have in place in order to do this properly. Specifically, I want to (1) limit my liability and (2) make sure that customers trust it enough to sign up. And of course, I'd like for it to not cost an exorbitant amount to set up.<p>Also, I am deciding between PayPal and Google Checkout for the payment processor. I have little experience with integrating either, and while PayPal is more widespread, Google's documentation seems to be clearer. Any recommendations?<p>Not sure if this matters, but I am doing all of this as a side-project, and have a full-time job.<p>Thank you.<p>EDIT: I am in North Carolina, US. There is nothing about this service that's region specific. Ideally, I'd be able to have international sign-ups. So far, I have had as many hits from Europe + Asia as from the US.
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patio11
You don't need a legal structure to charge people money. Sole proprietorship
is the most common form of business in the United States -- by quite a large
margin. For example, BCC is structured as a sole proprietorship: when someone
pays me for bingo cards, they're really paying _me_ for bingo cards.

You will probably find that no B2C customer actually cares about the structure
of your business, legally. Your website design matters 10,000 times more in
terms of trust gained. Your mileage may vary if you sell B2B, particular
B2BigFreakingEnterprise.

With regards to liability: your main defense against liability is not your
corporate structure or your terms of service. It is not pissing anyone off so
bad that they decide to sue you.

You can, if you choose, get an LLC and create a Terms of Service. These are
more to allow you to sleep better at night than insurance against catastrophe:
no matter what you do right now, if you get sued, _life is going to suck_.

You want to sell subscriptions? Paypal Website Payments Pro + Spreedly. You
can do it in two hours of coding and about two days or so in time it takes
Paypal to review your business. I do not recommend doing yearly subscriptions
until you have history: doing so increases your risk profile.

Your main regulatory issue for the typical SaaS app is simple: you owe income
taxes on it, both to the US and to North Carolina. Luckily, you will have very
good records of sales (because you'll be able to grab them from Paypal). If
you want to deduct expenses, make sure to record them and keep proof of them
(generally, receipts work fine -- for e-receipts, print to PDF and put it in
your Dropbox so that you don't lose it).

~~~
bradleyland
You're 100% right from a technical standpoint, but I disagree with your
opinion on the liability issues. I know it seems inconceivable when you start
your business, but being sued is a possibility for just about anyone. It's
entirely possible for your business to be sued because of the actions of an
employee, for example. If that happens, and you're a sole proprietor, you are
the one being sued.

This might sound like paranoia, but I'm living it, and you're right about
another thing. It _sucks_. We have a corporation, one person in the
organization did something none of the other members were aware of, and now
we're being sued. The plaintiff even went so far as to try and sue all of the
partners personally. Fortunately, the courts set the bar really high for
breaching the corporate firewall. Being sued personally is no joke. If someone
gets a judgement against you for some exorbitant sum of money, it's hard to
resolve. It can follow you around for a long time.

Setting up a corporation is so simple, and so inexpensive that I don't
understand why anyone wouldn't do it. I respect the fact that you've built a
very successful business entirely on your own, and entirely organically, but
operating without a corporation seems like flying trapeze without a net.

~~~
patio11
So, having looked into this a few times, my personal opinion is that a quickie
instafigleaf will wilt like the fig leaf it is under legal scrutiny.
Regardless of whether it is a LC or not, my software business has
substantially less in assets than a taco truck, and any tortious behavior it
carries out is definitionally certain to have been carried out by me
personally. My expectation is that a lawsuit means I get held personally
liable and that means bankruptcy. I could drop five hundred bucks tomorrow and
be BCC LLC, but that does not change my estimate of risk of bankruptcy.

I would certainly get something formal if I had partners, like you did. I
sincerely hope it works out for you.

~~~
bradleyland
That's a valid point regarding partners and mitigating risk. If you're a one-
man company, it's a lot easier to manage the risks, so forming a corporation
may be superfluous. I think it depends on your product as well. The chances of
being sued while providing a simple product like bingo cards is minimal. If
you're providing a service to businesses, you stand a much greater risk of
being sued. It's all a balance.

BTW, I'm not suggesting that you should form a corp. Just to be clear on that.
I do think this conversation is beneficial for the topic starter though.

I hear the "weak corporations are worthless" argument a lot. I will say that
our simple little corporation is holding up really well, and we didn't spend a
bunch of money forming it. We did not use one of those insta-corporation sites
though. We paid a local attorney, with whom we sat down and met with, to
establish our corporation and provide guidelines for maintaining it. It cost
us less than $1000.

IMO, the bottom line with litigation is that it comes down to who has a bigger
war chest. A weak corporate structure doesn't appear to be the shot that will
sink our ship. Being unable to sustain the fight is the top threat.

When the personal lawsuit hit the door, the first thing I did was investigate
bankruptcy. It is possible to discharge debt resulting from a judgement, but
it depends on your circumstances. I definitely lack the depth of understanding
required to explain it fully, but the gist of it is that receiving a discharge
for a judgement isn't always as straight forward as something like credit card
debt. Anyone engaged in a business with non-trivial risk of legal exposure
should understand the implications before dismissing the benefits of having a
corporation.

~~~
larrik
I'm not a lawyer, but I've been lead to believe that in the US at least, if
you are the only member of your company (which I believe Patrick is), then no
corporate structure is going to to protect you from liability. I think even
with only 2 people it's a bit iffy (especially if the other person is your
spouse).

If you are by yourself, Sole Proprietor is easier and simpler for taxes and
the like. LLC is more complex and may offer NO extra liability protection.

~~~
bradleyland
As far as simplicity goes, consider this. As a sole proprietor, you must file
a Schedule C with the IRS if you intend to take any deductions. Filing a
Schedule C also dramatically increases your chances of an audit. Also, when
you are audited, the audit covers all of your personal finances. If my
corporation is audited, the audit does not automatically extend to my personal
finances.

Having a corporation actually simplified my situation, even when I was a one-
man consultant shop. I've always maintained separate bank accounts for my
businesses, which gives me a clearer picture of my business performance by
isolating my personal finances from the picture. I find the required filing to
be minimal in contrast to the added clarity.

I can't make the argument that it requires less paperwork, but IMO, it does
make the paperwork simpler.

~~~
joeag
You may also end up with schedule C income anyway if your legal entity
provides you with a dividend or other payment outside your regular salary, and
you are likely to want to do that anyway because non-salary distributions are
not subject to social security taxes - saves you 15%.

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mgkimsal
Where abouts in NC are you? I'm in Raleigh, and would be happy to meet up and
show you some of how I'm setup. I charge yearly subscriptions for digital
content, as well as one-off sales. I use both GC and PP for checking out - no
sense in limiting yourself too much, imo. I have sales from around the world,
and GC and PP have covered the overwhelming majority of those sales.

EDIT: Ahh... you're in Durham. I've got to be in Durham this afternoon. If
you'd like to get together, ping mgkimsal@gmail.com. Also, I'll be at the
tripug PHP meeting in Carrboro next Wed evening at 6:30 if you'd care to meet
up and review stuff in more detail.

Good luck.

~~~
euroclydon
Hey, I live in Durham and I'm incorporated as an S-Corp, which can have some
advantages (just don't let tptacek hear you talking about them). I'm friends
with your boss at TransLoc too. It would be nice to meet up sometime and talk
shop. joshua.pearce at that google mail service.

~~~
tptacek
There's nothing wrong with S-Corps! They're superior in a lot of ways to
LLC's. The only things I get ranty about are: (1) not incorporating at all,
and (2) using S-Corps to dodge FICA taxes.

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kmanlives
I'm in the US (Georgia), and the first thing I did to limit liability is to
form an LLC (simple overview:
<http://en.wikipedia.org/wiki/Limited_liability_company>)

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IgorPartola
I realize the laws are different between the two states, but how expensive and
time-intensive was the process?

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kmanlives
I had an independent accountant do the majority of the work for me for a total
of $750. This included virtually all the setup, including verifying the name
wasn't taken, filing the paperwork (state and local), all the official docs,
getting TaxID, etc.

The process only took a few weeks from start to finish, which was a nice
surprise.

~~~
arethuza
In the UK setting up a limited company costs under £100, can be done online
and takes a few hours.

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nolite
Some important factors.. what country are you in? What country are your
subscribers in? Can you incorporate in a 3rd country?

Regarding payments, there are nothing but horror stories regarding Paypal, and
Google doesn't sound that much better. Look carefully concerning this..it
could kill your business

~~~
IgorPartola
Edited with details. Thank you.

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damoncali
Paypal is a nightmare compared to real merchant accounts. Talking to customer
support there is like smashing your hand in a car door.

In the long run you're better off with either Braintree (which is fine all by
itself) or Auth.net + Chargify/Spreedly/etc. I would switch to one of those
options as soon as you validate the business, as the cost is significant early
on.

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escanda
About the second point you would ask your bank if they offer a payment gateway
service, and offer Paypal or Checkout as a second option. When I am going to
buy something online I trust more a service which charges me through a
recognised bank, it feels safer in case I have a problem.

~~~
IgorPartola
My personal finances are with a credit union that most people haven't heard
of. Any suggestions of a non-horrible bank? Would using such a service mean
that I have to be PCI compliant, or does my application never see the credit
card number?

~~~
nolite
Read up on Recurly, Spreedly, and/or Chargify...

and also read this: <http://news.ycombinator.com/item?id=2169870>

~~~
IgorPartola
Thanks. These look very promising.

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eunomad
I agree that you should consider creating an S-corp.

I live in Europe and suggest using paypal if you are targeting Europeans. Many
Europeans do not have credit cards and need to do bank transfers to pay for
things online which is why they use paypal.

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EnergizerBunny
I think you mean exorbitant :)

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IgorPartola
I do indeed. There I go trying to use a fancy word...

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haploid
Why paypal/google instead of a _real_ payments gateway like authorize.net?

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IgorPartola
I was under the impression that using something like authorize.net would
impose more restrictions on my application (e.g.: require it to be PCI
compliant, etc.) and require more work to get going.

~~~
nborgo
I just set up Braintree and it was very easy. Probably not as easy as PayPal +
Spreedly, though. If you want to go with a "real" payment gateway, I highly
recommend it.

If anything, using Braintree removed all sorts of restrictions. They keep all
the credit card information. Let them worry about PCI Compliance, not me.

