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Online Businesses Need Legal Protection, Too

Jun 27, 2023
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There’s a few misconceptions in the online service business world about what kind of legal protection you might need for your online business. The Internet is full of digital lore about what online service businesses need for legal protection, and while there is definitely some truth among the bytes, there are some myths circulating as well. When it comes to legally protecting your online business, the last thing you want to rely on are misconceptions shared by online contributors, who are likely well-meaning but misinformed. One of the common misconceptions about legal protection for online business is that online businesses don’t need it, because they are an online business. A second misconception is that if you aren’t making a lot of money you don’t need to legally protect your business. A third common misconception is that you can do a couple of things and “check off” the legal column, never to revisit the topic again in your business. Let’s get to the bottom of these misconceptions and create a new framework to think about legal protection for your online business. 

Myth No. 1: Online Businesses Don’t Need Legal Protection Because They are Online

It’s true the Internet is the current frontier for commerce. Technological advances are popping up every day, and we are learning how to harness the power of technology in more efficient and faster ways than ever before. Take the recent explosion of AI. The Internet is all abuzz with how businesses can harness AI to do all sorts of things in their business to make business easier and more profitable. Because the Internet is the online version of the wild-west, there’s also a sense that it’s unregulated and people or businesses can act without any real consequences applying to them. Nothing could be further from the truth. Government regulation applies to online business just as it does for brick and mortar businesses. And individuals and businesses that believe they have been harmed and have a legal claim to bring against another person or business for that harm can bring a lawsuit against an online business in just the same way as they can bring it against a brick and mortar business. 

So what steps can online businesses take to get legally protected? While there are many elements to legal protection for businesses, there are three important steps that online business owners can take at the very beginning to put some legal protection in place. Implementing these three things will go a long way towards legally protecting you and your online business. 

First, form a legal entity. An LLC, or a corporation if that’s the best choice for your business, provides you, as the business owner, with limited liability protection. This means that if your business is sued for something the business did or didn’t do, the judgment is limited to the assets of the business and not your personal assets as the business owner. 

Second, obtain business insurance to cover your activities online. When you have the right insurance coverage, if a claim is brought against your business, the insurance pays for the lawyers to defend your business in the lawsuit and the cost of any settlement or judgment, subject to your deductible and policy limits. As this is America, and anyone can file a suit against anyone, having insurance in place to defend a claim, potentially one without merit, is very important. Even getting a nuisance lawsuit dismissed can cost upwards of $10,000.   

Third, separate your business assets from your personal assets. Your business entity, for example your LLC, should have its own bank account(s), and transactions related to your business should flow in and out of this bank account. If you don’t separate your business assets, this puts your business and your personal assets at risk. If your personal and business assets are “commingled” then a creditor or someone making a claim against your business can argue that you don’t really have a separate legal entity running your business, that your business entity is a “sham” and that you are not entitled to the liability protection from that entity. 

Myth No 2: Online Businesses Don’t Need Legal Protection Until They Start Making Money

With all of the expenses that can come with starting a business, it can be tempting to postpone legal protection. In the early days, it’s easy to adopt the belief that if your business isn’t making a lot of money then there is nothing to protect. Unfortunately, your business is at risk no matter how much money it is making, and even if it is operating at a loss. A customer can make a claim against you even if your business hasn’t become profitable. Without legal protection in place, for example a legal entity to operate your business, this claim will be against you personally and against your personal assets. In the overall scheme of things, the cost to set up a legal entity to operate your business is a small cost to pay to protect your personal assets. This is true even in states where it can be very expensive to form an LLC, for example California. Many newer online entrepreneurs pay thousands of dollars to learn how to set up an online business. Compared to the cost of many online courses and programs, the cost to set up a legal entity, which many business owners find they can do on their own, is a small cost to protect your personal assets and set your new business up for future success. 

Myth No. 3: Getting Your Online Business Legally Protected is a “Set It and Forget It” Activity

A third common misconception in online business is that legal protection for your business is a set it and forget it activity. Taking this attitude can expose your business to risk. In the same way businesses need to update their content, marketing, messaging and so many other elements of their businesses, they need to pay attention to, maintain and update their legal protection. Let’s look at a few examples. Once you form a legal entity, you’ll need to be sure that the entity is properly maintained with regular filings with your state’s filing office, usually the Secretary of State. Once you purchase insurance, you’ll want to revisit your policy as your business activities change and your revenue increases to be sure you have adequate coverage in place to support your growing business. Your insurance agent can help you review your policy to determine what updates you might need to make to your coverage. 

Beyond maintaining your legal entity and updating your insurance, you’ll need to consider what contracts your business needs. As you expand the types of activities that you are engaged in as a business owner, you’ll want to ensure you have contracts in place that are appropriate for those activities.  When you place your digital stake on the Internet with a website, you’ll want to ensure that you have the right documents posted on your website to legally protect your website and your content. When you start working with customers, you’ll want to ensure that you have the right contract in place to govern your relationships. For example, if you are a course creator, you’ll want online course terms and conditions that your customers must agree to prior to enrolling in your course. If you offer coaching services, you’ll want a coaching agreement in place with your customers to manage expectations and ensure you are paid. As you are growing your email list, you’ll want to be sure you are following the laws governing email marketing. At some point you’ll want to collect testimonials from your customers to bolster your marketing. You’ll need to know how to collect and use these testimonials properly. If you are recruiting affiliates to promote your product, or if you are an affiliate for your favorite online courses and digital products, you’ll want to be sure you’re covered by an affiliate contract and that you know the legal requirement for affiliate marketing. And you’ll want to revisit these contracts periodically.  You may have changed business practices, for example your refund policy, but forgot to update the terms and conditions that covers that refund policy.  

Put in Place a Framework That Helps You Legally Protect Your Business

All of these issues are going to come up at different times in your business. If you think about legal protection as a “set it and forget it” activity, you’ll miss important opportunities to structure your business in a way to maximize your legal protection. Instead of thinking about “legal” as something you need to check off your list, think of it as a means to proactively strengthen how you operate your online business. Think about the framework you can put in place so that legal considerations become part of your operations. Not in a consuming way, but in a proactive and strengthening way. 

Even if you have been operating your business for a while and didn’t think about how to apply a legal framework to your business, it’s never too late to start. In the same way you learn new things about marketing, messaging, funnels and ads, you can learn new things about how you can legally protect your online business and begin implementing these strategies. Small steps will add up. With each proactive step you take to legally protect your business, it’s like making a deposit in the bank. Over time, and with compounding, these small deposits will add up and you will look back and realize that you have built a strong and stable business, primed for even more growth and success. 

Get started today legally protecting your business. Head on over to the Step Up Your Legal™ Template Shop and grab one of the customizable legal templates to help legally protect your online business.