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When it comes to running a website, many webmasters worry about lawsuits. Copyright infringement, accusations of fraud from unhappy customers, contract disputes with suppliers and resellers–it never ends.

Contract Disputes

The biggest source of lawsuits, in general, are contract disputes. Everything from collections suits on credit card accounts and overdue medical bills, to billion dollar suits between Fortune 500 businesses, all are ultimately based on contracts.

Head down to your local courthouse and sit in on a docket call, and you’ll see that most lawsuits are not medical malpractice, slip and fall, or products liability. They are on breach of contracts.

You probably will get into a contractual dispute at one time or another in your internet career. It could be with a supplier, it could be with a joint venture partner or advertiser, or it could be with a customer.

Understand that this is part of being in business. This is part of the price that you pay for increased earnings and freedom. You are, in a sense, “paid” for dealing with problems that employees don’t have to deal with.

By forming an LLC, you can at least protect your personal assets from any contractual liability you might have. Note, that if you personally guarantee a contract (for example, a loan to stratup your business), your personal assets are on the line regardless of being incorporated.

Copyright Infringement, Defamation

The other hot areas in online litigation are copyright infringement and defamation. These are particularly prevalent if you permit your users to interact on your website. For example, if you run a forum on your website, and one user defames another, you could get caught in the middle of a defamation suit.

While there is some caselaw that is favorable towards protecting the website owner, you definitely don’t want your personal assets at risk in a defamation suit. Even more at risk is for copyright infringement, particularly if you allow user-generated content on your website.

If a user uploads pirated videos, music or picture to your site, you are responsible. It doesn’t matter that it’s impossible to monitor all uploads–your site is displaying stolen content, and so your site is responsible. Having a properly formed LLC will protect your personal assets from the potentially huge fines that can be imposed for copyright infringement.

Bankruptcy Won’t Save You Now

It used to be that few individuals would ever pay substantial judgments. Plaintiffs attorneys really only went after an individual’s insurance coverage or after big companies with deep pockets.

Collecting a judgment from individuals was simply too difficult when the debtor could file a Chapter 7 bankruptcy and wipe out all his debts. Usually the debtor would have so many other debts that the plaintiff would be lucky to collect pennies on the dollar. It wasn’t worth it to sue individuals.

These, days, with the new bankruptcy law, it’s much harder to wipe out debts in Chapter 7. Instead, most people will have to repay their debts out of their future earnings. It’s not so easy any more to “wipe out” legal judgments against yourself. Bottom line?

Individuals, particularly those with good, steady incomes (easy to garnish wages from your employer) are ripe targets for lawsuits. If you have a job in addition to your website operation, the last thing you want is to have 30% of your wages garnished each month to pay off a legal judgment. Protect your wages from your online business’s liabilities by forming an LLC.

How to Protect Yourself

There are several ways to protect yourself from these business debts.

  • First, you should incorporate your business as either a corporation or an LLC. This way, your personal assets (including your paycheck, if you run your web business on the side in addition to a day job) are not at risk. Forming a Limited Liability Company–or LLC–will shield your personal assets from business creditors and lawsuits.
  • Secondly, always be careful. Don’t commit fraud, avoid shady business partners and “deals”, and stay honest. The justice system isn’t perfect, but it always helps to be in the right.
  • Thirdly, look into purchasing insurance for your business. If your business is small, it might be too much of a hassle and too expensive. However, talk to your agent who handles your homeowner’s insurance and see what he/she can do.
  • But most importantly, get incorporated as an LLC. It costs only a few hundred dollars, including filing fees, and is some of the cheapest insurance you can buy. Even better, you only have to pay once (in most states).

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