November 21, 2005

posted by Daniel J. Solove

These considerations (as well as the question of how to divide profits-- by output, by membership, by "performance", by something else?) are what have kept us from taking Crescat commercial.

I’m actually working on a piece addressing the business associations implications of blogging. If you take ads, it’s highly likely that you’re a partnership by default whether you want to be or not. For a group blog, you do not want to be an informal partnership, i.e., one with no written partnership agreement. There are many disadvantages to being an informal partnership. I’ll mention two. First, dissolution is triggered by the withdrawal of a partner (co-blogger). This is a big deal if the partners are feuding because the partnership could be forced to dissolve (who gets the url?). Second, each partner is jointly and severally liable for partnership obligations (which would include those arising from a co-blogger’s copyright infringement or defamatory post). There are variations on these rules depending on which state’s partnership statute controls (UPA vs. RUPA), but this choice of law issue in itself could be litigated if, like a lot of group blogs, each partner is located in a different state.

Hence, if you take ads, you need to formalize the relationship, and an LLC is the way to go. An S corp. doesn’t work because as the above comment indicates you’re going to want to distribute profits on some basis other than percentage ownership. An LLP would work, and one advantage it has over an LLC is that partnership statutes have many more default rules than LLC statutes. This means the agreement can be shorter and simpler. The big disadvantage with an LLP as compared to an LLC is that in many states the liability shield is not as strong and annual filings may be necessary to preserve the shield. Formalizing is expensive (relative to what it costs to start a group blog). Even if you can put together the LLC agreement yourself, you have to pay filing and annual fees not only in the state of organization but technically probably in each state in which a blogger is located. You also need to decide in which state to organize. If it's not a home state of one of the co-bloggers, you'll have to retain an agent for service of process. Finally, you now have to prepare IRS form K-1 each year.

In the end, formalizing (or the risk associated with not formalizing) is just part of the equation for deciding whether or not to take ads.

Frankly, is it really worth it? I don't mean to belittle your blog--I enjoy reading it. But is your readership so large that you'll make so much money from the blog as to make it worth the hassle? Not everything has to be "monetized" to have value.

Dave, after reading Bill's email, it sounds much more daunting than I thought. Revenue would be small from ads, but it would cover the blog's expenses, which although not large, do exist. But in the end, the extra hassle might just not be worth it.

Note: If you're only taking ads to cover expenses, all the money goes to one person and no excess is contributed to co-bloggers, you can argue that you're group blog is not a partnership b/c it's not an "association of two or more persons to carry on as co-owners a business for profit." I would, however, have to do some research to assess the strength of this argument. If it works, this would greatly reduce the business associations implications of taking ads.

I question how valuable the liability shield is for any limited liability vehicle shielding an enterprise with no pecuniary assets. Veil piercing has always seemed most morally and economically justified when a business is under capitalized. Great, you've got a shiny LLC certificate, but what assets does it own that a tort creditor can seize? The website itself will have trivial value out of your own hands. Thus buying insurance or leaving some of the profits in an organization owned account to serve as a fig leafe/sacrifice would seem wise.

The value of the liability shield is that it protects the other co-bloggers from personal liability for the malfeasance (defamation, copyright infringement, trade secret disclosure, etc.) of a fellow co-blogger. To be sure, the malfeasor will be personally liable, notwithstanding the shield, so the victim can go after his/her assets. Undercapitalization is a factor in veil piercing, but it certainly is not determinative. It’s most relevant for ultra-hazardous businesses, which blogging is not. How do you even determine whether a blog is undercapitalized given it requires little or no capital to operate? This highlights the definitional problem of using undercapitalization as a factor in veil piercing.

Hipsters circa 2006:

"Dude, Co-Op is so corporate these days."

"I know, dude [shakes head], it used to be about the music, man. Now it's all LLCs, tax shelters, Cristal, ice and Bentleys."

Also (and I can't find the post), but I think Eugene Volokh once blogged that if a blog is not a for-profit venture, that the blogger's homeowner insurance would likely cover the blogger's legal fees if sued.