A sole proprietorship is a business owned by a single individual. Being a sole proprietor doesn't mean that you necessarily operate the business alone. This can be the case, but you also may hire employees and/or independent contractors to do work for you and still operate as a sole proprietorship. The key issue is ownership -- you can have hundreds of employees or freelance workers, but if you are the only owner of the business (and you haven't incorporated or created another formal business entity), then your business is a sole proprietorship. A sole proprietorship springs into existence whenever an individual commences doing business, and the business has no separate existence from the owner.

In determining whether you want to operate as a sole proprietorship, you may want to consider the following factors:

• Liability: A sole proprietor is personally liable for all the debts and obligations of the business, including liability for your own unlawful acts and those of your employees. For instance, if your employee writes a defamatory article or posts copyright infringing material on your website or blog, then you can be held personally liable, and a winning plaintiff can can collect the judgment out of your personal assets, like your bank account or house.


• Formation: It is odd to speak about "forming" something that springs into existence whenever someone commences doing business. That said, there are some basic steps that sole proprietors should follow to make sure they are operating in compliance with federal, state, and local laws. These steps are relatively easy and cheap to perform. Please see the Forming a Sole Proprietorship section for details. Because the process is simple, you probably would not need the assistance of a lawyer.


• Management Structure: There are no special legal requirements regarding the management structure of a sole proprietorship. As the owner of a sole proprietorship, you exercise complete control over the management of the business. The extensive control retained by the owner is one of the significant advantages of choosing to operate as a sole proprietorship.


• Operation: A sole proprietorship is relatively easy and cheap to operate. Owners do not have to observe the extra "formalities" of a corporation and there are generally fewer record-keeping and reporting requirements than for corporations or LLCs. Sole proprietors must still meet those tax and other regulatory obligations imposed on all small businesses. For more on the tax obligations of small businesses, see the Tax Obligations of Small Businesses section and the IRS's informational guide, Publication 583 (1/2007), Starting a Business and Keeping Records.


• Ownership of Assets/Distribution of Profits: The owner of the sole proprietorship owns all assets of the business and is entitled to receive all profits from its operation. Among the most important assets of any business that operates a website or blog are its articles, posts, videos, and other content. For details on who owns what from a copyright perspective, see the Copyright Ownership of Articles and Posts section.


• Tax Treatment: A sole proprietorship itself does not pay a separate income tax at the entity level. Rather, the owner reports the business's profits or losses on his or her individual income tax return and pays tax at his or her marginal income tax rate. In this way, sole proprietors avoid the "double taxation" associated with certain corporations. Owners may also be able to deduct some business losses against personal income from other sources, like a salary from a "day job," interest on savings, dividends from other investments, and gains from the sale of non-business property. If an owner files jointly with his or her spouse, these business losses may also offset the spouse's income. For more information on the tax obligations of sole proprietorships, see the IRS's page, Sole Proprietorships (includes links to forms and other resources).

If you operate a blog or website individually, but do not generate revenue or intend to make a profit, then you are not operating a sole proprietorship, and the law will treat you like any other individual. You will be personally liable for your own unlawful actions and any debts or other obligations you incur in the course of your activities. If you start collaborating with others, the issues raised in the Informal Group section will become relevant.

Perhaps the most common way of carrying on online publishingactivities is as part of an informal group of individuals actingcollaboratively. In this situation, there is no written partnership agreement or LLC operating agreement, and the individuals involved have taken no steps to create a formal business entity such as an LLC, a corporation, or a nonprofit organization.

A common example of this type of relationship is a so-called"co-blogging" arrangement. This could be a situation where two or morebloggers publish their content on a single jointly-run blog or websiteon a regular basis, sharing administrative responsibilities to agreater or lesser degree. Alternatively, it could be a situation wherea blogger or group of bloggers invite a "guest blogger" to publishcontent for a limited period of time (generally with no administrativeresponsibilities). Co-blogging is not the only example of this kind ofcollaborative relationship – any citizen media or other site runinformally (without an agreement or formal entity structure) by two ormore individuals fits the bill. For the sake of convenience, in thissection we will refer to individuals working in such a relationship as"co-publishers" because the activity all these different groups shareis publishing their content online.

While this form of publishing content has the advantage ofinformality and flexibility (no formation or operating costs, noburdensome bureaucratic requirements), it creates a great deal ofuncertainty about the legal and tax status of the co-publishers' relationship.This uncertainty can have negative consequences, including exposingco-publishers to personal liabilityfor the unlawful acts of their colleagues, and creating complicationsin the management and/or dissolution of the enterprise, as well as certain tax consequences. The sectionsthat follow discuss the advantages and disadvantages of operating as aninformal group and outline two methods for dealing with the legaluncertainty that goes along with it.

Advantages of Operating As An Informal Group

• Informality and Flexibility: The advantages of operating as an informal group stem from its informality and flexibility. No burdensome paperwork or costly filing fees are required to form the group, and operating it requires no special burden or expense. Informality also allows for great flexibility in managing the group's activities and structuring the relationship between co-publishers. As a practical matter, working as an informal group may seem the "natural" choice for co-publishers who don't have a solid idea of what they want out of a co-publishing relationship or how long it will last. If an arrangement is "just between friends," it might strike the wrong chord to propose increased formality. More seriously, the bother and cost of forming a more formal entity seems wasteful and unnecessary if co-publishers don't have long-term plans to continue their publishing activity. While these advantages are real, they come at the cost of uncertainty and potential exposure to personal liability, as explained below.

Disadvantages of Operating As An Informal Group

There are several potential disadvantages to operating as an informal group:

• Liability: One drawback for those engaging in online publishing activity as an informal group is personal liability for the acts of their co-publishers. The major liability risk for most citizen media sites or blogs is getting sued for defamation. Other significant risks includes legal claims for invasion of privacy, copyright and trademark infringement, and violations of trade secret laws, all of which could arise out of the act of publishing content online. Co-publishers could be held personally liable for the unlawful actions of their colleagues if they are deemed to be either:
  
  
  • Part of an informal partnership: A partnership is an "association of two or more persons to carry on as co-owners of a business for profit." Uniform Partnership Act § 202. If the individuals involved intend to carry on as co-owners of a business for profit, then a partnership is formed, and it does not matter if they have no specific, subjective intention to be “partners” or to create a “partnership." If your group does not generate revenue or intend to make and distribute profits, then you do not need to worry much about this issue.
    
    
    • If you generate advertising revenue from your website or blog, for instance, and your group distributes that revenue to individual participants after settling expenses (rather than, say, investing all of it back into running the website), then there is a strong likelihood that a court would characterize your group as an informal partnership and hold each co-publisher personally liable for the others' actions in furtherance of the partnership. In a group publishing context, articles and/or posts published by partners on the group website or blog probably would be considered "in furtherance of the partnership," although the law is not clear on this point.
    
    
    • If, on the other hand, your group website or blog generates no revenue, or the group uses all revenue to keep the operation running, then there is less likelihood that a court would characterize your group as a partnership. Another aspect a court might look at is whether your group is “carrying on” in any permanent way. Thus, a court might find that the usual “guest blogger” is not a partner with other bloggers on the site, even if revenues are generated, because they probably lack the intent to “carry on” as a business, which implies some degree of permanence (although certainly not perpetual existence).
  
  
  • The employer in an employer-employee relationship:Employers are liable for the unlawful acts of their employees committed in the scope of the employment.
    
    
    • As detailed on the Employee Versus Independent Contractor page, whether or not an employer-employee relationship exists (as opposed to an employer-independent contractor relationship or no employment relationship whatsoever) depends on the control the hiring party has over the manner and means of the hired party's performance of work, and courts apply a fact-sensitive, multi-factor test to make this determination. Compensation is not required.
    
    
    • As a general matter, the more independence co-publishers have in carrying out their publishing activities, the less of a problem this risk of liability poses. The reverse is also true: if you assign individuals in the group specific tasks and they carry out those tasks under your supervision, there is a significant chance that they could be your employees in the eyes of the law.

• Lack of Framework for Management: While informality and flexibility sometimes are advantageous, these same traits may make it difficult to manage an enterprise on a day-to-day level. Beyond creating confusion and inefficiency, lack of a framework can lead to disagreement. Without any formal agreement to fall back on for decision-making procedures or delegation of day-to-day responsibilities, serious conflicts could arise between co-publishers on a whole array of management issues. Don't be fooled -- although we use a lot of space to discuss liability risks above, in real life you are far more likely to be plagued by these management problems than you are to be sued for what you write online.

• Mistakes Regarding Tax Obligations: Operating informally, you might unknowingly disregard tax obligations. Potential tax pitfalls include failure to pay self-employment taxes, failure to obtain an Employer Identification Number, and/or failure to withhold employment taxes, in addition to disproportionate distributions or allocations of income if the relationship is classified as a tax partnership. For more on the tax obligations of small businesses, see the Tax Obligations of Small Businesses section of this Guide.

Two Methods for Increasing Legal Certainty

There are two ways that co-publishers can reduce the uncertaintyinherent in their informal group arrangement: (1) entering into a"co-publishing" agreement; or (2) forming a limited liability businessentity like an LLC, a corporation, or a nonprofit organization. Neither or these routes is a complete solution, but, in the words of Eric Goldman, both are "preferable to co-bloggers [or other co-publishers] doing nothing proactive to override the default rules."

Co-Publishing Agreements

Co-publishers can enter into a formal "co-publishing" or"co-blogging" agreement in order to clarify the status of theirrelationship and set out the parameters under which the group willoperate. If co-publishers are carrying on a business for profit, thenthis agreement will be legally indistinguishable from a partnership agreement, and they will have adopted the partnershipform of business. If co-publishers are not carrying on a business forprofit, then the group won't legally be a partnership, but theagreement can set out group decision-making procedures, delegateduties, and describe what assets (including copyrights) will belong toand be licensed to whom.

The benefits of adopting this approach is two-fold. First, itis cheap and involves few requirements in terms of paperwork.Co-publishers can draft the agreement themselves, although there is noassurance that the entire agreement will be legally enforceable withoutthe assistance of an attorney. Besides signing the agreement, there areno other steps or legal requirements to make it binding. Second, thisapproach allows for a great deal of customization to take into accountthe specific circumstances of the group and its publishing activities.In other words, much of the flexibility of the informal group structurecan be maintained, but now with some framework to fall back on.Effective customization, however, sometimes increases complexity in thedrafting process, and may necessitate the assistance of an attorney tomake the agreement fully enforceable.

Despite these advantages, there are limitations on what aco-publishing agreement can do. For instance, in an effort to avoidpersonal liability, co-publishers might put a clause in their agreementspecifying that the group is "not a partnership," or saying thatcertain individuals are not the employees of others. A court could givesome weight to this type of language, but would disregard it if thefacts showed otherwise. Additionally, assuming that the group isoperating for profit, a co-publishing agreement would not eliminatepersonal liability for the acts of co-publishers. As noted, with suchan agreement, the group would be treated like a partnership,which still exposes partners to personal liability for the unlawfulacts of partners taken in furtherance of the partnership. The agreementcould allocate liability in a particular way among the co-publishersthemselves (for instance, requiring one co-publisher to indemnify orpay back the others for liability arising out the group's publishingactivities), but this would not be binding against injured thirdparties. To obtain limited liability for the actions of other co-publishers, the group would have to form an LLC, Corporation, or nonprofit organization.

Forming an LLC, Corporation, or NonProfit Organization

Co-publishers can create a formal business entity like an LLC, corporation, or nonprofit organization. The common benefit here is limited liability,and each will bring the desired level of certainty to the grouprelationship (though not necessarily any more than a co-publishingagreement).

There are benefits and disadvantages to each of these businessforms -- for specifics, please see their respective pages (linkedabove). The common disadvantage vis-a-vis a co-publishing agreement isthe relative expense and burden that they all require to form andoperate. Additionally, adopting these forms may remove some of theflexibility in management and other affairs that the group enjoyed inits informal days. This is not necessarily the case, however -- ownersof an LLC usually enter into an operating agreement,which allows for the same kind of customization found in aco-publishing agreement. Keep in mind that, even with a limitedliability business entity, co-publishers would remain personally liablefor their own personal misconduct, like writing a defamatory article orpost.

Choosing Between the Two Options

For a group that is not operating for profit, a co-publishingagreement may be the best course to take, because liability exposure islimited (the agreement does not affect this), and the agreementprovides a relatively cheap and easy way to bring increased certaintyto the relationship. Moreover, if the group generates no revenue, itmay be hard to justify the costs of forming and operating a more formalbusiness entity.

For a group that is operating for profit, whether to go with aco-publishing agreement or a business entity with limited liabilityprotection depends to a great extent on the group's potential liabilityexposure. Some factors to consider in determining this exposure includethe number of individuals publishing content (the more people, the morerisk of liability) and the character of the published work (is it thekind of material that might be defamatory? other problems?). Theco-publishers would also need to evaluate their comfort threshold forrisk and any economic constraints that might stand in the way ofcreating a formal business entity.

A partnership is an "association of two or more persons to carry on as co-owners of a business for profit." Uniform Partnership Act § 202. These co-owners can operate the business by themselves, or hire employees and/or independent contractors to carry out tasks for them. As a practical matter, a partnership is usually created by the partners entering into a formal partnership agreement, which sets down ground rules for what capital contributions are required from the partners, how the business will be managed, and how profits and losses will be allocated, among other things.

In determining whether you want to operate as a partnership, you may want to consider the following factors:

• Liability: Each partner in a partnership is personally liable for all the debts and obligations of the business, including liability for your own unlawful acts and those of your fellow partners and employees. For instance, if your partner writes a defamatory article or posts copyright infringing material on your jointly-run website or blog, then you can be held personally liable, and the winning plaintiff can can collect the judgment out of your personal assets, like your bank account or house. The same goes for a defamatory article or infringing post published by an employee of the partnership in the scope of the employment relationship.


• Formation and Dissolution: A partnership is relatively easy and cheap to form. Please see the Forming a Partnership section for details on the required/advisable steps. You and your partners should draft and execute a partnership agreement. Drafting one that is highly customized to your business may involve some complexity. It will be up to you and your partners whether the assistance of a lawyer is required. Unlike a corporation, a partnership does not have a perpetual existence. Dissolution is provided for in the partnership agreement or happens with the death, retirement, withdrawal, expulsion, incapacity, or bankruptcy of a partner.


• Management Structure: As a general matter, a partnership allows for an informal, de-centralized management style, with partners exerting direct control over the day-to-day affairs of the business. Partners are free to customize the management structure in the partnership agreement.


• Operation: A partnership is relatively easy and cheap to operate. Partners do not have to observe the extra "formalities" of a corporation and there are generally fewer record-keeping and reporting requirements than for corporations or LLCs. Partnerships must still meet those tax and other regulatory obligations imposed on all small businesses. For more on the tax obligations of small businesses, see the Tax Obligations of Small Businesses section and the IRS's informational guide, Publication 583 (1/2007), Starting a Business and Keeping Records.


• Ownership of Assets/Distribution of Profits: Partners generally do not own the assets of the business personally -- depending on state law, either the partnership itself owns all business assets or the partners are co-owners of partnership property. In either case, a partner that withdraws from the business is entitled to a share of profits and partnership assets after liabilities are taken into account, and the same is true for all partners upon termination of the partnership. Unless the partnership agreement provides otherwise, profits and losses are split up among the partners on an equal, per-capita basis. For example, if there are four partners, the profits and losses will be split up one-quarter to each partner, absent an agreement specifying some other distribution.
  
  
  
  • Among the most important assets of any business that operates a website or blog are its articles, posts, videos, and other content. For details on who owns what from a copyright perspective, see the Copyright Ownership of Articles and Posts section.


• Tax Treatment: A partnership itself does not pay income tax. The profits or losses of the business "pass through" to the partners, and they pay income tax on their proportional share of the income at their individual rates. In this way, the partnership as an entity is generally not subject to the "double taxation" associated with corporations. Subject to limitations, partners may be able to deduct certain partnership losses against personal income from other sources, like a salary from a "day job," interest on savings, dividends from other investments, and gains from the sale of non-business property. If a partner files jointly with a spouse, these business losses may also offset the spouse's income.
  
  
  • Although the partnership itself pays no income tax, it must file an information return, Form 1065, annually with the IRS and provide the partners with a copy of their K-1. This return shows the partnership's income, deductions, and other required information, and must include the names and addresses of each partner and each partner's distributive share of taxable income. Relatively sophisticated accounting is required to accurately complete this form, and this could bump up operating costs for your business. For more information on the tax obligations of partnerships, see the IRS's page, Tax Information for Partnerships (includes links to forms and other resources).

If you are carrying on your online activities with a group of other journalists or bloggers (e.g., a co-blogging relationship) without a formal partnership agreement, it is still possible that a court could deem your group an informal legal or tax partnership, bringing with it potential personal liability for the actions of your co-publishers. This risk is greatly reduced, however, if your group does not intend to make a profit, or if your revenues are all scrupulously re-invested in the enterprise without distribution to group participants. For details, please see the Informal Group section of this Guide. Eric Goldman's article, Co-Blogging Law, gives the definitive treatment of liability pitfalls for co-bloggers operating informally.

Limited liability companies (LLCs) have become the most common typeof new business since their introduction by state laws in the last 30 years because LLCs combine the tax advantages of partnerships with the limited liability of corporations. This business form may be a good option for a website or blog with significant liability exposure. Owners of an LLC are called "members." You can operate an LLC as the sole owner (single-member) or in conjunction with fellow owners (multi-member). Members can run the business by themselves, or hire employees and/or independent contractors to carry out tasks for them. Among other requirements discussed below, an LLC is formed by filing articles of organization with the state and executing a formal operating agreement,which sets down ground rules for what capital contributions arerequired from the members, how the business will be managed, and how profits and losses will be allocated, among other things.

In determining whether you want to operate as an LLC, you may want to consider the following factors:

• Liability: Members of an LLC enjoy limited liability for the debts and obligations of the business, including liability for the unlawful acts of other members and employees. For instance, if a fellow member writes a defamatory article or posts copyright infringing material on your jointly-run website or blog, then your liability ordinarily is limited to amounts invested in the LLC. The same goes for a defamatory article or infringing post published by an employee of the LLC on the company website. Under some circumstances, you could still be held personally liable your own unlawful actions, but for the most part your personal assets would be off limits.

• LLCs, like corporations, are subject to the legal doctrine known as "piercing the corporate veil," which can result in members losing limited liability protection in extremely rare circumstances.


• If you apply for a small business loan, the lender probably will require you to give a personal guarantee. In that case, you are personally responsible for the paying back the debt, even if the business is an LLC and even if there is no basis for piercing the corporate veil.

• Formation: Forming an LLC is moderate in terms of burden and cost. Please see the Forming an LLC section for details on the required (and advisable) steps. It requires filing articles of organization with a state office, usually the Secretary of State. Creating and submitting articles of organization for an LLC is simple and generally does not require the assistance of a lawyer, but there usually are significant filing fees. LLCs do not have the perpetual existence of corporations, and many states require that the duration of the LLC be specified in the articles of organization. You and your fellow members should also draft and execute a operating agreement, and some states require this. Drafting one that is highly customized to your business may involve some complexity. It will be up to you and your fellow members whether the assistance of a lawyer is required.


• Management Structure: You have a great deal of flexibility in how you structure the management of an LLC because members may designate their desired management structure in the operating agreement. In general, LLCs are attractive because they allow for an informal, de-centralized management style with the members taking direct control over the day-to-day management of the business.

• It is important to include a clause regarding the desired management structure in the articles of organization, in addition to the operating agreement, to make sure the members' choice of structure is honored under state law.

• Operation: Operating an LLC is moderate in terms of burden and cost. As a general matter, there are fewer formalities associated with running an LLC than a corporation, and members can customize meeting, voting, and other operating procedures in the the operating agreement. However, in order to maintain their limited liability protection, members should observe certain formalities, such as keeping detailed financial records and recording minutes of major decisions. Additionally, state laws impose record-keeping requirements, as well as annual or biennial reporting requirements (and fees), all of which tend to drive up the cost of operating as an LLC. Some states place an annual franchise tax on LLCs. For details on annual/biennial reporting requirements, fees, and franchise taxes, see the the State Law: Forming an LLC section. This is all in addition to the tax and other regulatory obligations imposed on all small businesses. For more on the tax obligations of small businesses, see the Tax Obligations of Small Businesses section and the IRS's informational guide, Publication 583 (1/2007), Starting a Business and Keeping Records.


• Ownership of Assets/Distribution of Profits: Assets of the LLC, including those originally contributed by members, are owned by the company, not by the individual members. The property rights of LLC members include rights in management and control of the business and financial rights to share in profits, distributions, and other financial benefits. Allocation of profits among members is generally set in the operating agreement, and members are free to structure the distribution any way they please. Absent a provision in the operating agreement, state law will determine whether profits and losses are distributed on a per capita basis (i.e., 4 members, each get 1/4 share) or based on the amount of capital contributed to the business. While a member's economic rights in an LLC may be transferred, the transferee cannot become a full member of the LLC unless the other LLC members unanimously consent.

• Among the most important assets of any business that operates a website or blog are its articles, posts, videos, and other content. For details on who owns what from a copyright perspective, see the Copyright Ownership of Articles and Posts section.

• Tax Treatment: Members of an LLC can choose to be taxed as a partnership or a corporation. If the LLC is treated as a partnership (which in the case of an LLC with multiple members, it would be absent the election below), then the LLC's income and expenses are "passed through" to the members, and they pay tax on their share of the profits at their individual income tax rates. In this way, they generally are not subject to the "double taxation" associated with corporations. If members elect to have the LLC taxed as a corporation using a Form 8832 - Entity Classification Election, the LLC will file its own income tax returns.  Members need not file Form 8832 if  they want the LLC treated as a partnership because the default entity is a partnership. Special, but similar, rules apply for single-member LLCs. For details on the tax obligations of LLCs, see the Limited Liability Company page on the IRS website.


• Other Considerations: If you want your LLC to "do business" in states other than the one in which it is organized, you need to register as a "foreign" company doing business in that state. You do not need to do this simply because your website reaches the residents of other states. It might be an issue, however, if one of the members of the LLC worked (i.e., contributed content to the website or blog) from another state, and it would likely be required if your LLC had an office there. State procedures for obtaining this registration vary, but commonly there is a specific form that you need to complete, and you will need to submit copies of the articles of organization and a certificate of good standing from your state. There will also be a registration fee. To get the process started, you should visit the Secretary of State's website for the state in which you want to register.

The corporation is the best known business form. Most big companies that are "household names" are corporations, including companies like Google Inc., Microsoft Corp., and Yahoo! Inc. A corporation has a legal identity that is separate from its owners (usually referred to as "shareholders" or "stockholders"). Although many corporations are large organizations with many employees, it is possible for a single person to form and operate a corporation individually.

Operating as a corporation offers limited liability to shareholders, transferability of ownership interests (shares), and perpetual existence of the corporation, even after original shareholders have left the business. Because most successful, big-name companies are corporations, many believe that operating as a corporation must be advantageous, but this is not always true. In fact, however, corporations often have disadvantages, including "double taxation" and the cost and hassle associated with forming and operating a corporation. Because of these disadvantages, in many cases an LLC will be a better choice for a small citizen media business with owners who are concerned about liability exposure. In fact, unless you plan on taking your business "public" (i.e., selling shares of the company to the general public) in the near future, or you are working with venture capitalists who require you to form a corporation, there generally are few reasons to operate your small business as a corporation.

A few technical points are worth mentioning up front. First, when we mention a "corporation" in this guide, we mean a "C corporation" unless we specify otherwise. Probably all of the big companies you think of as "corporations" are C corporations. There is another type of corporation, however, called an "S corporation," which we discuss briefly on the S Corporation page. The important difference between the two is how they are treated for tax purposes. While S corporations are generally not subject to "double taxation" like C corporations, they still require most, if not all, of the costly and burdensome formalities associated with C corporations, and they offer no significant benefits over LLCs. Second, certain states recognize what is known as a "close corporation," which we discuss briefly on the Close Corporation page. This business form generally allows for greater flexibility and informality in managing business affairs than a C corporation, but it requires creation of a shareholders' agreement and significant limitations on transfer of stock, and LLCs are generally regarded as superior vehicles for obtaining an informal, de-centralized management structure with limited liability.

In determining whether you want to operate as a corporation, you may want to consider the following factors:

• Liability: Shareholders of a corporation enjoy limited liability for the debts and obligations of the business, including liability for the unlawful acts of other shareholders and employees. For instance, if a fellow shareholder writes a defamatory article or posts copyright infringing material on your jointly-run website or blog, then your liability ordinarily is limited to amounts invested in the corporation. The same goes for a defamatory article or infringing post published by an employee on the company's site. However, limited liability does not relieve you from personal liability for your own unlawful actions.

• Corporations, like LLCs, are subject to the legal doctrine known as "piercing the corporate veil," which can result in shareholders losing limited liability protection in extremely rare circumstances.
• If you apply for a small business loan, the lender probably will require you to give a personal guarantee. In that case, you are personally responsible for the paying back the debt, even if the business is a corporation and even if there is no basis for piercing the corporate veil.

• Formation: Forming a corporation is moderate in terms of burden and cost. Please see the Forming a Corporation section for details on the required steps. The steps are usually carried out by the initial owners of the corporation (called "incorporators" in legal terminology), although owners can hire others to do it for them. Corporations are governed by state law, and formation requires filing articles of incorporation with a state office, usually the Secretary of State. Creating and submitting articles of incorporation is simple and generally does not require the assistance of a lawyer, but there usually are significant filing fees. It also requires creation of corporate bylaws, which are internal rules and procedures regarding the operation of the corporation that are stored at the corporation's place of business but not filed with the state. Drafting bylaws that are highly customized to your business may involve some complexity. It will be up to you and your fellow shareholders whether the assistance of a lawyer is required.

• Forming a corporation is slightly more burdensome than forming an LLC. One difference is that the owners of a newly formed corporation should hold an initial organizational meeting to adopt bylaws, elect initial directors (if not named in the articles of incorporation), and authorize the issuance of stock to themselves, among other things. Minutes of this meeting must be recorded. Another difference is that stock must be issued, and this requires creation of formal stock certificates and a stock ledger for record-keeping purposes. Neither of these steps are required to form an LLC.

• Management Structure: Corporations are centrally managed by a board of directors, which is charged with making major strategic and financial decisions for the company and ensuring compliance with relevant legal and accounting requirements. The board of directors meets and makes decisions collectively. State corporate laws and corporate bylaws generally set out voting requirements for valid board action, such as how many directors are needed to constitute a quorum and whether action in writing without a formal meeting is permitted. The full panoply of issues relating to a properly functioning board of directors is beyond the scope of this Guide.

• The board of directors nominates the officers of the corporation to run the day-to-day affairs of the company and oversee the activities of employees (if any). Common examples of corporate officers include president, vice president, secretary, and chief financial officer. Effective day-to-day control of the business will be in the hands of these officers.

• Note that, if a corporation has single shareholder, state laws allow that shareholder to occupy the role of sole director and sole officer, all at once.

• In some states, shareholders can opt out of the centralized management structure by forming a close corporation, but there are significant disadvantages to forming a close corporation, and owners often choose to form an LLC instead. Please see the Close Corporation section for details.

• Operation: Operating a corporation is moderately burdensome and costly, somewhat more so than operating an LLC. State corporate laws provide for cumbersome formalities governing things like the election and removal of directors, filling vacancies on the board, holding board and shareholder meetings, keeping minutes of those meetings, recording board resolutions, and shareholder approval of major management decisions. Additionally, state laws impose record-keeping requirements, as well as annual or biennial reporting requirements (and fees), all of which tend to drive up the cost of operating as a corporation. For details on annual/biennial reporting requirements and fees, see the the State Law: Forming a Corporation section. This is all in addition to the tax and other regulatory obligations imposed on all small businesses. For more on the tax obligations of small businesses, see the Tax Obligations of Small Businesses section and the IRS's informational guide, Publication 583 (1/2007), Starting a Business and Keeping Records.

• Large, publicly-traded corporations generally have additional disclosure obligations under federal (and sometimes state) securities laws. However, a small owner-operated corporation that issues shares to a small number of people generally will be exempt from these disclosure requirements. If you contemplate issuing shares to more than ten people, or to people not actively involved in the business, you should consult an attorney regarding potential securities laws obligations.

• Ownership of Assets/Distribution of Profits: The corporation owns the assets of the business, and shareholders have no direct financial interest in them. Shareholders own the business itself, but their direct financial interest is in the shares of stock that they own. Shares entitle their holder to a portion of corporate profits, distributed by the company in the form of dividends. The percentage of profits received as a dividend by a particular shareholder depends upon that shareholder's proportion of share ownership. Thus, if you own 50% of the outstanding stock in the company, you would be entitled to receive 50% of the dividends if and when the company makes a distribution. Note that corporations do not have to distribute dividends every year; rather, the board of directors decides whether to distribute them or to invest proceeds back into the business.

• Shareholders also can sell their shares, unless there is a restriction on transfer imposed in the articles of incorporation or a shareholders' agreement (generally an issue with close corporations). In the case of large, publicly-traded corporations, the price that a shareholder can get for his/her shares is determined by the price on a stock market such as the New York Stock Exchange. In the case of smaller companies that are not publicly-traded, the amount for which a shareholder can sell her shares is negotiated between the parties to the transaction, and generally reflects their assessment of the value of that percentage of the business represented by the selling party's shares.

• Among the most important assets of any business that operates a website or blog are its articles, posts, videos, and other content. For details on who owns what from a copyright perspective, see the Copyright Ownership of Articles and Posts section.

• Tax Treatment: One of the major (at least perceived) disadvantages of operating as a corporation is "double taxation." The profits of corporations are normally taxed twice -- once at the corporate level (at the applicable state and federal corporate income tax rate ), and again on the individual level when profits are distributed to shareholders as dividends (at the applicable individual income tax rate - under current law, dividends paid by corporations generally are subject to tax at the same rate as capital gains or 15%). For some corporations, paying reasonable salaries to shareholders who participate in running the business can help ameliorate the potential burdens of double taxation to some extent. Shareholders of a corporation cannot deduct business losses to offset income from other sources. Also, corporations are generally taxed at a relatively high rate (currently about 34% or 35%) on its earned income, which may be higher than applicable indivdidual rates.

• A corporation must file its own income tax return on Form 1120. For details on required filings, see the Corporations page on the IRS website.

• Other Considerations

• The corporate form offers full transferability of shares, which makes it easier for a company to raise capital from outside investors, and it also makes it somewhat easier for individual shareholders to "get out" of the business by selling their shares to other shareholders or outsiders. This may be a major advantage for those looking to expand the business quickly through outside investment. However, if you are interested in operating a small business with others that you know and trust, and not giving up significant control of the business, the free transferability of shares may be a disadvantage to adopting the corporate form.

• If you want your corporation to "do business" in states other than the one in which it is incorporated, you need to register as a "foreign" corporation doing business in that state. You do not need to do this simply because your website reaches the residents of other states. It might be an issue, however, if one of the officers or employees of the corporation worked (i.e., contributed content to the website or blog) from another state, and it would likely be required if your corporation had an office there. State procedures for obtaining this registration vary, but commonly there is a specific form that you need to complete, and you will need to submit copies of the articles of incorporation and a certificate of good standing from your state. There will also be a registration fee. To get the process started, you should visit the Secretary of State's website for the state in which you want to register.

Surprisingly, there is no legal definition of a nonprofit organization. In general, a nonprofit organization is one that is organized to achieve a purpose other than generating profit. Despite this, a nonprofit organization is not precluded from making a profit or engaging in profit-making activities. It is prohibited from passing along any profits to those individuals who control it, like founders, directors, officers, employees, and members. Nothing, however, prevents a nonprofit from paying reasonable salaries to officers, employees, and others who perform a service for it.

This section is aimed at those seeking to start and operate a nonprofit corporation that is a public charity under section 501(c)(3) of the U.S. Internal Revenue Code (the "tax code"). A corporation is the most common and generally most appropriate structure used to create a nonprofit organization. You should seek the advice of an experienced nonprofit lawyer if you wish to establish a nonprofit organization using some other business structure.

Section 501(c)(3) of the tax code exempts certain nonprofit organizations from federal corporate income taxes. Gaining tax-exempt status gives a nonprofit corporation credibility with potential donors because it shows that the organization has a legitimate charitable purpose, a formal structure for accomplishing its goals, and is publicly accountable. Section 501(c)(3) tax exemptions are denied to any nonprofit organization engaging in certain political or legislative activities, which will be discussed below.

Section 501(c)(3) classifies nonprofit organizations into private foundations and public charities. In all likelihood, you want your nonprofit organization to avoid being classified as a private foundation because a number of complex additional regulations and restrictions apply to them. When you fill out your application for 501(c)(3) tax-exempt status, you should request to be classified as a public charity in Part X of Form 1023, usually by checking the box in Line 5g, 5h, or 5i (depending on the nature of your funding).

In order to qualify as a public charity, a nonprofit corporation must be formed and operated for a charitable purpose. "Charitable" is a narrow descriptor given the many types of organizations covered under section 501(c)(3). The section also applies to organizations with religious, educational, scientific, or literary purposes, among others. These purposes must be for the benefit of some significant section of society, whether it be the general public or a specific community.

Additionally, a public charity must be publicly supported. This means that the nonprofit corporation must normally receive funds from governmental entities or multiple private donors. Contrast this with a private foundation, which typically gets its funds from a single source. The calculations behind what "public support" means are complicated, see the Nonprofit Law Blog's Public Support Tests for details.

Keep in mind the following factors as you consider whether to operate as a nonprofit public charity corporation:

Liability

Like other corporate entities, nonprofit organizations can be sued for any number of reasons, including:

• publishing defamatory statements
• neglecting to pay taxes (tax exemptions under 501(c)(3) only cover federal corporate income tax; the nonprofit is still responsible for other taxes)
• violating state charitable solicitation laws, antitrust laws, or the tax code by engaging in prohibited political activity or substantial lobbying
• lawsuits common to any business: wrongful termination, employment discrimination, personal injury, and breach of contract

Like shareholders in a for-profit corporation, directors of a nonprofit corporation, and other individuals who participate in the founding and/or operating of the nonprofit organization, enjoy limited liability for the debts and obligations of the organization, including for the unlawful acts of other directors, officers, and employees.

• For example, assume you are a director of a nonprofit corporation for which you and others operate a blog about the environmental impacts of deep-sea fishing. If a fellow director or employee publishes a defamatory blog post or posts copyright infringing material on the nonprofit organization's website, you are not personally liable by virtue of your status as a director of the organization, and your liability ordinarily is limited to the amount you contributed to the nonprofit organization (if any).

However, directors, officers, and employees may be personally liable for their own wrongful conduct, regardless of whether they are paid for their work or are volunteers.

• For example, assume that you make defamatory statements about one of the larger fishing companies. The fishing company can sue you personally and satisfy the judgment out of your personal assets.

Note that if you apply for a small business loan to help fund your nonprofit corporation, the lender probably will require you to give a personal guarantee. In that case, you are personally responsible for the paying back the debt, even if your business is a nonprofit corporation and even if there is no basis for piercing the corporate veil.

Formation

Nonprofit organizations usually incorporate in the state where they expect to do business. Forming a nonprofit 501(c)(3) corporation is burdensome. The section on Forming a Nonprofit Corporation provides the steps necessary to get established in general; the section on State Law: Forming a Nonprofit Corporation outlines what is required by the fifteen most populous U.S. states and the District of Columbia.

There are two main steps involved in forming a nonprofit corporation:

1. Incorporating as a nonprofit corporation at the state level

If you want to incorporate, you must file articles of incorporation with a state office, usually the Secretary of State. Creating articles of incorporation for a nonprofit corporation can be more involved than creating one for a for-profit corporation because you will need to include language about the purpose of your nonprofit corporation in order to be eligible for 501(c)(3) tax exemptions. Drafting the articles of incorporation generally does not require the assistance of a lawyer, and usually the filing fees are significantly less than the filing fees for incorporating as a for-profit corporation.

You will also need to create corporate bylaws which are the internal rules and procedures of the nonprofit corporation. Drafting bylaws that are highly customized to your business may involve some complexity. Additionally, you must keep a records book at the nonprofit's place of business.

The incorporators and/or directors of a newly formed nonprofit corporation should hold an initial organizational meeting to adopt bylaws and elect initial directors (if not named in the articles of incorporation), among other things. Minutes of this meeting must be recorded.

2. Applying for 501(c)(3) corporate income tax exemptions at the federal level

You need to file Form 1023 in order to apply for tax-exempt status under 501(c)(3). The application process is complicated, but can be done without the assistance of a lawyer if you are willing to devote the requisite time and energy in to the process. IRS resources (both the website and the call centers) are of immense help as is Anthony Mancuso's book "How to Form a Nonprofit Corporation," which provides line-by-line guidance on how to complete the application form. For detailed information on how the IRS evaluates journalism non-profits to see whether they qualify for a tax exemption, see the Citizen Media Law Project's Guide to the Internal Revenue Service Decision-Making Process under Section 501(c)(3) for Journalism and Publishing Non-Profit Organizations.

The filing fee for the application is high: $300 if your gross receipts have not exceeded or will not exceed $10,000 annually over a 4-year period, and $750 otherwise. You do not have to apply for tax-exempt status if you anticipate bringing in gross receipts of less than $5,000 per year. If you actually bring in more than $5,000 in any particular year, however, you will need to file Form 1023 within 90 days of the end of the year. See Application for 501(c)(3) Tax Exemption for details.

Note that if the IRS classifies you as a private foundation and not a public charity, you should contact an experienced nonprofit lawyer immediately to understand the implications of such a classification.

Management Structure

Like other corporations, a nonprofit corporation consists of the following classes of people:

• Incorporators: Incorporators form the nonprofit corporation.

• Board of Directors: The board of directors makes major strategic and financial decisions for the organization and ensures compliance with relevant legal and accounting requirements.

• Officers: Officers oversee day-to-day affairs; usually officers consist of the president, vice-president, secretary, and treasurer.

• Employees: Employees execute the decisions made by the directors and officers.

Another category unique to nonprofits is members. Members are a special class of individuals and/or organizations that have rights to participate in the current and future affairs of the nonprofit organization. Nonprofit organizations are not required to have members. You should consult with an experienced nonprofit lawyer if you wish to become a membership organization.

State corporate laws and the nonprofit organization's corporate bylaws govern such things as:

• the required number of directors, or minimum and maximum sizes of the board
• voting requirements for valid board action, such as how many directors are needed to constitute a quorum
• whether action in writing without a formal meeting is permitted

The full array of issues surrounding nonprofit governance is beyond the scope of this Guide. For example, there are reasons to both limit a board's numbers (concentrate control) and broaden a board's numbers (live up to the ideals of representation). A good legal professional or legal resource should be able to help you find the best structure for your nonprofit. For the board example above, in "Starting and Managing a Nonprofit Organization," Bruce R. Hopkins suggests creating an additional advisory committee, thus satisfying concerns of representation and control. You should seek out resources such as Hopkins' book, or consult with a lawyer experienced in nonprofit matters.

Operation

Operating a nonprofit organization is often burdensome and costly. There are reporting requirements and operating restrictions that you need to keep in mind in order to to comply with the law and maintain 501(c)(3) exempt status. Expect increased paperwork and red tape in order to comply with:

• state corporate laws' formalities for corporate governance
• state laws on charitable organizations' record-keeping requirements
• IRS regulations on tax exemptions (do not underestimate the time and energy that you will need to spend organizing the fundraising arm of your nonprofit corporation in order to solicit and accept donations and remain a publicly supported public charity)
• the public's right to inspect your nonprofit organization's corporate records book

Note that the operating restrictions and requirements are even more stringent if your organization qualifies as a private foundation and not as a public charity.

Additionally, you will also be responsible for the tax and other regulatory obligations imposed on all small businesses. For more on the tax obligations of small businesses, see the Tax Obligations of Small Businesses section and the IRS's informational guide, Publication 583 (1/2007), Starting a Business and Keeping Records.

Ownership of Assets/Distribution of Profits

Once incorporated, the newly created nonprofit organization is a separate legal entity from its incorporators, directors, and employees. In fact, a nonprofit has no owners, at least not in any ordinary sense. The nonprofit corporation owns all assets of the business and is entitled to receive all profits from its operation. Among the most important assets of any nonprofit corporation that operates a website or blog are its articles, posts, videos, and other content. For details on who owns what from a copyright perspective, see the Copyright Ownership of Articles and Posts section.

Despite its name, a nonprofit organization is not precluded from making a profit or engaging in profit-making activities. However, a nonprofit is prohibited from passing along any profits to those individuals who control them, like founders, directors, officers, key employees, and members. (A handful of states allow a nonprofit corporation to issue stock as a mechanism of control, but no dividend rights accompany the issued stock.) Instead, a nonprofit organization must use any profits to further its program activities or "exempt functions." It may also invest profits in another tax-exempt organization.

Although a nonprofit organization may not distribute profits to its directors, officers, key employees, or members, a nonprofit organization may pay its employees a salary and give them benefits. A nonprofit organization may also pay directors for their expenses and time spent attending director meetings. The key is that the salaries and payments must be reasonable. Excessive payments or exorbitant amounts posturing as salaries or compensation violate the tax code and may lead to penalties and a loss of tax-exempt status.

Note: If you dissolve your nonprofit organization, you must invest all profits into another nonprofit organization.

Tax Treatment

If you obtain 501(c)(3) tax-exempt status, your nonprofit corporation will be exempt from paying federal corporate income tax. However, the 501(c)(3) tax exemption does not apply to unrelated business taxable income or "UBTI," which refers to income generated from regular trade or business activity that is not substantially related to the nonprofit organization's exempt purpose. 

Note that your nonprofit corporation may engage in unrelated trade or business activity, but will be liable for the taxes on the gross income exceeding $1,000 generated by it. In this situation, you will need to file Form 990T, the UBTI return, with the IRS.

For example, the sale of advertising in a periodical constitutes UBTI, according to the IRS. Therefore, if your nonprofit organization sells advertising space on a website, in a print periodical, or for a broadcast, you must report the income generated from advertising as taxable. However, you might be able to deduct the cost of selling advertising space as an ordinary and necessary trade or business expense. 

For more information on advertising sales as UBTI, or UBTI in general, consult the IRS publication, Tax on Unrelated Business Income of Exempt Organizations. 

If you achieve 501(c)(3) tax-exempt status, you will still need to file an annual tax return with the IRS, unless your organization's gross receipts are normally $25,000 or less. Organizations beyond the $25,000 threshold with gross receipts below $100,000 and total assets at the end of the year less than $250,000 can file the return on Form 990EZ. Organizations with gross receipts above $100,000 and assets above $250,000 must file the return on Form 990. For details, including how to calculate gross receipts, see the Instructions for Form 990 and Form 990-EZ.

Beyond exemption for federal income tax, qualifying under 501(c)(3) provides another important benefit: donations to the organization will be tax deductible by donor, making fundraising easier. Moreover, some donors, like foundations and the federal government, are barred from funding projects that don't have 501(c)(3) status.

You may also be eligible for other special benefits, such as:

• discounted postal rates
• state tax exemptions (such as sales tax), and limited tort liability
• local tax exemptions, including property tax

Taxation is a very technical subject and you should consider having the nonprofit corporation's tax returns and reports handled by an experienced tax accountant.

Prohibition on Political and Legislative Activities

An important issue is the federal tax code's rule against 501(c)(3) organizations engaging in political and legislative activities. Because the proscribed activities violate the tax code (and may result in the revocation of the organization's tax-exempt status, the imposition of an excise tax, and liability for back taxes), you must understand how 501(c)(3) defines each type of activity. See the section on Prohibitions on Political and Legislative Activities in this guide for more information.

Other Considerations

As discussed above, forming and maintaining a 501(c)(3) nonprofit corporation can take a lot of time, energy, and money, especially if you are beyond the gross receipts threshold requiring you to formally apply for 501(c)(3) exempt status. You may worry that the work needed to incorporate will distract you from your online publishing activities, but also believe that the benefits of tax-exempt status are too important to pass up.

One option to explore is whether a relationship with a "fiscal sponsor" is right for you. Fiscal sponsorship is the mechanism by which a nonprofit organization with 501(c)(3) status lends its legal and nonprofit status to persons, groups, or businesses that engage in activities related to the sponsor's mission. Through fiscal sponsorship, you may be able to function as a nonprofit organization (including receiving tax-deductible donations) without going through the hassle of forming your own independent organization. Fiscal sponsorship also offers the possibility of benefiting from the sponsor's established administrative infrastructure, financial liquidity, and expertise. In exchange for these services, the fiscal sponsor generally keeps a percentage of each financial transaction or charges a monthly or yearly membership fee. Note that fiscal sponsors that work on a percentage basis or provide services beyond simply acting as an umbrella organization often have a minimum fundraising requirement for eligibility.

Seeking a fiscal sponsor may be best if you are:

• working on a short-term project
• initiating a project that has yet to show long-term viability (in some cases fiscal sponsors may help a new project spin off as an independent nonprofit organization)
• waiting for IRS approval on your application for the 501(c)(3) tax exemption
• performing work effectively, but without access to support staff

When evaluating potential fiscal sponsors, you may want to consider several factors, including: 

• the mission and vision of the sponsoring group
• the sponsoring group's administrative and management policies
• whether the sponsoring group has sufficient financial resources to support you
• whether the sponsoring group has human resource capacities
• the transparency with which the sponsoring group operates
• the accountability and financial integrity of the sponsoring group  

When determining if fiscal sponsorship is right for you, you should weigh the benefits of gaining immediate tax-exempt status and administrative support (if selected) against the time and effort it takes to research fiscal sponsors and apply for sponsorship, the control relinquished in the relationship, and the fees charged by a sponsor.

Some examples of fiscal sponsors include:

• Fractured Atlas is an organization that offers fiscal sponsorship as well as other services (such as event liability insurance and even health insurance) to individuals or groups involved in the arts (including publishing). In order to apply, you must become a member. While rates for membership start at $7.50/month, there is no fee to apply for fiscal sponsorship. Once you are sponsored, Fractured Atlas will accept donations for you and act as a bank from which you can withdraw funds at any time. When you withdraw from your account, you are charged an administrative fee of the greater of $10 or 6% of the funds withdrawn. All sponsored groups can begin fundraising immediately once they are approved by the Fractured Atlas board.

• The Tides Center is a large fiscal sponsor supporting programs that seek to accelerate social change. In addition to sponsorship, the Tides Center offers other office-related services such as human resources management and payroll management. Tides offers more comprehensive services and greater availability of experts than most fiscal sponsors and charges a fee equal to 9% of gross annual revenue. The Tides Center does not offer sponsorship to projects with less than $30,000 in annual funding and does not offer sponsorship to individuals.

• Los Angeles-based Community Partners provides sponsorship services to southern California organizations. They do not have a minimum fund-raising requirement, but they analyze your business structure to determine the community's need for your project and the likelihood that your project will raise sufficient funding.

A cooperative corporation (or simply, a "cooperative") is a special form of corporation that places ownership and/or control of the corporation in the hands of the employees or patrons of the corporation. A cooperative is intended to be community-based, giving those whom the entity serves or employs a direct say in the operation of the entity. You might be familiar with cooperative corporations in the form of local food cooperatives or credit unions, in which control of the cooperative is vested in the patrons of the organization; however, many states allow for the formation of other kinds of cooperatives as well, including journalism cooperatives.

Although the manner in which cooperatives function can vary from state to state (see State Law: Forming a Cooperative Corporation), most states seek to enhance the community-based nature of cooperatives by limiting the power that individual stakeholders can wield in the cooperative. In general, no matter how large an individual's ownership stake in the cooperative might be, each stakeholder is entitled to no more than a single vote in the operation of the cooperative. This helps to ensure that no single voice in a community dominates the operation of the cooperative.

Like other forms of corporation, operating as a corporation offers limited liability to shareholders, transferability of ownership interests (shares), and perpetual existence of the corporation, even after original shareholders have left the business. Some states (alternatively or additionally) allow for the creation of non-profit cooperatives, which generally follow cooperative rules with respect to control of the organization by members of the cooperative, and the rules for non-profit corporations with respect to other issues.

Forming as a cooperative can also provide significant tax benefits over other forms of corporation. For-profit cooperatives that distribute their profits to their patrons as a special "patronage dividend" (which is similar to a refund) will not be taxed on those profits at the federal level so long as the distributions follow specific statutory rules. This can reduce or eliminate the "double taxation" issue faced by regular corporations. Non-profit cooperatives will by default be treated the same way, but, like other non-profit corporations, might be able to apply for an exemption from federal taxation under Section 501(c)(3) of the Internal Revenue Code. However, the rules governing taxation of cooperatives can be complex, and you will likely require the assistance of a tax professional to take maximum advantage of these benefits.

In determining whether you want to operate as a cooperative corporation, you may want to consider the following factors:

• Liability: Shareholders of a cooperative enjoy limited liability for the debts and obligations of the business, including liability for the unlawful acts of other shareholders and employees. For instance, if a fellow shareholder writes a defamatory article or posts copyright infringing material on your jointly-run website or blog, then your liability ordinarily is limited to amounts invested in the cooperative. The same goes for a defamatory article or infringing post published by an employee on the cooperative's website. However, limited liability does not relieve you from personal liability for your own unlawful actions.

Cooperatives, like other forms of legal entity, are subject to the legal doctrine known as "piercing the corporate veil," which can result in shareholders losing limited liability protection in extremely rare circumstances.

If you apply for a small business loan, the lender probably will require you to give a personal guarantee. In that case, you are personally responsible for the paying back the debt, even if the business is a cooperative and even if there is no basis for piercing the corporate veil.

• Formation: Forming a cooperative is moderately complex in terms of burden and cost. In general, the specific steps will depend on whether you are forming a for-profit cooperative, in which case the steps will resemble those for forming a corporation, or a non-profit cooperative, in which case the steps will resemble those for forming a non-profit corporation. In addition to the normal steps required to form a corporation, forming a cooperative will likely require you to decide up front when and on what basis to distribute profits in the form of patronage dividends. This will require an understanding of the tax consequences of these decisions. Some states may impose additional steps or requirements.

• Management Structure: As with formation, the management structure of a cooperative depends on whether it is a for-profit cooperative (with shareholders, as in a corporation) or a non-profit cooperative (with members, as in a non-profit corporation), generally tracking the management structures of regular for-profit and non-profit corporations. The primary difference between a cooperative and a corporation is that each shareholder or member in a cooperative is entitled to no more than a single vote, regardless of the stake that an individual holds in the cooperative. Some states might allow for the existence of non-voting members or shareholders. Apart from this even distribution of voting power, shareholders or members in a cooperative generally vote on the same type of issues as their counterparts in regular corporations, while the day-to-day affairs of the cooperative are handled by a board of directors and the officers and employees of the cooperative.

• Operation: Operating a cooperative is moderately burdensome and costly, somewhat more so than other corporate forms. State corporate laws provide for cumbersome formalities governing things like the election and removal of directors, filling vacancies on the board, holding board and shareholder meetings, keeping minutes of those meetings, recording board resolutions, and shareholder approval of major management decisions. Additionally, state laws impose record-keeping requirements, as well as annual or biennial reporting requirements (and fees), all of which tend to drive up the cost of operating as a corporation. For details on annual/biennial reporting requirements and fees, see the State Law: Forming a Cooperative Corporation section. This is all in addition to the tax and other regulatory obligations imposed on all small businesses.

If you contemplate issuing shares to more than ten people, or to people not actively involved in the business, you should consult an attorney regarding potential securities laws obligations.

• Ownership of Assets/Distribution of Profits: The cooperative owns the assets of the business, and shareholders/members have no direct financial interest in them. In a for-profit cooperative, shareholders own the business itself, but their direct financial interest is in the shares of stock that they own. Shares entitle their holder to a portion of corporate profits, distributed by the company in the form of stock dividends. The percentage of profits received as a stock dividend by a particular shareholder depends upon that shareholder's proportion of share ownership. Thus, if you own 50% of the outstanding stock in the cooperative, you would be entitled to receive 50% of the stock dividends if and when the cooperative makes a distribution.

Cooperatives do not have to distribute stock dividends every year; rather, the board of directors decides whether to distribute them or to invest proceeds back into the business. Cooperatives that issue stock dividends will be "double taxed" on the amount of the dividends at both the corporate and personal levels.

In this respect, stock dividends are different from "patronage dividends," another type of distribution that a cooperative can make. In general, a "patronage dividend" consists of a refund to the patrons of a business proportional to the amount that each patron has paid to the cooperative during a given year. Although a cooperative can limit the patrons that receive "patronage dividends" to people who are also shareholders or members, they are generally not required to do so. Unlike stock dividends, a cooperative may deduct the amount of any patronage dividends from its gross income before calculating its taxable income.

Shareholders also can sell their shares, unless there is a restriction on transfer imposed in the articles of incorporation or a shareholders' agreement.

Among the most important assets of any business that operates a website or blog are its articles, posts, videos, and other content. For details on who owns what from a copyright perspective, see the Copyright Ownership of Articles and Posts section.

• Tax Treatment: One of the major (at least perceived) disadvantages of operating as a corporation (including a cooperative corporation) is "double taxation." The profits of journalism cooperatives can be taxed twice -- once at the corporate level (at the applicable state and federal corporate income tax rates), and again on the individual level when profits are distributed to shareholders as stock dividends (at the applicable individual income tax rate - under current law, stock dividends paid by corporations generally are subject to tax at the same rate as capital gains or 15%). However, unlike other corporations, cooperatives can avoid double taxation by distributing profits as a "patronage dividend" as opposed to a stock dividend. As discussed above, a cooperative may deduct the amount of any patronage dividends from its gross income before calculating its taxable income; this means that only the individual patrons receiving the patronage dividend might be taxed on those amounts. Any profits not distributed as a patronage dividend will be taxed at the applicable corporate rate, and then taxed again at the individual level if distributed as a stock dividend.

For some cooperatives, paying reasonable salaries to shareholders who participate in running the business can also help ameliorate the potential burdens of double taxation. Shareholders of a cooperative cannot deduct business losses to offset income from other sources. Also, cooperatives are generally taxed at a relatively high rate (currently about 34% or 35%) on earned income, which may be higher than applicable individual rates.

• Other Considerations:

Cooperatives are ideally suited to responding to situations where market forces in a given industry have failed to serve a particular community. In the journalism context, such a situation might be a "news desert" in which local coverage is not available from traditional news outlets. A cooperative allows a community in such a situation to come together and raise funds to provide necessary goods or services that are not otherwise available. The one-person/one-vote system of control by shareholders (or members in the case of a non-profit cooperative) helps to ensure that all participating people in the community feel that they have an equal voice in the cooperative.

On the other hand, the fact that shareholders in a cooperative are limited to a single vote regardless of the number of shares held might discourage institutional investors, who usually seek significant control over a corporation in return for their investment. Similarly, the fact that cooperatives will normally issue patronage dividends to dispose of their profits, as opposed to stock dividends, might make a cooperative a less attractive investment vehicle. This can limit the growth of a cooperative beyond the means of a particular community.

However, this corporate form offers full transferability of shares, which can make it easier for a company to raise capital from outside investors, and it also makes it somewhat easier for individual shareholders to "get out" of the business by selling their shares to other shareholders or outsiders. If you are interested in operating a small business with others that you know and trust, the free transferability of shares may be a disadvantage to adopting the corporate form.

If you want your cooperative to "do business" in states other than the one in which it is incorporated, you need to register as a "foreign" corporation doing business in the other states. You do not need to do this simply because your website or content reaches the residents of other states. It might be an issue, however, if one of the officers or employees of the cooperative works (i.e., contributes content to the website or blog) from another state, and it would likely be required if your cooperative has an office there. State procedures for obtaining this registration vary, but commonly there is a specific form that you need to complete, and you will need to submit copies of the articles of incorporation and a certificate of good standing from your state. There will also be a registration fee. To get the process started, you should visit the Secretary of State's website for the state in which you want to register.

• Additional Resources: A number of organizations exist to support cooperative corporations in various sectors, including:

Banyan Project (introducing reader-owned community news cooperatives to the United States to help counteract news deserts, distrust of media, and widespread misinformation)

National Cooperative Business Association (the nation’s oldest and largest national membership association, representing cooperatives of all types and in all industries)

University of Wisconsin Center for Cooperatives (university-based research project focused on a research, educational, and outreach agenda that examines cooperative issues across multiple business and social sectors)

CooperationWorks (national cooperative created to grow the cooperative model across the United States)

Given the newspaper industry's financial difficulties and the social significance of news reporting and analysis, many journalism start ups are considering the L3C business form. Proponents argue that the L3C offers journalism ventures a sustainable business model with the potential to save newspapers. Yet, there are serious limitations to the L3C, including a capital structure largely dependent on an uncommon type of private foundation investment. For more information on whether forming an L3C is right for your project, see the Should You Form an L3C? section of this Guide.

L3C Business Form Basics

The L3C is a variation on the Limited Liability Company designed to take advantage of both non-profit and for-profit sources of capital. As the term "Low-Profit" suggests, an L3C typically engages in socially-beneficial activities which may not be lucrative enough to attract sufficient commercial investment. By using a tiered capital structure, the L3C can potentially attract a diverse group of creditors to finance its operations, including private foundations and socially-conscious for-profit entities.

In addition to the financing benefits, an L3C may offer a marketing advantage over the standard LLC in attracting socially-conscious investors and consumers. In contrast to a standard LLC, which can be organized for any lawful business purpose, an L3C must operate to significantly further a charitable goal as required by IRS Regs. Sec. 53.4944-3(a) . Still, any LLC can function exactly like an L3C if its articles of organization and operating agreement are drafted to track the provisions of Regs. Sec. 53.4944-3(a).

Tax Treatment of the L3C

Despite its socially-conscious mission, an L3C is not a tax-exempt organization under Section 501(c) of the Internal Revenue Code, and donations and investments in L3Cs are not tax deductible. Since the profits of an L3C "pass through" to its members and are taxed at individual rates, L3Cs operate like standard LLCs for federal tax purposes.

The L3C's primary advantage is its ability to attract private foundation Program-Related Investments (PRIs) though its formal compliance with the PRI requirements set out in Regs. Sec. 53.4944-3(a). PRIs are a means for private foundations to invest in for-profit entities without incurring certain penalty taxes. State laws authorizing L3Cs require their organizing documents to track the provisions of Regs. Sec. 53.4944-3(a).

As a cautionary note, however, the IRS has not ruled whether private foundation investments in L3Cs qualify as PRIs. State laws authorizing L3Cs do not bind the federal tax authorities regarding PRIs, which may limit the utility of the business form until the IRS makes its determination.

We also have a PDF version of our "Primer on Low-Profit Limited Liability Companies" that you can download here.