THE BLOG

Running Web-Based Businesses Entirely Through Internet Communication

Jul 12, 2010 | Updated May 25, 2011

The Internet is creating a new class of web-based, geographically-dispersed entrepreneurs. Digital communication allows work, capital, and knowledge to come together in a virtual world that can let go of the old necessities of handshakes and paperwork. Until recently, however, the legal frameworks available for structuring these businesses haven't kept pace. All of that changed in 2008 with the passage of Vermont's virtual business laws, and particularly the digital LLC. Now there are forms that allow the legal formalities of setting up and running a business to be migrated entirely into cyberspace. Starting a company may never be the same again.

These developments are, in a sense, overdue. In the commercial world, many kinds of transactions are safely and routinely handled via the web, from buying books to energy trading to selling the contents of our garage. Internet banking allows digital controls over transactions with a high need for security - and it all works remarkably well. Given this environment, it seems absurd to still be using the same paper-based means of documenting meetings and recording the decisions of companies that were developed in an age of steam and telegrams. But that is the basic orientation of most business organization laws. Even a web-based service like Legal Zoom sends you a physical minute book as the end-result of setting up a new corporation online.

Why are the traditional options for business organizations ill-suited to the needs of such web-based businesses? Some of the limitations have nothing to do with the potential of the digital world. For instance, under U.S. law, traditional partnerships may not survive past the death or departure of one of their members and do not afford their members limited liability. Traditional corporations provide greater permanence and are generally better in terms of the ability to raise capital but also impose cumbersome internal governance processes that are appropriate for companies with thousands of shareholders but that ill-suit the needs of a small, entrepreneurial ownership group. The limited liability company (LLC) form offers entrepreneurs much greater flexibility, streamlined governance, and pass-through taxation. However even with these structural advantages, an LLC in its traditional form is still tied to paper for its formalities, and so cannot optimally meet the needs of a web-based, geographically dispersed team of entrepreneurs.

Vermont's groundbreaking legislation offers for the first time a legal framework for virtual companies. These changes allow three critical aspects to take place. The first is digital interaction with the State, a step authorized in other states as well. Moving beyond this, however, Vermont has made two key additions, allowing digital originals of bylaws, operating agreements, and other primary documents, and by permitting the full use of any "sequentially structured" digital communication in its formal decision making. These steps permit the formal interactions to move entirely into the digital sphere. The availability of software to carry out these functions will lower the barrier to entry for entrepreneurs worldwide who might not have or be able to afford legal counsel when starting a corporation or LLC, and will open up the possibility for a "Cambrian Explosion" of new digital firms and start-ups.

In order to catalyze this new business environment, The Law Lab at Harvard's Berkman Center for Internet and Society has developed Digital LLC, a web-based software platform that allows entrepreneurs to form and manage an LLC completely online. Where existing on-line "set up a company" sites typically just have a user fill in the initial filings with the state, Digital LLC aims to be an interactive forum for the entire length of a digital LLC's existence. The software provides tools for negotiating the LLC structure and building the two main components that govern the management of an LLC - the Operating Agreement and the Articles of Organization. Once the business is set up, the software provides a framework for making and recording decisions and identifying and resolving disputes as they occur. (See the videos here.) Through Digital LLC, businesses can be established and run entirely through internet communication.

As the digital business sector grows and matures, The Law Lab will expand its work to focus on new ways to reduce barriers to entry, provide governance safeguards and efficiency, reduce formalities, and augment paper-free and nearly lawyer-free administration. We must help the ideas-based entrepreneurs of the 21st century. Digital companies' flexible, non-terrestrially based nature will help make them a natural governance form around which geographically dispersed innovators can coalesce, unlocking a whole new wave of firm creation and entrepreneurial activity.

Oliver Goodenough is co-director of The Law Lab, Berkman Center for Internet & Society at Harvard University and Professor at Vermont Law School.

Zeba Khan is an independent writer and social media consultant with The Law Lab, Berkman Center for Internet & Society at Harvard University.