Post-Modernism and the Law
Blogging and Business Planning Part 2

Blogging and Business Planning

Subtitled: I think Professor Bainbridge just made me money (read the full post for the reason why).

[Disclaimer: This is not legal advice.  Rather, I am having fun, thinking aloud about a subject I find fascinating.]

One of my favorite law school courses was Business Planning.  I also took - and enjoyed - Corporations and Taxation of Business Entities.  Who knew that they would have relevance to blogging? 

Enter corporations professor Stephen Bainbridge, who asks:

Is the Volokh Conspiracy a partnership [now that it accepts ad revenue and voluntary compensation - in the form of "tips"- from readers]?

The professor concludes, indeed, that the Volokh Conspiracy is a partnership (and yes, tips from tip jars are taxable income).  He also suggests that the Volokh Conspiracy bloggers not operate as a General Partnership (though he suggests that we buy his book to learn why).  I don't want to steal book sales from the good professor, but assuming a group blog is a partnership, it should be a Limited Liability Company.  Why?

A business has four tax goals and non-planning tax goals.  The four tax planning goals are:

  • Avoid double taxation of profits
  • Allow full flow through of losses
  • Avoid taxation to the entity and to the holders upon transfer of asset from the holders to the entity. 
  • Avoid taxation to the entity and holders upon transfer from entity to the holders

Our four non-tax planning goals are:

  • Limited liability
  • Flexibility and ease in formation and operation of the entity
  • Flexibility of allocation of profits and losses
  • The ability to take the entity public

The perfect entity would meet all 8 goals, but nothing in life is perfect.  We should thus see which corporate or partnership entity meets most of them.

The C-Corporation is a big failure, since profits are double-taxed (once at the corporate level, and then again upon distribution to the shareholders) and since losses are trapped at the corporate level.  The S-Corporation meets many of our goals.  Unfortunately, though, you must allocate losses in proportion to a persons pro rate share of the corporation.  This means that the rich guy or gal who pays the bills can't deduct the company's losses.  An S-Corporation also restricts who can be a shareholder.  Thus, a group blog probably would not want to be a corporation.  Let's see how partnerships fare.

The three main types of partnerships are: General Parterships, Limited Partnerships, and Limited Liability Companies.  Although GPs and LPs pass our four tax-planning goals, they fail the Purple Elephant of business planning, namely they do not provide for limited liability.

In a GP, all partners are personally liable for the acts of the other partners.  In an LP, at least one partner remains personally liable for the acts of others.  An LCC, however, provides a corporate veil.  Thus, no member (they're called members instead of partners) of an LLC faces personal liability.

This would mean that if one co-blogger defamed someone, e.g., that all partners (in a GP) or at least one partner (in an LP) would be personally liable for damages.  Thus, the plaintiff could attach the partner's house to pay any judgment.

The LLC meets every goal except that you can't take an LLC public, although you might be able to make a tax-free reorganization that could moot this concern.  Anyhow, who's going to take a blog public?  Thus, for-profit group blogs should operate as an LCC.

Anyhow, why did Professor Bainbridge make me money?  Thus far I have been operating this blog at a loss.  But I haven't been writing-off expenses related to it.  But if my blog is indeed a business, then I can begin writing off expenses.

P.S.  No -- I am not going to write-off blogging-related expenses.  Nor am I convinced that this blog is a legal partnership.  (There's no sharing of the ad revenue, which means C&F is not a group of two or more persons engaged in a joint profit-making venture).  Incidentally, there is no sharing of ad revenue because it would be more expensive to share it than for me to keep all of it -- Sharing it would require us to draft documents, file extra tax returns, and ensure that our sharing arragement has "substantial economic effect," etc.

P.P.S. I also think you should buy Professor Bainbridge's book.