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  1. #1

    legal action by customers - how do you avoid that?

    Hi all,

    How do you (as web hosting provider) protect yourself from being sued by your customers?

    For example, when you brought down your server for an urgent unscheduled maintenance for 1 hour, then your customer complaint and wanted to sue you for 100K or more due to:
    - the loss of data (corruption)
    - missing opportunities of closing a deal
    - interruption of a huge transaction (like online broker, etc)

    when you operate as sole-proprietorship or partnership, you have to kiss good bye to your car/bank accounts/etc, don't u?

    how do you avoid that?


  2. #2
    Join Date
    Jul 2002
    Location
    kansas city
    Posts
    205
    become incorporated.

    the most important reason to incorporate is that it limits your personal liability. a corporation is a seperate legal entity from the individuals who own and operate it. it can hold titles to property, borrow money, sue, be sued, basically its a person on paper. any rights, including constitutional ones that a human would enjoy, a corporation may enjoy.

    in your case i will assume a bit, and say that an LLC or limited liability company would best fit your needs. a typical corporation has three levels.. shareholders, directors, and officers and have a strict set of rules which the company must abide by. however an LLC combines the protection of a corporation with the tax benefits of a partnership, and also is a legal entity as described above.

    you do not need an attorney to form your LLC for you, however I would recommend it. i would advise discussing things with a tax advisor and or attorney, better yet an attorney with their CPA to find out how this would effect your taxes, and if its something that would work for you.

    another great source of information is your local IRS office. they have every form you would ever need to fill out laying around, and now have a great cd packed with forms/info ..

    LLC is the way to go if you're wanting to protect yourself in this situation. however I am not an authority on the subject, so please again advise an attorney to find what best suits you.
    - brian

    failing to plan is planning to fail.

  3. #3
    hi Brian,

    Thanks for the sound advice. I agree wholeheartedly.

    I wonder how much is the whole cost for incorporating a company/LLC? furthermore you need to hire accountant, solicitor & lawyer, don't u?

    Can a small web hosting companies justify the cost?

    never been go down this path before ...

  4. #4
    Join Date
    Jul 2002
    Location
    kansas city
    Posts
    205
    the cost of doing creating an LLC is going to vary.. you might check the phone book for a company that specalizes in this and see if you could come up with a price quote.. or the IRS office may have someone they could recommend. there is also the option of getting a startup kit, which may be less costly.. but personally i would let a professional do it for peace of mind.

    im not sure how to answer your question about justifying the cost other than take a step back and look at it from an insurance angle.. sure you get bent over every time you pay auto insurance, and you may never run into your neighbors bently, but say you do..

    other than that, i suppose you could try to avoid hosting any potential customers that may sue you due to loss (heavy ecommerice sites) .. create backups regulary so that in the event data is corrupted or lost you have something to throw back up there. also a good TOS with specific disclamers and limitation of liabities may help.. ' in no event shall acme company be liable for damages resulting from loss of data, bleh blah random foolishness..

    .. you could always start up as a sole-proprietorship then reform as an LLC later down the road if you lack the funds, or are unsure if this is something you would like to stick out for the long haul.

    glad i could help.

    cheers
    - brian

    failing to plan is planning to fail.

  5. #5
    Join Date
    Jul 2002
    Location
    UK
    Posts
    79
    2 Sections from our TOS ( Quite a standard set of disclamers that you will see with most hosts )

    6. DISCLAIMER OF WARRANTY
    THE SERVICES, THE PROXIMA WEB-HOSTING SITE, INCLUDING WITHOUT LIMITATION, ALL PRODUCTS AND SERVICES DISPLAYED OR OFFERED ON THE PROXIMA WEB-HOSTING SITE, AND ALL TEXT, GRAPHICS, LINKS AND APPLICATIONS ARE PROVIDED TO CLIENT ON AN 'AS IS' BASIS AND WITHOUT WARRANTY OF ANY KIND. PROXIMA WEB-HOSTING DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO EACH OF THE FOREGOING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OR ARISING FROM A COURSE OF DEALING. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, PROXIMA WEB-HOSTING SPECIFICALLY DISCLAIMS ANY WARRANTY THAT (1)THE SERVICES WILL BE UNINTERRUPTED OR ERROR-FREE; (2) DEFECTS WILL BE CORRECTED; (3) THERE ARE NO VIRUSES OR OTHER HARMFUL COMPONENTS; AND (4) THE SECURITY METHODS EMPLOYED WILL BE SUFFICIENT.


    7. LIMITATION OF LIABILITY
    IN NO EVENT SHALL PROXIMA WEB-HOSTING BE LIABLE FOR DAMAGES RESULTING FROM LOSS OF DATA, PROFITS, USE OF THE PROXIMA WEB-HOSTING SITE OR ANY PROXIMA WEB-HOSTING PRODUCTS OR SERVICES, OR FOR ANY INCIDENTAL, INDIRECT, PUNITIVE, OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH THIS AGREEMENT OR IN CONNECTION WITH ANY PRODUCTS OR SERVICES PROVIDED HEREUNDER. IN NO EVENT SHALL PROXIMA WEB-HOSTING CUMULATIVE LIABILITY EXCEED AN AMOUNT GREATER THAN FIVE HUNDRED DOLLARS (500 US).

    And to order this service the customer must explicily select they have read and agreed to your TOS.

    Just remember its not a way to get away with giving poor service in ANY way but to protect your house from being taken as everyone seams to what to sue everyone else these days for anything.
    Proxima Web-Hosting

  6. #6
    Join Date
    Jul 2002
    Location
    Pittsburgh, PA
    Posts
    276
    You do not need a lawyer or accountant althought they would be nice.

    LLC fees vary by state, but range from $80 - $800 per year. *Most* states (I believe 47 of them) are under $150 a year. California is $800 or maybe $850 or so, becuase they make you pay the first years minimum tax upfront which is like $600 - $700 of the $8XX (I forgot the exact numbers, but mine are pretty damn close).

    In Pennsylvania I pay $100 a year to be LLC - that is just the state filing fee.

    Another option is incorporating in another state. It may be more of a hassle for than its worth, but it can save you plenty of $$$ on taxes if done right. If you ever wondered why lots of business are incorporated in Nevada or Delaware this is why. They are not all based there, but hire a representative to act on their behalf in those states (get mail and forward it to you, etc.) Nevada taxes are VERY low, maybe not even a state income tax (sorry I can't recall the details, I looked at all this a year ago before I got LLC), because the casinos provide enough money to the state. The same thing applies to Delaware - not casinos, but the taxes are low because of something.

  7. #7
    Join Date
    Nov 2001
    Posts
    309
    I have seen many threads here on the same subject, but I have never seen information about host actually been sued from his client. Have you ever heard about such a case?
    I doubt that a host will be sued for a couple of hours downtime .

    Peter

  8. #8
    Join Date
    Aug 2002
    Posts
    636
    precisely... I have to agree and back up steve (2 posts up)... although going the route of being incorporated can be a trip down expense lane (although worth every dollar), the place you MUST start is in your TOS. **THEY MUST AGREE TO IT BEFORE SIGNING UP**.

    From a legal perspective, a TOS can only go so far in court (if it were heavily prosecuted against) as being 'unfair' blah blah blah... but it's better than nothing at all (this is where the 'corporation'/LLC comes in handy).

    Hope this helps
    Geek 3 Computer Repair

  9. #9
    Join Date
    Aug 2000
    Location
    NYC
    Posts
    6,627
    LLC fees vary by state, but range from $80 - $800 per year.
    There may be exceptions, but generally it is not an annual fee. You pay once to create your corporation (including LLC; "corporation" is often used generically for either type of entity) when you file the papers.

    You still may have other annual obligations such as franchise tax and of course income tax, but in most states in the US you don't pay an annual fee to maintain a corporation.
    Specializing in SEO and PPC management.

  10. #10
    Join Date
    Sep 2001
    Location
    all over
    Posts
    120
    Originally posted by brian-WHT


    in your case i will assume a bit, and say that an LLC or limited liability company would best fit your needs. a typical corporation has three levels.. shareholders, directors, and officers and have a strict set of rules which the company must abide by. however an LLC combines the protection of a corporation with the tax benefits of a partnership, and also is a legal entity as described above.
    An LLC can be taxed as a sole proprietor or a C-corporation (provided there is more than one member) as well. To some, being taxed as a partnership may not be a tax advantage, especially if you forsee profitability and plan on retaining said profits. You should consult a professional and not WHT, as most of the information disclosed on these boards with regards to tax planning and asset protection are only half correct.

    I would consult an attorney and a CPA, but if you are strapped for funds you can easily incorporate yourself (of course, consult an attorney and a CPA first so you are on the right track!). File a certificate of incorporation with the state, SS4 with the IRS for an EIN (depending on how you elect to structure your corporation you may not need this) and whatever registration forms / licenses your state requires. Most states document this heavily online. It will cost you 10% what a lawyer will charge, most likely and very easy to do yourself correctly if you seek out the right advice.

    Best of luck.

  11. #11
    Tthis is a very very very good and informative thread.
    Thanks to everyone who contributing

    What I've gathered here so far:
    - The cheapest way to go for web hosting start-ups is sole-proprietorship + T O S !!! written by solicitor/lawyer
    - As soon as the budget permits, convert this to a LLC/Corp and seek advise from a CPA

    Talking about lawyer/solicitor, any URL of lawyer websites out there who specialise in Internet-related business? I don't want to have my TOS written by a lawyer who asked "what is web hosting?" as his/her 1st question

    and what's the price range for writing a proper TOS will cost you?

  12. #12
    Join Date
    Nov 2001
    Location
    Ann Arbor, MI
    Posts
    2,978
    The best way to not be sued is not to do anything that would be considered negligent.
    -Mark Adams
    www.bitserve.com - Secure Michigan web hosting for your business.
    Only host still offering a full money back uptime guarantee and prorated refunds.
    Offering advanced server management and security incident response!

  13. #13
    Join Date
    Jun 2002
    Location
    Lansdale, PA
    Posts
    16
    If you're interested in forming a corporation or LLC, here's a link that might be useful to you: http://www.mycorporation.com
    Patrick Casady: Co-Owner
    RPG-Works.Net: Hosting For Creators
    [email protected] AIM: prcasady
    Please e-mail or IM for fastest response!

  14. #14
    Join Date
    Nov 2000
    Location
    Pennsylvania
    Posts
    472
    Can a LLC have more than one business under it? I own 5 web businesses and wanted to place them all under one company... can you do that?
    John
    http://www.zurax.com
    http://www.jwshosting.com

  15. #15
    Join Date
    Jul 2002
    Posts
    441
    Originally posted by venomx
    Can a LLC have more than one business under it? I own 5 web businesses and wanted to place them all under one company... can you do that?
    u sure can

    just need DBAs or Assumed Names

  16. #16
    Join Date
    Nov 2000
    Location
    Pennsylvania
    Posts
    472
    Great now I just need to come up with a good name that goes along with everything...
    John
    http://www.zurax.com
    http://www.jwshosting.com

  17. #17
    Join Date
    Aug 2002
    Location
    deville
    Posts
    214

    *

    This was really informative thread. Thanks for posting it.

  18. #18
    Join Date
    Jun 2002
    Location
    North Pole
    Posts
    115

    Re: legal action by customers - how do you avoid that?

    Originally posted by blitzlight
    Hi all,

    How do you (as web hosting provider) protect yourself from being sued by your customers?

    For example, when you brought down your server for an urgent unscheduled maintenance for 1 hour, then your customer complaint and wanted to sue you for 100K or more due to:
    - the loss of data (corruption)
    - missing opportunities of closing a deal
    - interruption of a huge transaction (like online broker, etc)

    when you operate as sole-proprietorship or partnership, you have to kiss good bye to your car/bank accounts/etc, don't u?

    how do you avoid that?

    A good ToS will help you there (as another person already said). Not to be rude or anything, but if you're another low end host (using cheap dedicated/co-located servers) and charge like $5/month, I don't see any reason why a company that deals with "huge transactions" would go to a small host. Just for the simple fact that they have very little control over the "server". If I were doing huge transactions, I would drop a T1 on-site, not pay a host $5.

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