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I'm considering registering a business that I am bootstrapping. At this point I am concerned about keeping costs down. The cheapest option in my state is to register a Sole Proprietorship. The next cheapest would be an LLC. Obviously the LLC gives me protection over personal assets while the sole proprietorship does not.

What liabilities should I consider for a SAAS business? I'm hosting on AWS, so at this time the only thing I can think of is AWS resource usage could cost a lot if not restricted properly. Once I am collecting payment for service there could be liablity there.

Any other thoughts on liabilities that I should consider?

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AWS = Amazon Web Services? – bneely Dec 13 '11 at 21:52
Yes. Amazon Web Services. – MikeNereson Dec 13 '11 at 22:05

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Possible risks for SaaS from top of my head :-

  • Getting sued/charged for

    • Loss of data / other problems ('Errors and Omission')
    • Accidental release of confidential info
    • Trademark infringement
    • Patent infringement
    • Copyright infringement
    • Employment legislation and tribunals
    • Miscelanious laws that you didn't even know about (e.g. if you have customers in Europe then there is a risk of falling foul of 'Cookie Law'- no point in debating right/wrong of this specific example, as there will be examples of stuff like this in every single jurisdiction)

  • Financial reasons

    • Sure your liabilities are pretty well limited with AWS but if this ever takes off then will be a whole load of other financial liabilities you will inevitably build up - office leases, tax, long term AWS instances, employment contracts, partnerships etc etc etc.
    • Payment liabilities (as Steve mentioned)

  • Other Reasons (should venture be a success)

    • Sets you off on the 'correct' footing and avoids converting later
    • In UK allows you to pay yourself in dividends rather than payroll which is MUCH more tax efficient way (don't know about the USA but most western economies have very similar tax systems)
    • Gives you more options should you choose to sell business
    • Possibly simpler selling product (esp overseas). For example if I (UK business remember) sell to someone in the USA as a Ltd company (LLC equiv) then no problem. Otherwise I need to either loose 30% withholding tax or get an SSN and fill in a US tax return and pay taxes on US derived income. There may be similar problems selling from USA to other countries.
    • A lot of customers/suppliers will deal with a 'small business' v a Corporation (LLC) in a totally different way (just about first question you will be asked on a bank application for example), and some may not deal with you at all unless you're an LLC

In the UK the cost difference between running a sole trader v Ltd. company (at small scale) will be about $500 p/a. For this sort of cash I wouldn't, personally, consider any other option just for the bit of extra protection against the unknown unknowns.

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How about you lose someone's data, or confidential data gets leaked, then you'd have a liability, if someone sued you.

The "Limited" in LLC (and Ltd in the UK) is key here, in that you are not personally liable for issues within the company.

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You're right. I am trying to get a good idea as to what those "issues" could be for a SAAS. Thanks for your answer. – MikeNereson Dec 13 '11 at 16:55
The fact is it doesn't matter what issues arise if you are operating via a limited company (e.g. LLC). If something goes wrong, you may lose the company but your personal assets will generally be safe. – Steve Jones Dec 13 '11 at 17:26
the question though is what sorts of liabilities exist for a person offering a SAAS. Without knowing that its not possible to rationally chose the correct business entity. – MikeNereson Dec 13 '11 at 19:19
It sounds like you should meet with a lawyer. You may get other fine answers here, but you seem to be driving at a complete list of all possible problem scenarios. – bneely Dec 13 '11 at 21:54
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It is not sensible to try to get a list of all possible adverse scenarios, as you'd end up taking way too much time, for little benefit. Just take reasonable steps to cover the main issues that are likely to arise, and have great insurance to cover anything else. That is what insurance is for, mitigating risks that are not worthwhile controlling directly. Off the top of my head, risks you should be on top of are: 1) Data loss through fraud, accident, hacking, bugs, etc 2) Payment problems, credit card fraud, chargebacks 3) Employee issues 4) Counterparty risk, e.g. hosting errors, downtime – Steve Jones Dec 14 '11 at 8:32

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