Some Old Lessons For New Enterprises

e-Commerce firms have aggressively marketed themselves as the new kids on the block. They eagerly discard old ways of doing business, confident that their way of doing business ' online ' is better. It's an e-commerce article of faith that everyone can work more efficiently if he or she would only eliminate outdated practices that don't take advantage of the conveniences available online.

Often, these denizens of all things digital have been correct. Consider the many fields that have been revolutionized ' and jobs that have been eliminated ' by 'new economy' firms. The Internet has not been a friend to individual real estate agents, travel agents and booksellers, however much it has helped their customers and clients. Increasing online access and familiarity have even transformed something as mundane as paying bills, in one of the quiet Internet success stories recently heralded in The New York Times (see, www.nytimes.com/2006/05/29/technology/29ecom.html?_r=1&th&emc=th&oref=slogin, subscription or purchase required).

The Horseshoe Crab As Business Benchmark

As a result in the ascendancy of online commerce, confident e-commerce entrepreneurs mock those who persist in traditional methods of doing business, labeling them dinosaurs. In their view, firms that still use pre-Internet tools and practices are ripe for extinction at the keyboards of younger, leaner competitors equipped with the fighting tools of a laptop and wireless connection.

But maybe some supposedly 'old' laws and ways of doing business have survived ' for decades and centuries ' for reasons other than that the Internet had not yet been invented. Sometimes, the tried and true is sufficient for what's needed. The old way may work more reliably, and perhaps even better than, the new path offered by e-commerce.

Similarly, in a silly ' but accurate ' analogy, professional sports teams constantly recycle coaches, even those who have been fired, because they are perceived as adding some value. Team owners hope that these 'old' coaches' experience and wisdom will push a struggling team to a championship level. In recent years alone, old-era coaches such as Scotty Bowman in hockey, and Dick Vermeil and Bill Parcells in football, have come out of retirement to win championships. Even Billy Martin, despite all of the controversy that followed him, was rehired ' repeatedly ' by taskmaster George Steinbrenner and several other major league baseball teams because his teams won.

In a Darwinian sense, perhaps traditional legal practices and laws evolved in response to business needs that the Internet has not, and perhaps can never, fill ' at least not with the same cost-efficiency as that which has always worked. Some traditional laws that appear as irrelevant to online business as a floppy disk may even be just as important to e-commerce firms today as they were when they first fil-led a need in the traditional economy.

To carry the evolution analogy further, some species, such as the horseshoe crab have not changed much for 350 million years. Yet without them, another species, the red knot, could go extinct.

Even e-commerce firms should still pay attention to the ways things have always been done, and the laws that business has always worried about and relied upon. That doesn't mean, however, that 'new way' innovations can't make the tried-and-true easier and more productive. For example, what says 'old economy' more than the traditional board meeting? Imagine the cost-savings online conferencing could wring out of the meeting, and the preparation for it. The high costs of traveling to expensive hotels, and expense account dining and entertainment could easily be avoided if everyone attended a virtual meeting from one's own office or home. Those actually attending a meeting can maintain contact with clients and their immediate needs by checking e-mail while trapped for hours in conference rooms.

Even the black-letter law trappings of such meetings ' formal notices and voting, and corporate minutes ' now seem as much a fossil of a bygone era as the telegram or the overnight-courier package. Corporate lawyers who once spilled endless ink over the importance of preserving corporate formalities, of dotting the i's and crossing the t's to avoid the exotic-sounding horrors of 'piercing the corporate veil,' now form and use limited-liability companies, or LLCs, it seems, without those cares.

LLC Doesn't Spell Hands Off for Firms

LLCs emerged from the dawn of e-commerce as the new entity of choice, which promised to eliminate all those annoying worries of the old corporate structure. Technically, LLCs were not an offspring of e-commerce ' the first LLC statutes in the early 1990s predated the Internet explosion. Nonetheless, their perceived advantages of simplification and cost-savings compared to a traditional corporation provided a perfect legal complement to the simultaneous dot-com revolution. As a result, attorneys today routinely form LLCs for new firms, unless there are compelling tax or regulatory reasons to stick with a corporation.

Yet e-commerce entrepreneurs should keep in mind why business use of corporations evolved in the first place. The legal concerns underlying the corporate form still exist, even in an LLC (or limited partnership, LLP, or in any of the other new entities that have emerged as business laws have tried to adapt to real-world needs).

Most important, owners of well-advised e-commerce companies don't want personal liability for business obligations, whether as the member of an LLC, shareholder of a corporation or limited partner of a limited partnership. To keep the assets and debts of the business separate from their personal lives ' the 'corporate veil' never to be pierced ' requires that the entity and its owners be kept separate, in everyday operations, as well as in the legal documents.

In other words, having an LLC won't make a difference if the business owner doesn't keep a separate checkbook and bank account for the LLC, or uses that account to pay his or her personal bills. Legal protection doesn't come simply from the words on the legal paperwork to form the company, but arises from the combination of that structure ' whether an LLC or corporation ' with day-to-day operations that strictly maintain the distinction between the business firm and its owners, whatever they may be called technically. The mechanical aspects of proper corporate behavior should be familiar to most executives. Advice on corporate recordkeeping and resolutions, proper corporate signature practices and, most important, on keeping personal and corporate accounts separate, has appeared in many publications.

What's New Is Sometimes Also What's Old

Traditional corporate documentation also provides a framework for business passages ' admission of new investors, buyouts and resolving disputes among owners (or trying to resolve them, at least). The complex documentation of equity financing and multiple classes of ownership, or arbitration clauses, cannot be eliminated simply because the business entity is an LLC rather than a corporation. Expensive lawyers and investment bankers are still needed to prepare offering and disclosure statements, and buyout agreements, however the firm is organized.

Similarly, today's business firm must have a control structure to govern its operations, both day-to-day and in long-range planning. In simple terms, someone must be the boss, whether his or her business card says President or Managing Member. Day-to-day managers still need oversight and guidance from more experienced executives. The LLC's elimination of corporate formalities doesn't end the business imperative of having effective leadership.

Similarly, e-commerce firms may even still need live board and shareholder meetings, with all the expenses such meetings entail, more than their brick-and-mortar counterparts, because an important function of a corporate board is the exchange of ideas. Firms in evolving markets face many uncertainties and difficult choices, for which the wisdom and guidance of 'board-level' advisors ' like the old coaches who come out of retirement to win championships ' may be critically important. Those advisors can help senior executives plan for a longer horizon than the next month's sales quota. And, if the board includes 'outsiders' with varied experience, the meeting can provide perspective and insights that may not be apparent to executives focused on day-to-day duties, or who have not solved business challenges in a variety of industries.

For these reasons, business board meetings do much more than simply fulfill requirements of corporate statutes. This knowledge sharing may occur more readily at a live meeting or retreat, with spontaneous conversations and networking at meals, or at a ballgame or cultural event. At a virtual meeting, in contrast, each participant may be present and interact with others only for the time spent on the connection, whether by phone or online hookup. Even then, those 'attending' may be multi-tasking with a Blackberry or by e-mail, or holding other conversations while putting the meeting on the 'mute' setting; the firm gets fewer expenses, but disproportionately less benefit from the meeting.

Tech-a-Tech vs. Tete-`a-Tete

Moreover, just because a corporate meeting can be held virtually doesn't mean that it can be done cheaply. The cost of high-quality equipment to have a virtual meeting, without the disruptions of dropped signals or inaudible conversations, may itself be considerable.

Certainly, live meetings can have many of the same distractions. Meeting breaks have always been a time to return calls, and physical presence is no insurance that good ideas will be exchanged. Virtual chats conducted by asynchronous e-mail or Instant Message conversations may also generate ideas that may not have emerged from a board room, because participants have more time to think, reflect on the issues and ponder their responses. Nonetheless, being in the same place at the same time, at a corporate meeting or retreat, increases the likelihood of starting such a dialogue among participants, which could be continued in an online discussion.

Real-estate law is another 'legal dinosaur,' an older law that seems unnecessary or irrelevant to e-commerce on the surface, yet which cannot be overlooked. What could be further from a virtual economy than the literal dirt of real estate? Online, the choice of a domain name has been analogized to the traditional real-estate maxim 'location, location, location' in its importance in helping the e-consumer find a firm online. Yet many traditional real-estate concepts affect e-commerce as well ' which, if ignored, could wipe out any efficiencies, and profit, from e-commerce operations.

Firms that are constantly adapting to change cannot risk being locked into a long-term lease for space with only limited flexibility for growth, to add or subtract space, or to relocate. Old-fashioned real estate law could become a ball and chain regardless of how advanced a firm's technical capacities are, or may become. Choosing facilities with the proper infrastructure, and access to the latest networking and access technologies is equally important.

Many Factors Still to Consider

One of the highlights of the e-economy has been its revelation of how many back office operations and expenses ' the logistics of managing inventory and filling orders at the least cost ' can drive success with cost-savings. (See, 'Going High-Tech On The Paper Trail: Records Management With Barcode and RFID Technologies.') Yet, that profitability will also be driven by the terms of the leases and outsourcing contracts for those operations. Even low-tech zoning can affect a firm, particularly a startup, if it operates from a space that doesn't permit commercial activity. An e-commerce business plan that ignores these 'old-fashioned' legal concerns relating to real estate will seem as inadequate to investors as one that didn't mention technology at all in the first place.

In fact, doing business online is no shelter from the spectrum of laws and worries that drive up brick-and-mortar firms' costs but that are not highlighted in cyberspace law conferences. The employees of an e-commerce firm are still protected by a host of laws against discrimination, and regulation of workplace conditions, salaries and benefits. Simply labeling someone as an independent contractor, as is popular with tech firms, doesn't mean that the IRS will agree with that characterization (and overlook the payroll taxes that may be due).

Similarly, no e-commerce firm can ignore the Streamlined Sales Tax Project, the nationwide effort to end the 'tax-free' savings of shopping online (www.streamlinedsalestax.org/oprules.html). Contrary to popular belief, buying online doesn't excuse payment of sales taxes. On the one hand, outdated tax code definitions of what it means to do business in a state didn't adequately cover the nationwide market of e-commerce, and may not have formally required e-commerce firms to collect sales taxes, as their brick-and-mortar counterparts were required to do. But on the other hand, that issue of jurisdiction has been in litigation across the country ' with e-commerce firms often settling or losing, and paying back taxes in either case. In response, states also began a concerted effort to eliminate the advantages of ignoring the law by requiring e-commerce firms to collect those taxes ' and customers still owe the use tax on their prior purchases. (The SSTP offers an amnesty period that expires on Sept. 30. See, www.streamlinedsalestax.org/states%20offering%20amnesty.htm for details, and for a list of states participating in the amnesty program.)

Embrace the New, But Remember the Old

While the pre-Internet rules may be applied differently to e-commerce, the underlying legal concerns that created a need for those laws often turn out to be just as important to the new economy as to the dinosaurs that tech entrepreneurs boast of replacing.

While the original dinosaurs died out when their environment changed, today's e-commerce firms must survive that process in reverse: They must adapt the best aspects of the brick-and-mortar laws and legal structures to an electronic marketplace that never existed before. A few prehistoric species have managed to survive without change. But most species have not lived through that transition; the once-mighty T-Rex became destined to become prey to predators able to adapt more nimbly to the changing environment. e-Commerce firms should learn a lesson from law, natural history and old coaches that dictates that just because a legal requirement is old, it isn't automatically outdated or unnecessary. Successful firms will instead combine the best of the old laws and legal practices with the innovation of the online marketplace to find their own niche in the evolving virtual world.

e-Commerce firms have aggressively marketed themselves as the new kids on the block. They eagerly discard old ways of doing business, confident that their way of doing business ' online ' is better. It's an e-commerce article of faith that everyone can work more efficiently if he or she would only eliminate outdated practices that don't take advantage of the conveniences available online.

Often, these denizens of all things digital have been correct. Consider the many fields that have been revolutionized ' and jobs that have been eliminated ' by 'new economy' firms. The Internet has not been a friend to individual real estate agents, travel agents and booksellers, however much it has helped their customers and clients. Increasing online access and familiarity have even transformed something as mundane as paying bills, in one of the quiet Internet success stories recently heralded in The New York Times (see, www.nytimes.com/2006/05/29/technology/29ecom.html?_r=1&th&emc=th&oref=slogin, subscription or purchase required).

The Horseshoe Crab As Business Benchmark

As a result in the ascendancy of online commerce, confident e-commerce entrepreneurs mock those who persist in traditional methods of doing business, labeling them dinosaurs. In their view, firms that still use pre-Internet tools and practices are ripe for extinction at the keyboards of younger, leaner competitors equipped with the fighting tools of a laptop and wireless connection.

But maybe some supposedly 'old' laws and ways of doing business have survived ' for decades and centuries ' for reasons other than that the Internet had not yet been invented. Sometimes, the tried and true is sufficient for what's needed. The old way may work more reliably, and perhaps even better than, the new path offered by e-commerce.

Similarly, in a silly ' but accurate ' analogy, professional sports teams constantly recycle coaches, even those who have been fired, because they are perceived as adding some value. Team owners hope that these 'old' coaches' experience and wisdom will push a struggling team to a championship level. In recent years alone, old-era coaches such as Scotty Bowman in hockey, and Dick Vermeil and Bill Parcells in football, have come out of retirement to win championships. Even Billy Martin, despite all of the controversy that followed him, was rehired ' repeatedly ' by taskmaster George Steinbrenner and several other major league baseball teams because his teams won.

In a Darwinian sense, perhaps traditional legal practices and laws evolved in response to business needs that the Internet has not, and perhaps can never, fill ' at least not with the same cost-efficiency as that which has always worked. Some traditional laws that appear as irrelevant to online business as a floppy disk may even be just as important to e-commerce firms today as they were when they first fil-led a need in the traditional economy.

To carry the evolution analogy further, some species, such as the horseshoe crab have not changed much for 350 million years. Yet without them, another species, the red knot, could go extinct.

Even e-commerce firms should still pay attention to the ways things have always been done, and the laws that business has always worried about and relied upon. That doesn't mean, however, that 'new way' innovations can't make the tried-and-true easier and more productive. For example, what says 'old economy' more than the traditional board meeting? Imagine the cost-savings online conferencing could wring out of the meeting, and the preparation for it. The high costs of traveling to expensive hotels, and expense account dining and entertainment could easily be avoided if everyone attended a virtual meeting from one's own office or home. Those actually attending a meeting can maintain contact with clients and their immediate needs by checking e-mail while trapped for hours in conference rooms.

Even the black-letter law trappings of such meetings ' formal notices and voting, and corporate minutes ' now seem as much a fossil of a bygone era as the telegram or the overnight-courier package. Corporate lawyers who once spilled endless ink over the importance of preserving corporate formalities, of dotting the i's and crossing the t's to avoid the exotic-sounding horrors of 'piercing the corporate veil,' now form and use limited-liability companies, or LLCs, it seems, without those cares.

LLC Doesn't Spell Hands Off for Firms

LLCs emerged from the dawn of e-commerce as the new entity of choice, which promised to eliminate all those annoying worries of the old corporate structure. Technically, LLCs were not an offspring of e-commerce ' the first LLC statutes in the early 1990s predated the Internet explosion. Nonetheless, their perceived advantages of simplification and cost-savings compared to a traditional corporation provided a perfect legal complement to the simultaneous dot-com revolution. As a result, attorneys today routinely form LLCs for new firms, unless there are compelling tax or regulatory reasons to stick with a corporation.

Yet e-commerce entrepreneurs should keep in mind why business use of corporations evolved in the first place. The legal concerns underlying the corporate form still exist, even in an LLC (or limited partnership, LLP, or in any of the other new entities that have emerged as business laws have tried to adapt to real-world needs).

Most important, owners of well-advised e-commerce companies don't want personal liability for business obligations, whether as the member of an LLC, shareholder of a corporation or limited partner of a limited partnership. To keep the assets and debts of the business separate from their personal lives ' the 'corporate veil' never to be pierced ' requires that the entity and its owners be kept separate, in everyday operations, as well as in the legal documents.

In other words, having an LLC won't make a difference if the business owner doesn't keep a separate checkbook and bank account for the LLC, or uses that account to pay his or her personal bills. Legal protection doesn't come simply from the words on the legal paperwork to form the company, but arises from the combination of that structure ' whether an LLC or corporation ' with day-to-day operations that strictly maintain the distinction between the business firm and its owners, whatever they may be called technically. The mechanical aspects of proper corporate behavior should be familiar to most executives. Advice on corporate recordkeeping and resolutions, proper corporate signature practices and, most important, on keeping personal and corporate accounts separate, has appeared in many publications.

What's New Is Sometimes Also What's Old

Traditional corporate documentation also provides a framework for business passages ' admission of new investors, buyouts and resolving disputes among owners (or trying to resolve them, at least). The complex documentation of equity financing and multiple classes of ownership, or arbitration clauses, cannot be eliminated simply because the business entity is an LLC rather than a corporation. Expensive lawyers and investment bankers are still needed to prepare offering and disclosure statements, and buyout agreements, however the firm is organized.

Similarly, today's business firm must have a control structure to govern its operations, both day-to-day and in long-range planning. In simple terms, someone must be the boss, whether his or her business card says President or Managing Member. Day-to-day managers still need oversight and guidance from more experienced executives. The LLC's elimination of corporate formalities doesn't end the business imperative of having effective leadership.

Similarly, e-commerce firms may even still need live board and shareholder meetings, with all the expenses such meetings entail, more than their brick-and-mortar counterparts, because an important function of a corporate board is the exchange of ideas. Firms in evolving markets face many uncertainties and difficult choices, for which the wisdom and guidance of 'board-level' advisors ' like the old coaches who come out of retirement to win championships ' may be critically important. Those advisors can help senior executives plan for a longer horizon than the next month's sales quota. And, if the board includes 'outsiders' with varied experience, the meeting can provide perspective and insights that may not be apparent to executives focused on day-to-day duties, or who have not solved business challenges in a variety of industries.

For these reasons, business board meetings do much more than simply fulfill requirements of corporate statutes. This knowledge sharing may occur more readily at a live meeting or retreat, with spontaneous conversations and networking at meals, or at a ballgame or cultural event. At a virtual meeting, in contrast, each participant may be present and interact with others only for the time spent on the connection, whether by phone or online hookup. Even then, those 'attending' may be multi-tasking with a Blackberry or by e-mail, or holding other conversations while putting the meeting on the 'mute' setting; the firm gets fewer expenses, but disproportionately less benefit from the meeting.

Tech-a-Tech vs. Tete-`a-Tete

Moreover, just because a corporate meeting can be held virtually doesn't mean that it can be done cheaply. The cost of high-quality equipment to have a virtual meeting, without the disruptions of dropped signals or inaudible conversations, may itself be considerable.

Certainly, live meetings can have many of the same distractions. Meeting breaks have always been a time to return calls, and physical presence is no insurance that good ideas will be exchanged. Virtual chats conducted by asynchronous e-mail or Instant Message conversations may also generate ideas that may not have emerged from a board room, because participants have more time to think, reflect on the issues and ponder their responses. Nonetheless, being in the same place at the same time, at a corporate meeting or retreat, increases the likelihood of starting such a dialogue among participants, which could be continued in an online discussion.

Real-estate law is another 'legal dinosaur,' an older law that seems unnecessary or irrelevant to e-commerce on the surface, yet which cannot be overlooked. What could be further from a virtual economy than the literal dirt of real estate? Online, the choice of a domain name has been analogized to the traditional real-estate maxim 'location, location, location' in its importance in helping the e-consumer find a firm online. Yet many traditional real-estate concepts affect e-commerce as well ' which, if ignored, could wipe out any efficiencies, and profit, from e-commerce operations.

Firms that are constantly adapting to change cannot risk being locked into a long-term lease for space with only limited flexibility for growth, to add or subtract space, or to relocate. Old-fashioned real estate law could become a ball and chain regardless of how advanced a firm's technical capacities are, or may become. Choosing facilities with the proper infrastructure, and access to the latest networking and access technologies is equally important.

Many Factors Still to Consider

One of the highlights of the e-economy has been its revelation of how many back office operations and expenses ' the logistics of managing inventory and filling orders at the least cost ' can drive success with cost-savings. (See, 'Going High-Tech On The Paper Trail: Records Management With Barcode and RFID Technologies.') Yet, that profitability will also be driven by the terms of the leases and outsourcing contracts for those operations. Even low-tech zoning can affect a firm, particularly a startup, if it operates from a space that doesn't permit commercial activity. An e-commerce business plan that ignores these 'old-fashioned' legal concerns relating to real estate will seem as inadequate to investors as one that didn't mention technology at all in the first place.

In fact, doing business online is no shelter from the spectrum of laws and worries that drive up brick-and-mortar firms' costs but that are not highlighted in cyberspace law conferences. The employees of an e-commerce firm are still protected by a host of laws against discrimination, and regulation of workplace conditions, salaries and benefits. Simply labeling someone as an independent contractor, as is popular with tech firms, doesn't mean that the IRS will agree with that characterization (and overlook the payroll taxes that may be due).

Similarly, no e-commerce firm can ignore the Streamlined Sales Tax Project, the nationwide effort to end the 'tax-free' savings of shopping online (www.streamlinedsalestax.org/oprules.html). Contrary to popular belief, buying online doesn't excuse payment of sales taxes. On the one hand, outdated tax code definitions of what it means to do business in a state didn't adequately cover the nationwide market of e-commerce, and may not have formally required e-commerce firms to collect sales taxes, as their brick-and-mortar counterparts were required to do. But on the other hand, that issue of jurisdiction has been in litigation across the country ' with e-commerce firms often settling or losing, and paying back taxes in either case. In response, states also began a concerted effort to eliminate the advantages of ignoring the law by requiring e-commerce firms to collect those taxes ' and customers still owe the use tax on their prior purchases. (The SSTP offers an amnesty period that expires on Sept. 30. See, www.streamlinedsalestax.org/states%20offering%20amnesty.htm for details, and for a list of states participating in the amnesty program.)

Embrace the New, But Remember the Old

While the pre-Internet rules may be applied differently to e-commerce, the underlying legal concerns that created a need for those laws often turn out to be just as important to the new economy as to the dinosaurs that tech entrepreneurs boast of replacing.

While the original dinosaurs died out when their environment changed, today's e-commerce firms must survive that process in reverse: They must adapt the best aspects of the brick-and-mortar laws and legal structures to an electronic marketplace that never existed before. A few prehistoric species have managed to survive without change. But most species have not lived through that transition; the once-mighty T-Rex became destined to become prey to predators able to adapt more nimbly to the changing environment. e-Commerce firms should learn a lesson from law, natural history and old coaches that dictates that just because a legal requirement is old, it isn't automatically outdated or unnecessary. Successful firms will instead combine the best of the old laws and legal practices with the innovation of the online marketplace to find their own niche in the evolving virtual world.