Tired of his dead-end job, Jim created a website that sold electronics for the home. Through a friend, he had met with an importer of goods made in China, and worked out an agreement to buy wholesale so that he could sell the electronics at low retail prices on the Internet. Using drop shipping, Jim didn't even have to handle the goods. As the market became more competitive for home electronics, Jim had to slash his profit margins to a point that he was nearly breaking even. He even considered cutting out the importer and bringing in the goods directly from China but knew he wasn't cut out for handling all of the shipping and paperwork. Diane, who owned a competing website, offered to ?partner? with Jim by taking over his website and giving him a cut of the profits. Jim accepted, and Diane ran things smoothly for a while. One day, Jim found out he was being sued by the importer. Why? Diane, the importer, and some customers were fighting over quality of goods sold, payments due, and refunds demanded. Complaints had been filed with Jim's Internet service provider (ISP) asking that the site be shut down because of fraud, Jim's credit card merchant and PayPal accounts were gone for the same reason (try doing business on the Web when you can only accept checks or money orders). To make matters worse, Diane had filed for bankruptcy. When the importer won in court, he went after Jim's assets (home, car, savings, etc.) to satisfy the judgement because Diane had none. Plus, Jim had some big legal bills that his own attorney wanted paid. With no other options, Jim filed for bankruptcy too. Both Jim and Diane made mistakes in operating their online businesses that financially destroyed them. Even a good idea means nothing if the right legal protections aren't in place to protect what you earn. The first step that you should take before you sell anything on the Internet is to put into place the right business foundation. There are four common ways to set up your Internet business: (1) Sole Proprietorship (2) General Partnership (3) Subchapter ?S? Corporation (4) Limited Liability Company
