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Online Collaboration Goes Legit

A New Vermont law lays the foundation for new types of vlrtual corporations.

It is one thing to talk about the “virtual corporation” and online commons as new organizational forms. It’s quite another to have those forms be legally recognized. Yet in a little-noticed law enacted in June 2008, the State of Vermont has formally conferred “legal personhood” on online communities that wish to form limited-liability partnerships.

The law was tucked into a bill called “Miscellaneous Tax Documents,” but the new virtual corporation law has enormous implications. It enables people to come together as virtual businesses, with dispersed partners who may live anywhere, and avoid the usual requirements that the company host in-person board meetings, maintain a physical office and file paper documents with the state.


“Inside Cyber Space” image by Larskflem, via Flickr, licensed under a Creative Commons Attribution-NonCommercial license.

New York Law School professor David R. Johnson, a key player in conceptualizing and promoting the new law, testified before the Vermont legislature in April:

We need to make it easier for people to come together to form companies (firms, rather than just markets) that can provide economic incentives for sustained work by dispersed individuals, that can collectively own the jointly produced work product (whether that is a valuable piece of intellectual property or a new branded service created by the participants), that can enjoy limited liability (thereby avoiding being re-characterized as partnerships), and that can open a bank account, distribute net proceeds to the participants who have contributed value, and enter into contracts with third parties.

Vermont is following in the steps of Delaware, which long ago became the state of choice for the chartering of large corporations. Delaware offers low taxes, few regulations and a business-friendly law for corporate governance, and in return collects some $700 million a year from incorporation taxes and fees. Now Vermont is poised to become the “Delaware of the Net.” By charging a registration fee of up to $275 per enterprise – which might attract tens or hundreds of thousands of enterprises – Vermont could collect a nice bit of change.

State Representative Alison Clarkson of Woodstock, Vermont, who introduced the legislation, does not consider state revenue of $20 million-plus unreasonable. Clarkson also envisions the law helping Vermont attract new tech companies and nonprofits to the state, which would create more jobs and generate greater tax revenues for Vermont. (Companies would not have to pay Vermont income tax unless they are located in the state.)

Clarkson worked to develop the legislation with Oliver Goodenough, a professor at the Vermont Law School who is also her husband, and with assorted legal and tech experts including Professor David Johnson and John Clippinger of Harvard’s Berkman Center. James Moore, a business strategists and tech wizard, has become involved as well, and I recently attended a meeting in Montpelier, Vermont — the state capital — to discuss how to capitalize on the law’s potential.

The benefits to Vermont are only part of the story here. The larger impact is the law’s potential role in promoting innovative online organizational structures.

Right now, any group of individuals that wishes to collaborate on a shared project and maintain some measure of control over the value generated – a software project, a wiki-based archive, a database – must incorporate as a company or nonprofit, or forge a partnership agreement. The law more or less forces a collective to operate under a traditional organizational form, and to spend lots of money satisfying various legal requirements of sometimes-dubious relevance.

Besides dictating organizational forms, current law privileges the interests of investors and boards of directors, and has no recognition for co-creators who wish to collaborate to create shared value in virtual spaces, and who wish to make decisions as a group.

So imagine if a group of self-organized individuals could come together on the Internet to create valuable products and services – and to establish their own “operating agreement” among themselves, according to their specific goals — and yet still receive the benefits of “legal personhood” that corporations enjoy.

The participants in such enterprises would not necessarily have to adopt the traditional corporate form, which vests supreme power with a board of directors, who oversee the CEO, who in turn hires and fires employees. The participants could instead forge a collective agreement on how the “virtual corporation” would govern itself and its digital assets. The operating agreement might stipulate that certain company decisions would be made through software-based systems, or that disputes would be resolved through online ADR (alternative dispute resolution). And all of this would have standing in the law.

At this point, it is not entirely clear what the virtual corporation operating agreements should stipulate in order to produce a happy and effective collective. For all of its success, Wikipedia has had its share of problems in its self-governance, to take one example. But the point here is that Vermont law would sanction innovative organizational forms, many of them facilitated by Web 2.0 software platforms. Instead of having to play a charade to meet the rigid, backward-looking requirements of conventional corporate structures, online collectives could form their own rules for self-governance and management of their shared virtual resources (while still meeting necessary tax and reporting requirements, and identifying an agent for service of process).

The Vermont law strikes me as an ambitious next stage in the evolution of tech and legal infrastructure that started with free software and Creative Commons. The General Public License (for free software) and CC licenses authorize new forms of sharing and collaboration, and have the force of law. We’ve seen the explosion of new online creativity and collaboration that has resulted. The new Vermont law has the potential to authorize all sorts of interesting new collaborative organizations that would have the full legal standing to “compete” with conventional corporations.

My friend John Clippinger of the Berkman Center has described the virtual corporations law as the first step toward imagining a new type of “cloud law.” He is referring to “cloud computing,” the next generation of computing that will locate software systems in the “cloud” – remote server-farms that are accessible from anywhere, through one’s iPhone, laptop or other portable device. Cloud computing will be sold as a utility – like electricity or phone service – and will enable even more powerful modes of Web 2.0 collaboration. For economic reasons, tech experts regard the Cloud as the virtually inevitable next stage of computing.

So Vermont’s first step toward developing “cloud law” is a welcome development. It will make it easier for online enterprises to be highly flexible in their operations; to leverage digital technologies as they evolve; and to scale effectively while creating the usual benefits of new businesses – jobs, tax revenues, innovation. Already a few other states — New Hampshire and Washington — have expressed an interest in possibly emulating the Vermont law.

Cloud law is a departure from existing law in that it enables online communities and corporations to legally name and protect certain collective, indivisible resources in online collaboration. The participant-members of a community or corporation can specify how those shared assets – a database of scientific research, for example – will be managed. Some might be accessible only to member-participants, while others might be treated as pure public goods, available to anyone: two different tiers of commons, as it were. The terms by which a shared virtual resource could be monetized could also be stipulated in the operating agreement, along with the specific membership rights of participants.

David Johnson incubated a lot of the thinking for the virtual corporations law through the Virtual Company Project, which is hosted by the Do Tank and Democracy Design Workshop at NYU’s Institute for Information Law and Policy. The Project’s web page explains:

The Virtual Company Project aims to create the legal, technical and business infrastructure necessary to enable formation and operation of companies, entirely online, and to facilitate the creation of companies (and valuable work product or services) by groups of individuals who want to share time and attention (in a collective effort) rather than investing capital.

The net has enabled the creation of markets (eBay) and altruistic community production (wikipedia and open source projects). But it hasn’t yet made it easy for a group of individuals, located around the globe, to create a persistent legal entity that has the ability to own property, open a bank account and enter into contracts with third parties (think a specialized wikipedia for profit, or a consulting service staffed by a transient group but able to contract with customers and collect fees).

In its grandest sweep, Johnson envisions the rise of a new sector of companies that could service people who wish to form their own virtual corporations (or nonprofits, if the Vermont legislature extends the idea to them). A hosting company could offer users an easy one-stop service for choosing a business model and template operating agreement for their new enterprises, for example. It could also sell the use of software applications, archiving services for company decisions, social services for participants, and collection services to pay taxes. “The hosting company could become a kind of eBay auction house for businesses,” the Virtual Company Project proposes.

While the existence of the new Vermont law is a major achievement, a great deal remains to be done in making it known and useful to the people of the Internet. For its part, the State of Vermont needs to develop some of the systems to streamline registration, tax collection and so forth. And virtual corporations need to consider how they might manage collective endeavors in new ways – e.g., new ways to make decisions online; to assign projects and distribute compensation to contributors; to identify company needs; and to enable contributors to self-select which tasks they will undertake. Johnson would also like to develop new sorts of graphical interfaces that let participants “see” the state of the company.

It’s an exciting moment…if the vision can be built out. I will try to blog on new developments on this front as they arise.