Context: (based in the USA)
I am building an online marketplace for services and am wondering on how much protection I can get from my terms of service. I am thinking of starting this business first as a sole proprietor. If business looks good, then I plan on forming an LLC. I don't plan on
borrowing money to start. (so no loan problems here)
My question is whether or not my terms of services
will protect me from liability. I know that as a sole proprietor, if
something goes wrong, I will be liable. I know that this is a good reason of
forming an LLC. If all my users have to agree to my terms of service (no
agreement, no usage), and that terms of service states that the website and I
are not liable for anything, the users agree to indemnify me, and they agree
to not sue, etc, will this be enough to protect the website and me? (provided I myself do NOTHING illegal)
I have been meeting with a mentor and he has said that users can still sue regardless of what the terms say. Whether they will win is another story, but they can still sue.
What are your opinions? first-hand experiences with terms not working?
The core thing to keep in mind is that what a Terms of Service (ToS) usually protect against, and what incorporation protect against, don't really overlap.
A ToS generally covers common issues that might arise between you and you users, or arising from actions taken by your users. A common example is DMCA Safe Harbor, which under specific circumstances protects you against copyright infringement claims if your users upload copyrighted material.
Incorporation has a different purpose. It keeps most liabilities concentrated in the company, and protects your personal assets . And it does so whether the original issue arose from the company doing business with users, or with other businesses, or interacting with the Government.
So no, you can't use a really good Terms of Service instead of incorporation. That leaves a question, whether you can reasonably launch your site first and incorporate later. That's a tough call, but it has been debated before.
Properly-drafted ToS will not eliminate the possibility of your being sued, but they will reduce the likelihood and the cost of that happening by stacking the deck in your favor from the legal perspective.
Regrettably, in the US anyone can sue anyone else at any time for almost any reason.
Whether or not you form an LLC, you should have a knowledgeable lawyer review your ToS. It is almost certain that s/he will make significant improvements to what you have prepared.
Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.