URGENT REMINDER: 2017 DMCA Agent Designation – Previous Designated Agents Must Re-Register Online Before December 31, 2017

do-it-now-1432945_1920If you operate, manage, or host a website, mobile app, blog or other digital service  that allows users (aka third parties) to post comments or upload media, such as pictures, videos or audio files, then you need to be taking advantage of the Digital Millennium Copyright Act (“DMCA”)  Safe Harbor to protect yourself from copyright infringement liability for infringing materials posted on your site by users of your service.

Last year, the U.S. Copyright Office introduced a new online DMCA Agent Directory and registration process to replace the prior paper-based system and directory for DMCA Designated Agents, which became effective on December 1, 2016.  Designating a DMCA Agent with the Copyright Office is part of the process to protect you from copyright infringement liability for third party posts (aka user-posted content) on your app/blog/website and corresponds to the DMCA Takedown Notice Procedures that should be included in the Terms of Use on your website/blog/app.  If you do not register (or re-register) a DMCA designated agent, you risk losing the safe harbor protections of Section 512 of the DMCA, leaving you potentially vulnerable to certain types of claims of copyright infringement.

 register-1627729_1280NOTE: Even if you previously designated an agent with the Copyright Office prior to December 1, 2016 (via a paper form), you will need to submit a new designation electronically using the online registration system by December 31, 2017, or your prior designation will expire and become invalid.

In order to register, you will need to create an account.  You will need to include a primary contact (with the option to include a secondary contact) when you register, and then an email will be sent to the primary contact with instructions on how to active the account.  Once the account is activated, you will be able to complete the DMCA designed agent registration process.

You will need to register the following information:

  • Full Legal Name of Service Provider (legal entity name) and related contact information
  • Alternative Name(s) of Service Provider (including all names under which the service provider is doing business, such as domain name(s), blog or mobile app name(s), assumed/trade name(s), etc.)
    • NOTE: Separate legal entities are not considered alternate names. Related or affiliated service providers that are separate legal entities (e.g., corporate parents and subsidiaries) are considered separate service providers, and each must have its own separate designation.
  • Name of Agent Designated to Receive Notification of Claimed Infringement (which can be the name of an individual or a specific position or title [e.g., Copyright Manager, VP Legal Affairs, or General Counsel] or a specific department [e.g., Copyright Compliance Department] or third-party entity [e.g., ACME Takedown Service] rather than an individually named person as the agent…which may be preferable to avoid having to update the form if the named individual should ever leave the company) and related contact information
  • Pay the Fee (the current registration fee to designate an agent, or amend or resubmit a designation is $6.00 per service provider, with no additional fee for any alternate names)

In addition to registering a designated agent, you will also need to post copyright infringement notice provisions on your site and comply with the DMCA takedown and notice procedures. Click on the following links for more information about the DMCA Safe Harbors and what you need to do to benefit from them, as well as DMCA Designated Agent FAQs.

Renewal Requirements. In an attempt to ensure that the DMCA Agent Directory contains accurate and up-to-date information, your agent designation will expire and become invalid three years after it is registered (or last amended) with the U.S. Copyright Office, unless you renew it prior to the expiration for another three-year period. The online system will send renewal reminders to the primary and secondary contacts, service provider, and designated agent listed in your account 90 days, 60 days, 30 days, and 7 days prior to your renewal deadline.

Lessons From Google Surviving The Genericide Attack

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a federal district court’s grant of summary judgment in favor of Google Inc. in connection with an attempt to cancel the “Google” trademark registrations under the theory that the mark has become computer-1330162_1920 (2)a generic term used by the public for searching on the internet. The ruling is a victory for brand owners, especially those who risk genericness challenges because of the success of their products or services and the widespread (mis)use of their marks by the public.

Overview of the Google Case

In 2012, Chris Gillespie and David Elliott registered 763 domain names that included the word “google” and an additional term identifying a specific brand, person, product, location or event such as googledisneyworld.com, googledallascowboys.com and googledonaldtrump.com. Google filed a cybersquatting compliant under the Uniform Domain Name Dispute Resolution Policy,[1] claiming that the domain names were confusingly similar to the “Google” trademark and were registered in bad faith. The complaint was filed with the National Arbitration Forum (“NAF”), and the NAF found in favor of Google and transferred the domain names to Google.[2] Elliott and Gillespie (collectively “Elliott”) then filed an action in the Arizona district court petitioning to cancel the “Google” trademark[3] under the Lanham Act,[4] arguing that the word “google” is primarily understood as a generic term universally used to describe the act of internet searching.

The parties filed cross-motions for summary judgment, with Elliott arguing that (1) it is an indisputable fact that a majority of the relevant public uses the word “google” as a verb (e.g., “I googled it”), and (2) verb use constitutes generic use as a matter of law, and Google arguing that verb use does not automatically constitute generic use and that Elliott failed to present sufficient evidence to support a jury finding that the relevant public primary understands the word “google” as a generic name for internet search engines. The Arizona district court found in favor of Google,[5] and ruled that, even if the term “google” has become known — and is used as a verb — for searching the internet, that doesn’t necessarily mean that the primary significance of the term “google” to the relevant public is as a generic name for internet search engines generally instead of as a mark identifying the Google search engine in particular. On May 16, 2017, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s grant of summary judgment.[6]

Before we discuss the court’s decision in more detail, let’s review some of the concepts framing the issues raised in the Google case.

The Spectrum of Distinctiveness — Weak vs. Strong Marks

Not all marks are created equal, and some terms can never be marks. The generally recognized categories of types of terms on the “spectrum of distinctiveness” or “distinctiveness/descriptiveness continuum” (which roughly reflects their eligibility to obtain trademark status and the degree of protection accorded from weakest to strongest) are (1) generic, (2) descriptive, (3) suggestive, and (4) arbitrary or fanciful terms. Generic terms are terms that the public understands primarily as the common name for the goods or services, such as “Salt” when used in connection with sodium chloride or “The Chocolatier” for a store providing chocolate candy. “Generic terms, by definition incapable of indicating source, are the antithesis of trademarks, and can never attain trademark status.”[7] In other words, because generic terms identify the product or service and not the source of the product or service, generic terms are not protectable. On the other end of the spectrum are arbitrary and fanciful terms. Arbitrary marks are common words that are used in a unique way such that the words have no relationship to the product or service, such as “Apple” for computers. Fanciful marks are terms that have been invented or “coined” for the sole purpose of functioning as a trademark, such as the term “Google” for an internet search engine[8] or “Xerox” for copiers. Arbitrary or fanciful marks are “automatically entitled to protection because they naturally serve to identify a particular source of a product.”[9]

However, even a strong arbitrary or fanciful mark has the potential to lose its trademark significance and become generic.

Genericide — When Good Marks Go Bad

The Lanham Act allows cancellation of a registered trademark if it is primarily understood as a “generic name for the goods and services, or a portion thereof, for which it is registered.”[10] This phenomenon has become known as “genericide” — when the public appropriates a trademark and uses it as a generic name for a particular type of goods or services, irrespective of the source of those goods or services. Once a mark becomes generic, it is no longer subject to trademark protection — and “linoleum,” “thermos” and “videotape” are some well-known victims. As McCarthy on Trademarks and Unfair Competition describes, genericide can occur for a variety of reasons: Continue reading

IMPORTANT NOTICE: 2017 DMCA Agent Designation – Previous Designated Agents Must Re-Register Online Before December 31, 2017

do-it-now-1432945_1920If you operate, manage, or host a website, mobile app, blog or other digital service  that allows users (aka third parties) to post comments or upload media, such as pictures, videos or audio files, then you need to be taking advantage of the Digital Millennium Copyright Act (“DMCA”)  Safe Harbor to protect yourself from copyright infringement liability for infringing materials posted on your site by users of your service.

The U.S. Copyright Office recently introduced a new online DMCA Agent Directory and registration process to replace the prior paper-based system and directory for DMCA Designated Agents, which became effective on December 1, 2016.  Designating a DMCA Agent with the Copyright Office is part of the process to protect you from copyright infringement liability for third party posts (aka user-posted content) on your app/blog/website and corresponds to the DMCA Takedown Notice Procedures that should be included in the Terms of Use on your website/blog/app.  If you do not register (or re-register) a DMCA designated agent, you risk losing the safe harbor protections of Section 512 of the DMCA, leaving you potentially vulnerable to certain types of claims of copyright infringement.

 register-1627729_1280NOTE: Even if you previously designated an agent with the Copyright Office prior to December 1, 2016 (via a paper form), you will need to submit a new designation electronically using the online registration system by December 31, 2017, or your prior designation will expire and become invalid.

In order to register, you will need to create an account.  You will need to include a primary contact (with the option to include a secondary contact) when you register, and then an email will be sent to the primary contact with instructions on how to active the account.  Once the account is activated, you will be able to complete the DMCA designed agent registration process.

You will need to register the following information:

  • Full Legal Name of Service Provider (legal entity name) and related contact information
  • Alternative Name(s) of Service Provider (including all names under which the service provider is doing business, such as domain name(s), blog or mobile app name(s), assumed/trade name(s), etc.)
    • NOTE: Separate legal entities are not considered alternate names. Related or affiliated service providers that are separate legal entities (e.g., corporate parents and subsidiaries) are considered separate service providers, and each must have its own separate designation.
  • Name of Agent Designated to Receive Notification of Claimed Infringement (which can be the name of an individual or a specific position or title [e.g., Copyright Manager, VP Legal Affairs, or General Counsel] or a specific department [e.g., Copyright Compliance Department] or third-party entity [e.g., ACME Takedown Service] rather than an individually named person as the agent…which may be preferable to avoid having to update the form if the named individual should ever leave the company) and related contact information
  • Pay the Fee (the current registration fee to designate an agent, or amend or resubmit a designation is $6.00 per service provider, with no additional fee for any alternate names)

In addition to registering a designated agent, you will also need to post copyright infringement notice provisions on your site and comply with the DMCA takedown and notice procedures. Click on the following links for more information about the DMCA Safe Harbors and what you need to do to benefit from them, as well as DMCA Designated Agent FAQs.

Renewal Requirements. In an attempt to ensure that the DMCA Agent Directory contains accurate and up-to-date information, your agent designation will expire and become invalid three years after it is registered (or last amended) with the U.S. Copyright Office, unless you renew it prior to the expiration for another three-year period. The online system will send renewal reminders to the primary and secondary contacts, service provider, and designated agent listed in your account 90 days, 60 days, 30 days, and 7 days prior to your renewal deadline.

The Digital Millennium Copyright Act (DMCA) Safe Harbor

email-826333_1280The Digital Millennium Copyright Act (“DMCA”) is an amendment to the U.S. Copyright Act (i.e., the federal copyright law) signed into effect in October 1998 that, among other things, provides certain limitations on the liability of online service providers (“Provider(s)”) for acts of copyright infringement by third parties.

The DMCA actually contains two types of liability limitations:

The first (Section 512(d)) protects a Provider that unknowingly provides a link to infringing copyrighted material located on another site.

The second (Section 512(c)) , which we discuss in more detail here, limits the liability of Providers that store copyrighted materials on a system or network they control or operate if (among other things), (i) such storage was directed by a third-party user, (ii) the service provider has designated an agent (also referred to as a “take-down agent”) to receive notifications of claimed infringement, and (iii) the service provider has both registered the agent’s contact information with the U.S. Copyright Office and publicly provided such information on its website.

It is important to note that, because the DMCA protects against claims of copyright infringement and not other types of wrongdoing, it will not help against claims of infringement concerning trademarks or service marks, stolen trade secrets, or other types of intellectual property.  The DMCA is also not relevant to claims of defamation, although a Provider may have protection for defamatory statements made by third parties under Section 230 of the Communications Decency Act.

The DMCA Safe Harbor

The DMCA is a “safe-harbor” is an exception to the general rule that a Provider is liable for acts of infringement committed by its users. Because the DMCA is intended to protect Providers from inadvertent infringement by third parties, it will not help in a situation where the Provider itself is accused of infringement (i.e., where the Provider posts infringing copyrighted content), or where the Provider knows content it hosts infringes a copyright.

Because the DMCA can be an absolute defense to liability for copyright infringement by a third party, registering a take-down agent may even prevent someone from suing the Provider for infringement in the first place.

Online Service Providers

In essence, you qualify as a Provider and are eligible for protection under the DMCA if you operate, manage or host a website, blog, mobile app, social media platform, portal, game, or other digital service that allows users (aka third parties) to upload or post content. That can include the following activities:

  • Allowing users to post comments or review, or respond to discussion threads
  • Allowing users to upload media, such as pictures, .gifs, videos or audio files

The above is true because the definition of “infringe” or “infringement” is very broad and captures many activities. For example, if your site allows users to submit a thumbnail sized avatar in connection with the user’s comment and the user chooses an image that infringes a third-party’s copyright, you can be liable. Knowledge or intent are not relevant for purposes of liability for infringement under the copyright law; so, you can be held responsible for copyright infringement even if you have no idea these activities are going on (and, if you have not registered a DMCA agent, even if you take down the offending material immediately after being notified!).

How to Benefit from the DMCA Safe Harbor Provisions

In order to enjoy the benefits of the safe-harbor provisions, a Provider must comply with a few administrative requirements:

  1. Designate a copyright take-down agent to receive DMCA takedown notices.

In order to designate an agent, a Provider must create an account, provide some basic information (the Provider’s legal name, alternatives names for the Provider, the name or title of the Provider’s agent designated to receive infringement claim notices, and related contact information) and pay a filing fee (currently $6 to designate an agent, or amend or resubmit a designation, for an unlimited number of alternative names, websites, etc. for the Provider). The U.S. Copyright Office maintains an official list of designated agents, which allows a person who believes his or her work is being infringed to quickly send a takedown notice.

  1. Adopt a copyright infringement policy and notify site users.

The Provider must publish a statement on its website to provide notice to the site users of its copyright infringement policies, the consequences of repeated infringing activity, and advising users of the takedown agent’s contact information. Many people include a DMCA policy in their terms of service, but it may also be placed in a separate document.

  1. Watch for and properly comply with any notice of claimed infringement received.

A person claiming infringement must provide the Provider a written notice that substantially meets the following requirements:

  • A detailed description of the copyrighted work(s) allegedly being infringed;
  • A description (such as the subdomain link) of the location on the site where the   allegedly infringing content appears reasonably sufficient to permit the Provider to locate the material;
  • The claimant’s contact information, including name, address, telephone number, and, if available, email address;
  • A statement that the claimant has a good faith belief that the allegedly infringing use is not authorized by the claimant as the copyright owner, by the claimant’s agent, or by law;
  • A statement affirming that, under penalty of perjury, the information in the notice is accurate and that the claimant is, or is authorized to act on behalf of, the copyright owner; and
  • A physical or electronic signature of the copyright owner or someone authorized on the owner’s behalf to assert infringement of copyright and to submit the statement.

Remember that the DMCA protects only against copyright infringement, not against other types of accused wrongdoing. Therefore, a Provider must be careful to make sure any notice it receives alleges a copyright infringement and not some other type of wrong doing.

Also note that not all cease and desist letters or takedown notices will be proper, and a Provider is not under a legal obligation to comply with notices that do not substantially meet the above requirements.

If a takedown notice does not meet the requirements, a Provider should respond to the party who submitted the takedown notice, state that the notice does not comply with the DMCA requirements, and inform the complainant that he may resubmit a takedown notice that substantially complies with the DMCA requirements.

If a takedown notice does meet the requirements, a Provider should promptly:

  1. remove or disable access to the material that is claimed to be infringing;
  2. notify the complainant that the material has been removed; and
  3. notify the allegedly infringing party that the material has been removed so that he may file a counter-notice.

Often, a potentially offending user will not file a counter-notice, but if he or she does, a proper counter-notice must contain substantially the following information:

  • The alleged infringer’s name, address, phone number
  • Identification of the material and its location before removal
  • A statement under penalty of perjury that the material was removed by mistake or misidentification
  • The alleged infringer’s consent to local federal court jurisdiction, or if overseas, to an appropriate judicial body
  • A physical or electronic signature of the alleged infringer

If the counter-notice meets these specifications, the Provider should forward the counter-notice to the person who claimed infringement. That person must then file a lawsuit within 10 business days of the Provider’s notice to the complainant of the counter-notice; otherwise, the Provider should reinstate the disputed material within 10-14 business days after sending the counter-notice to the complainant.

While there is no requirement under the DMCA for a Provider to remove any material(s), the receipt of a valid takedown notice acts to give the Provider notice of the allegedly infringing activity, and therefore ineligible for limited liability. The Provider may then face liability for continuing to host the material.

Consult a qualified attorney if you are unsure of what the notice or demand letter is alleging or if you have questions about whether you must comply with a takedown notice or how you should comply with the takedown notice.

I didn’t register a DMCA takedown agent and now someone has filed a copyright infringement lawsuit against me. Am I out of luck?

In order to benefit from the safe harbor protections, a Provider must register a DMCA agent prior to an allegation of infringement which it wishes to defeat with the registration.

Even if a Provider has not registered a DMCA agent, it may still be able to defend against a claim on the merits of the alleged infringement. For example, if the amount of supposedly infringing material is small or is posted in a way meant to be educational and includes a citation for the material, you may have a defense under the fair use doctrine (although a fair use defense may not apply depending on the facts of each particular situation). Some cases also indicate that a defense may exist by asserting that infringing third-party posts are simply not the responsibility of the Provider. However, if a Provider has not registered under the DMCA, it will not be able to claim that it was unaware of the infringing activity or that it quickly removed the offending material.

10 Legal Considerations for Entrepreneurs – Part 4

business-idea-1240830_1920

 

In Part 3, we covered business licenses and permits, working with employees and contractors, and the importance of written agreements. In this last part of the series, we’ll discuss other issues you should consider to help your business grow

9. Develop a System and Stay Organized.

Although this isn’t technically a legal tip, being organized and having a system in place to handle the operational aspects of your business can save you time, money, headaches and legal issues down the road. Ideally, your business affairs will always be in order so that someone could step in to run if for you if necessary. (Additionally, the more organized you are, the less time your professional team will have to spend sifting through shoeboxes to find crucial information.)      

Have a method to process orders, pay bills, pay employees, pay taxes, maintain your licenses, etc. Set up an accounting and record-keeping system so you can properly account for all business disbursements, payments received, invoices, accounts receivable/payable. Speak with an accountant about the taxes your new company is responsible for paying, and get copies of the IRS’s Tax Calendar for Small Businesses and Publications 334, Tax Guide for Small Business, and 583, Starting a Business and Keeping Records.  Keep important company documents in a safe place and have backup systems in place should anything happen to your physical work space or your electronic record systems.

10. Other Issues to Consider.

Business Plan. A business plan is not only a good idea to help you clearly outline your goals and ferret out potential opportunities, costs and obstacles, but it may be required if your business intends to seek a loan or venture capital funding.  The SBA and organizations specific to your profession/industry can provide helpful planning resources.

Insurance. As an entrepreneur, you should expect the unexpected.  You’ll want (and may be required) to obtain certain types of insurance for your business.  General business policies can cover everything from product liability to company vehicles.  You may want to obtain health and disability insurance for yourself and your employees.  You might also consider a personal umbrella policy.  You and the entity should both be named as insureds on any general liability insurance for the business, and the entity should also be the named insured on all property insurance covering any property owned or leased.  Contact an insurance agent or broker to answer questions and give you policy quotes.

Intellectual Property. Intellectual property — copyrights, trademarks, domain names, patents, trade secrets — can be some of the most valuable assets a company has.  Make sure that any intellectual property you create (or hire someone to create for you) or utilize in your business is properly protected.  You also want to make sure that you’re not infringing on a third party’s intellectual property rights. Consult with an intellectual property attorney to learn more.

Marketing. Getting your business legally sound is very important, but unless you get the word out about your new venture, customers won’t know what you offer or be able to find you. The more professional you look, the more likely customers are to feel comfortable working with you and your new business. All stationary, bills, invoices, etc. should be in the name of the entity rather than in your personal name. You should not use the stationary of the company for personal needs. You may want to have a logo created for your business, and you’ll want to make sure it’s not confusingly similar to anyone else’s logo and that you own the logo if someone else creates it for you. You’ll likely also want to have a website for your company. You should have an agreement with the web designer to ensure that you own the site and content (and domain name). You may also need to include Terms of Use, a Privacy Policy, and/or a Disclaimer on your site. If you are creating promotional materials, you’ll want to be sure you have the right to use images and other content you may want to include. You may want to create a marketing plan to help you develop business and perfect your image.

Support Team. Your new venture will be much more successful if you have a great support team around you. From family, friends and business partners to mentors, advisors and professional service providers, your team can make or break your endeavor.  These people will be your sounding board, your cheerleaders, and remind you that you’re not alone.

Starting a business is a thrilling and slightly overwhelming undertaking, but with a bit of planning (and some key professionals to help advise you), you could be up and running and playing by the rules in no time.

10 Legal Considerations for Entrepreneurs – Part 3

business-plan-2061633_1920In Part 2, we discussed selecting a business entity, taking advantage of protections provided by an entity, and funding your business.  Now we’ll look at other licenses you may need to run your business, considerations when working with employees and contractors, and the importance of written agreements.

6. Obtain Licenses, Permits & Certifications.

There are numerous federal, state and local regulatory agencies that may govern everything from education to professional licenses and violations. Most businesses need licenses in order to begin operations. Licenses may be required for your city, your municipality, your county and/or your state. Some occupations and professions require a state license or permit as well. If you’ll be running a home-based business, then you’ll need to make sure you’re not violating any zoning restrictions or homeowner association rules.

The U.S. Small Business Administration provides information about industry-specific federal and state business licenses and permits, as well as links to the specific agencies that maintain such licenses and permits.  Many states provide state-specific information and links to helpful business-related registration, licensing, permit and related sites, such as the Missouri Business Portal and Texas Wide Open For BusinessUSA.gov provides an A-Z list of all agencies as well as information regarding federal, state and local government.  A list of state regulatory agencies is available at All Things Political.

7. Employees and Independent Contractors.

If you intend to hire yourself or anyone else as a full or part-time employee of your company, then you may have to register with the appropriate state agencies, withhold and pay taxes, verify each employee’s eligibility to work in the United States, obtain workers compensation insurance or unemployment insurance (or both), create an employee handbook, and comply with other employment regulations. Hiring independent contractors instead of employees for your new business may be less burdensome, but working with independent contractors has its own set of risks. For example, if your independent contractor is discovered to meet the legal definition of an employee, you could face a number of costly legal consequences. Furthermore, unless an employee is performing services within the scope of his employment (work-for-hire), it is best (and often required) to have a signed, written agreement transferring rights in intellectual property created by an individual, independent contractor or entity to your business. For more information about hiring employees and working with independent contractors, visit the U.S. Small Business Administration and/or consult with an attorney.

8. Get it in Writing.

Relying on verbal or “handshake” deals may seem appealing, but it’s almost always advisable to have a written agreement in place. Whether it’s an office or equipment lease, an agreement with your business partners, a confidentiality agreement, a contract to provide services to a customer, or an agreement with someone providing services to your business, written contracts set out the details of the transaction, each party’s responsibilities and obligations, and often provide for procedures or remedies in the event something goes wrong. This last part is precisely why it’s advisable to negotiate a deal up front when the parties are happy with each other and excited about the transaction rather than waiting for an issue to arise and attempting to negotiate an agreement when at least one party is soured on the deal.

All contracts related to the business should be entered into in the name of the business and not by you personally. Know that it is rare for anyone to sign the first draft of an agreement.  It is always advisable to have an attorney review (and potentially negotiate) the agreement before it’s signed to ensure that you’re not missing something hidden (or not included) in the fine print.

In Part 4, the last installment in the series, we’ll talk about other issues you should consider to help your business grow.

10 Legal Considerations for Entrepreneurs – Part 2

calculator-178127_1920

In Part 1 we discussed the importance of working with professionals and how to select and protect a name for your business or product. In Part 2, we’ll discuss how to select the right business entity, how the entity can protect you, and how you can fund your business.

3. Decide on the Legal Structure.

Forming a limited liability company or corporation to run your business not only helps to establish credibility for your new venture, but, more importantly, can protect your personal assets from potential future liabilities of your business. There may be tax advantages to forming an entity, and filing in certain states (such as Delaware and Nevada) may provide additional benefits, even if the business is not physically located in one of those states. You should consult with your attorney and accountant to determine the best entity for your business.

Additionally, if your company is minority- or women-owned, you may derive significant advantages from Disadvantaged Business Enterprise (DBE) certification or similar programs. However, many of these programs look to how the business was initially formed and funded, so setting up your entity in line with these programs’ restrictions is extremely important.

If you are starting a business with more than one person, a Company Agreement (also known as an Operating Agreement) or Corporate Bylaws are important documents that will govern how the business is run and outline management plans, voting rights, and profit and loss allocations. Essentially, these documents are prenups for business, and it is best (and sometimes required) to negotiate these agreements at the beginning of the business relationship.

If, in the future, you contemplate any major structural or financial changes with respect to the entity, e.g., you accept any additional members into the entity, a building is purchased by the entity, any major investments are made by the entity, etc., you should contact your attorney before these matters are completed so that any appropriate changes to the entity documents (i.e., the Articles or the Operating Agreement) can be made.

If you are set up as a corporation, limited liability company, or partnership, are a sole proprietorship with employees, or would just prefer not to use your Social Security Number in connection with company business, you will need to apply for a Federal Employer Identification Number (FEIN) from the Internal Revenue Service (IRS). The IRS uses this number to identify your business for all taxation matters, and it is required for businesses with employees.  Some states require businesses to also have a state tax identification number.

If you act responsibly and take a few precautions, a limited liability company or corporation is a major benefit over a sole proprietorship or general partnership.   If you do not form an entity, you could become a de facto sole proprietorship or partnership, either of which could expose you to personal liability for business-related debts and claims.

4. Separate Business From Personal.

In order to benefit from the protections a legal entity provides, it is imperative to keep the entity completely separate from your personal assets and to keep separate, detailed records of all business-related funds and transactions. For example, you should open a bank account and obtain a credit card in the name of the entity (which will usually require a copy of the Articles of Organization/Incorporation and the Federal Employer Identification Number for the business – but you should check with your bank to determine its requirements).  You will likely deposit an initial amount into this account from your personal funds (which is often treated as an initial capital contribution to your company), and any additional monies you put into the business can be treated as loans to the company or additional capital – all of which should be documented.  In the future, all company revenues should be deposited into, and all company expenses should be paid out of, the company bank account.  It is very important that you do not commingle your personal funds with the funds of the business (i.e., you should not pay personal bills out of, or deposit personal income into, the business account), as this could result in “piercing the corporate veil” and effectively make you personally liable for the business as though the entity never existed. You may take periodic distributions out of the entity, but such distributions should be reflected as such on the books and records of the entity.

Note: Even if you have formed an entity, you may still be held personally liable for certain claims, such as claims arising out of an act or omission you, such as your own negligence, fraud or illegal act; claims arising out of a contract, particularly one that was personally guaranteed by you; claims based on the concept of “piercing the veil” of the entity (which usually arise over commingling or diversion of assets); and liability for consenting to or receiving a distribution in violation of the business’s operating agreement or the applicable business entity statute.

5. Speaking of Money…

The initial funding of a business can come from many potential sources, such as personal savings, loans or investments from friends and family, business loans from banks or through Small Business Administration (SBA) loan programs, lines of credit, government backed loans, venture capital, research grants, or third-party investors. Be sure to provide adequate capital for the entity’s intended purposes — and document the capital infusion, whatever the source.

Avoid personal guarantees whenever possible. Act ethically. Don’t attempt to mislead the entity’s creditors about the financial condition of the business. Do not divert assets. If the business looks like it is going down, don’t attempt to lessen your own loss by taking big draws or moving assets out of the entity. That will only help open the floodgates to your personal assets.

Note: If you are raising money for a company, whether through the sale of stock, LLC interests, or LP interests, or bonds, notes, or other debt instruments, you’re selling a “security” under federal and state securities laws — the failure with which to comply may carry criminal penalties. If you fail to comply with the applicable regulations, you could be liable to pay back the investors out of your pocket — with interest. It is highly advisable to consult with an attorney before attempting to raise money for your business.

In Part 3, we’ll discuss obtaining other licenses you may need to run your business, working with employees and contractors, and the importance of written agreements.