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

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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.

10 Legal Considerations for Entrepreneurs – Part 1

startup-1018512_1920Becoming an entrepreneur is an exciting endeavor…but being your own boss often requires that you wear many different hats and take responsibility for all of the details involved with operating a business. After you’ve evaluated your business idea and researched the market, and while you’re in the process of creating your business plan and determining startup costs and other essentials to get your business up and running, here are some legal considerations to keep in mind…

1. Hire Professionals.

Attorneys, accountants and other professionals are invaluable resources for a new business owner, as they can help you navigate through the many details and requirements necessary to start and run your business, including those mentioned below. Seek referrals from friends, family, and other business owners. You may want to find professionals who are familiar with your particular industry and/or working with new businesses. Having good professionals on your business team (especially in the beginning) can be one of the best investments you’ll ever make in your business, and, hopefully, you will develop relationships with these advisors that will last for the life of the business (and beyond). It is often much less expensive to hire a professional to do something right the first time than it is to hire a professional to fix a problem after-the-fact. Although a great deal of information, “forms” and resources are available online and can be helpful for educational purposes, relying on the internet to be your lawyer will likely come back to haunt you at some point.

2. Name Your Business (or Product).

Deciding on the name of your business is one of the most important – and sometimes most difficult – aspects of starting a new business. Not only will you want to make sure the name is appealing to customers, but you’ll also want to make sure the name isn’t already being used by a third party providing identical or similar products or services. Before using or registering a business name, you should at least perform a quick “knockout” availability search: (a) check for entity names and state trademark registrations with Secretary of State Offices where business will be done; (b) search the federal U.S. Patent and Trademark Office (USPTO) trademark database; and (c) perform a Google search to determine whether any third party has common law rights to the name. If you are in a regulated profession or industry, there may be restrictions of what you can and cannot include in your business name. You’ll also want to make sure the domain name is available for your business name.

Once you decide on a name (and type of entity) and are comfortable that it’s available to use, you’ll need to register your name with your Secretary of State’s Office and potentially with your County Clerk’s Office as well.

Please note that registration of a business name with one or more Secretary of State offices does not guarantee that you have exclusive rights to use that name and/or are not infringing another party’s mark. The Secretary of State does not allow registration of identical business names in its state (mostly to avoid internal confusion). However, multiple entities can register identical fictitious, assumed or doing business as (d/b/a) names in the same state.  [For example, if XYZ Company, LLC is already registered with the Texas Secretary of State, another company could register ZYX Products, LLC and then register a fictitious name for XYZ Company…so it would be ZYX Products, LLC, d/b/a XYZ Company.]

Trademarks or service marks, on the other hand, can be used by multiple entities at the same time, so long as they are not used in connection with the same or similar goods or services and customers are not likely to be confused as to whether the goods or services are provided by the same entity. If your entity is also using its business name as a trademark or service mark in connection with its products or services, then it is advisable to have your legal counsel perform a trademark search to be as certain as possible that no other individual or entity is also using the mark for similar goods or services.  Depending on the results of the search, filing a trademark application with the USPTO to obtain a federal trademark registration for the mark (and/or logo) may be advisable.

Click here for more information about selecting and protecting names and marks.

In Part 2, we’ll discuss legal entities, financing your venture, and related matters.

Can My Company Say “Super Bowl” in Our Super Bowl Ad?

football-player-260556_1280-2By now, you’ve probably seen and heard countless promotions mentioning “The Big Game”…but maybe you’ve never considered why they don’t just come out and say the actual name of the game.  Well, the term Super Bowl is a registered trademark owned by NFL Properties LLC.  And with advertisers spending $5 million or more on 30-second commercial spots for the Super Bowl, it’s little wonder that the NFL is so protective of its trademarks and copyrights.  (And, even if the price tag for an ad isn’t quite as high, the same is true for other big events and recognizable brands, such as the World Series, the Oscars, March Madness and the Final Four, the Emmys, the Grammys, and the Olympics.)

You might remember hearing about the Indiana church that received a cease and desist letter from the NFL related to its plan to project the game on a big screen and charge admission for a Super Bowl party in 2007.  Although it may seem harsh to go after a church, the letter (which had as much to do with the church’s use of the Super Bowl mark as it did with the church’s plans to show the game on a big screen) resulted in that church — as well as other churches that got wind of the letter — to cancel their plans.

Trademark owners have a duty to police their marks in order to avoid losing rights in the marks.  In other words, mark owners are legally required to protect against unauthorized uses of their marks, or they risk diminishing the value of their brands, damaging their goodwill, and weakening their marks and the value attached to those marks.  It would be pretty hard to justify the sponsorship fees and ad rates that “official” sponsors and advertisers pay if any of these mark owners allowed anyone else to benefit without having to shell out for that privilege.

And although sportscasters and news providers can say “Super Bowl” to talk about the game (thanks to a trademark fair use exception for criticism and news reporting), unless you are an approved, official sponsor, you’ll need to get creative instead of using the “Super Bowl” mark (or hashtag, for all you ambush marketer wannabes) to promote your products, services, or sales.

So, enjoy “The Big Game” and all of the “Star-Studded Red Carpet Events” during “Awards Season,” because “The Battle of The Brackets” in March will be here before you know it!

 

New Trade Secrets Law – What it Means for Your Trade Secrets and Your Company

On May 11, 2016, President Obama signed the Defend Trade Secrets Act (“DTSA”), which went into effect immediately. The DTSA will have a major impact on intellectual property law and also has implications related to employees and independent contractors. Although the DTSA contains elements similar to the Uniform Trade Secret Act adopted in some form by every state except for New York and Massachusetts, there are notable differences. For example, the DTSA creates a federal private/civil confidential-stamp_GyH5lHOdcause of action for trade secret misappropriation. Previously, federal law only provided for criminal actions brought by the government. Available remedies include injunctive relief, exemplary damages in addition to actual damages, and attorneys’ fees. The DTSA also allows for civil seizure of an opponent’s property in extraordinary circumstances. These remedies could provide powerful tools for trade secret protection.

The DTSA provision of most immediate concern is the required employee notice of civil and criminal immunity for whistleblowers who disclose trade secrets to government officials for the purpose of reporting a suspected violation of law. The immunity also protects disclosures to attorneys or in sealed court filings. In order to comply with the DTSA, all agreements with employees, independent contractors or consultants covering trade secrets or confidential information must include notice of the DTSA’s whistleblower safe harbors and immunity. Although the DTSA requires that an employer provide notice of the whistleblower immunity in any agreement with an employee that governs the use of a trade secret or other confidential information, the act defines “employee” to include any individual performing work as a contractor or consultant. Compliance can be achieved by including specific language in the agreement or providing a cross reference to an existing whistleblower policy document, such as an employee handbook. Failure to include the required notice in employment agreements results in the employer losing the right to recover attorneys’ fees or exemplary damages from the employee.

Employers should take the following steps to comply with the DTSA:

  • All agreements concerning trade secrets or confidential information should be revised. This likely includes employment agreements, non-disclosure and confidentiality agreements, contractor agreements, severance or separation agreements, and more. The DTSA notice provision applies to agreements entered into or updated after May 11, 2016.
  • Employers may want to consider changing forum selection clauses in any contract affected by the DTSA. Having federal and state court options could be beneficial in a trade secret or other employment dispute.
  • Contractor or consulting agreements should be amended so that the service provider is required to notify its employees of the DTSA’s whistleblower protections.

Additional compliance issues may arise as case law develops and companies adjust to the DTSA’s requirements.

Happy Birthday Copyright Ruled Invalid

birthday-937520_1280You may be hearing “Happy Birthday” more often now that a federal judge in Los Angeles has ruled that the copyright Warner/Chappell Music claimed to own in the lyrics of the song is invalid.  According to the opinion issued on September 22, 2015, “Because Summy Co. never acquired the rights to the Happy Birthday lyrics, Defendants [Warner/Chappell], as Summy Co.’s purported successors-in-interest, do not own a valid copyright in the Happy Birthday lyrics.”

Unless the ruling is overturned or someone else comes forward with a valid ownership claim, third parties will no longer be required to pay licensing fees to use the song in movies, TV shows, greeting cards and the like…and Warner/Chappell will be out an estimated $2 million a year in royalties it collected from the song.

Click here for more on the story.

Why Should I Register My Trademarks?

TrademarkIn the United States, trademark rights are based on (1) priority (who used the mark first), (2) territory (the geographic area(s) where the mark has been used), and (3) use (whether products or services are actually provided under the mark).

Generally, the first to either use a mark in commerce or file an intent-to-use application with the United States Patent and Trademark Office (USPTO) has the ultimate right to use and registration of the mark.

Common law rights arise when products or services are offered for sale in connection with the mark.  However, common law rights are limited to the trade area in which you actually use the mark and those rights may be limited or even prohibited by prior senior uses of the same or confusingly similar marks.

A trademark owner may also register a mark in one or more individual states through Secretary of State Offices.

Although registering your mark with the USPTO is not required to establish rights in a trademark, there are many important benefits of federal trademark registration with the USPTO.  For example, upon registration of a federal trademark, the registrant obtains rights to the mark throughout the United States retroactive to the date of filing of the application. The registrant also obtains the right to stop junior users from adopting confusingly similar marks in overlapping trade areas or anywhere the registrant has acquired goodwill in such mark.

Here are some of the benefits of registration:

  • Registration provides constructive notice nationwide of the mark owner’s claim in the mark and evidence of ownership of the mark.
  • The mark owner has the exclusive right to use the mark on or in connection with the goods or services set forth in the registration.
  • The mark owner may bring lawsuits for infringement in federal court.
  • The mark owner may be entitled to recover profits, damages and costs of infringement, attorneys’ fees and treble damages.
  • Registration can be used as a basis for obtaining registration in foreign countries.
  • The mark can obtain incontestable status after continuous use for 5 years after the date of registration on the Principal Register (which limits third parties’ rights to contest your mark).
  • Registration may be filed with U.S. Customs Service to prevent importation of infringing foreign goods.

An application for trademark registration requires: (1) a completed application form, (2) a nonrefundable filing fee ranging from $225-$375 per class of goods/services, and, for marks already being used in commerce, (3) specimens of the mark showing use of the mark in connection with the applicable goods/services.

Click here for more information about how to select and protect a trademark.