Category: incorporation

THE JUGGLING GAME AND HOW TO PROTECT YOUR INTELLECTUAL PROPERTY

Greg HarrisLeave a comment

It doesn’t matter if you are a hot technology start up, a small food services business with an interesting recipe or a services business with a new business idea, legal protection of your intellectual property is critical to your business and should be one of the first things you think about when you’re ready to embark upon your new adventure. And this is one of the balls you need to juggle when you first start out.  Intellectual property generally falls into four principal categories – patents, copyrights, trademarks and trade secrets – and is fraught with misinformation.

three women and two men watching on laptop computer on table

For instance, a client recently asked me about copyrighting her business idea.  And another client wanted advice as to how to protect his trademark because of his patentable device.  Neither of these protections are possible, but the misinformation generally associated with intellectual property makes believe that they are.  This blog attempts to demystify it.

Copyrights.  Copyright protection is available for original works of an author and only protects the manner in which an idea is expressed.  If you have a distilling recipe for a banana liqueur, you don’t obtain a copyright for it unless the recipe is stylized in narrative format.  Besides, copyright applications are public records so your delicious recipe can be copied by all those who review the copyright rolls. On the other hand, if you have a computer program, work of art or literary piece, copyrights may be available.  Copyright registration using the primary registration method costs $35 on the main registry and generally takes 6-8 months.  You need to go through it though to protect your work.

Trademarks. Trademarks and servicemarks identify the source of the product or service (e.g., the brand name). It can also protect your logo or a tagline.  The major purpose of trademark law is to prevent confusion among consumers as to the source of goods or services and can exclude others from using the same or similar marks. That is one of the concepts that I always try to drive home.  Even if it is not an exact match, does your trademark cause confusion in the marketplace because it is so close to another trademark in the same industry?  That’s why doing a search of your mark is the first thing I tell my clients to do.  Even though trademark registration can take place federally or at the state level, I always recommend getting Federal protection given how often our goods and services cross state lines these days.  Trademarks cost between $300-$400 in filing fees and also take 6-8 months.

Patents.  A patent is a legal monopoly granted by the federal government to an individual inventor allowing the inventor to exclude others from making, using, or selling the invention during the life of the patent. Patent protection is available for any product, process, or design that meets certain requirements of novelty, non-obviousness, and utility. U.S. patent protection lasts for 20 years from the date on which the application was filed, with the exception of design patents, which last for 14 years from the date the patent was granted.  In the United States, a patent application may be filed no later than one year after a description of the invention is published, or the invention is first put on sale or made available for commercial use. Be careful though to obtain patent protection in all jurisdictions your idea may be used in order to maintain protection overseas.  Patent protection can take a long time to prosecute and cost thousands of dollars.

Trade Secrets.  A trade secret is any information, formula, pattern, or device used in one’s business that gives a competitive advantage and is not generally known within the industry. It must be of continuing use and must be kept confidential. This last requirement is extremely important, because once the information is no longer secret, it is no longer protected. A person or company claiming a trade secret must use reasonable and active procedures and controls designed to prevent disclosure and misuse. Leaving confidential materials lying around or within easy access can result in forfeiture of trade secret protection. Total or absolute secrecy, however, is not required. A trade secret can be communicated to employees who must use it, and it can be assigned, licensed, or otherwise disclosed to other persons who are required to maintain its confidentiality.  If material is known to some part (but not all) of the industry, trade secret protection may be available.

Other Considerations.  Other lesser known caveats of this type of protection include the following:

  • More often than not, it is the employer who is the owner of intellectual property on a work created by an employee in the course of his or her employment. If the creator of the work is not an employee, he or she will own the copyright unless the work was created within specific statutory categories of works as a “work for hire” under a written contract which details the work produced was done so and commissioned by the company.
  • Before engaging prospective lenders, investors, employees, consultants, suppliers and vendors (really any third party), you should obtain the recipient’s agreement to maintain the information in confidence via a separate NDA or confidentiality agreement. This needs to be done prior to any disclosure of your business.
  • If a formal NDA is not in the cards, then you should always at the very least add a statement that the information being disclosed in “Confidential.”

With these pointers, you will be positioned for IP success. And while this information is readily available and easily researched, it doesn’t match the expertise that an attorney  could offer your business. After all, you want to do whatever you can to make sure that your best ideas remain just that – yours.

Partner Agreements – But We’re Getting Along So Well!

Greg HarrisLeave a comment

It doesn’t matter if you’ve formed a corporation, LLC, partnership or some other form of entity.  And it doesn’t matter where you’ve formed your entity or for what reason you’ve formed it.  More likely than not, you have a partner or partners (or members or shareholders).  And whether there are two of you or 20 of you, when the business first starts, everyone is of like mind. Everyone gets along.  But inevitably, the business is successful or unsuccessful, and the result is that the partners want more, or they want less. The discussion below outlines legal and business issues that the founders of a new venture may want to consider in structuring relationships with one another.

Partners always want to know who is in charge.  Control of the business entity is sometimes determined by the nature of the partners themselves.  I have one software client with two members.  One member writes the code and one member runs the company and seeks funding. This system works well for them.  On the other hand, I have other clients where the partners are truly equal.  Who’s in charge then?  Even though partners are equal, consideration needs to be given as to whom ultimately makes the decisions.  Deadlock and corporate dissolution is no way to go through a business life cycle.  And the draconian solutions (Dutch Auction, Russian Roulette or Texas Shoot Out) are truly extraordinary solutions that should be avoided at all costs.

One of the other issues that new clients overlook when we talk about their new venture is the outcome of a voluntary or involuntary transfer of ownership interest.  Whether in a Buy-Sell Agreement, a Cross Purchase Agreement or just a good old fashioned shareholders or members agreement, the partners need to decide whether the Company and the other partners have the right to buy out the other partner if they want to (or have to) sell.  What happens if a partner dies, becomes disabled, no longer works full time, gets divorced or goes bankrupt?  The Company and the other partners may decide that that partner’s ownership stake must be repurchased.  And repurchased at some measurable value.  I often counsel my clients through these myriad of decisions.

The final issue that we often discuss at our initial partners’ meeting is the protection of the Company.  I represent the Company and it is just as important to me that the company is protected from the partners themselves.  Protections can take the form of a stock restriction agreement or an employment agreement, but I always recommend that the partners’ ownership interests are subject to vesting and/or repurchase rights based on employment with the Company.  I also want the partners to agree not to compete with the Company, not to solicit its employees or clients to keep all information (IP, business plans and otherwise) confidential and to assign all intellectual property rights to the company.

These are just a few of the considerations that partners should be thinking about.  Of course, every industry is different.  A gym or yoga studio has different needs than a restaurant or software company, but the partners agreeing to work with one another in good faith on issues like these above are universal in every business.  Contact me to discuss your business’s partnering needs.

Choosing the Right Entity for My Business is Easy?

Greg HarrisLeave a comment

You have decided to take the plunge and start your own business.  Congratulations!  Now the real work begins.  But if you take things one step at a time, you will be able to tackle all of the operational issues that you will face throughout this adpexels-photo-929245.jpegventure.

The first item on your checklist is to form a limited liability entity for your business.  Selecting the right jurisdiction and structure for your new business helps maximize your chances of financial and operational success while at the same time takes advantage of corporate tax breaks. And when faced with the confusing choices for structuring a business, new business owners can become overwhelmed. From corporations to limited liability companies (LLC’s); C corporations to S corporations; and Delaware entities to Massachusetts ones; how does one decide what’s best? It’s important to understand the differences – and similarities in vehicles, especially since categories can overlap – in order to choose what’s right for you.

Two choices need to be made before you embark upon your entrepreneurial journey:

  1. Corporation, LLC or something else?
  2. Jurisdiction of entity

Corporations, LLCs or Something Else

Sole Proprietorships, Partnerships, Corporations and LLC’s each have their own fiscal and legal benefits, but for the vast majority of companies, the choice really comes down to your business’s tax burden. Sole Proprietorships and single member LLCs don’t necessarily file separate tax returns. Income, profits and losses are reported on Schedule C of the principal’s individual tax return.  Partnerships and LLCs are treated as partnerships and those entities’ income “passes through” to partners’ individual tax return through a Form K-1.  Corporations are taxed in two very different ways: as partnerships where the operations pass through to the shareholders (S Corporation) or as its own individual entity (C Corporation).

While many micro-businesses with minimal risk are sole proprietorships and many professional services businesses (law firms, accounting forms, architectural firms, etc.) take the form of partnerships, the vast majority of my clients choose between corporations and LLCs.

A single member LLC is disregarded for tax purposes and income is reported on the Member’s personal tax returns.  A multi-member LLC’s default tax form is a partnership, but the members may elect to be treated as a corporation.  While an LLC is flexible in its corporate organization, it has limitations for more mature high tech businesses.  LLCs can’t issue tax advantageous stock options and many investors don’t want to invest in an LLC.  Generally, LLCs are useful for real estate investing and small companies with few capital requirements.  If a client is purchasing investment property or opening a consulting business, I recommend forming an LLC.

C Corporations are the standard corporate structure and the default selection when you file your articles of incorporation. C Corporations’ benefits are plentiful – they help keep separate your business and personal finances, permit you to issue traditional stock options and restricted stock, and allow you to sell shares for investment capital raising. However, C corporations contain two levels of tax: (1) the corporation itself is taxed, based on its net income, and (2) the stockholders also are taxed when they receive dividends or liquidation proceeds from the corporation. Don’t be fooled by what you read in the news.  Even with the 2018 corporate tax rate cut (down to 21%), these two layers of income tax can unfortunately result in a combined income tax rate of 45% or more on income earned by the C corporation.  In addition, C corporation start-up losses incurred are not to be used on its owners’ personal income tax returns, whereas they can be with LLCs and S corporations.

S Corporations, while the same type of legal entity as a C Corporation, are taxed very differently.  A business structured as an S Corporation is taxed as a pass-through in order to avoid the double taxation issue altogether.  Potential drawbacks of this structure however are that S-Corp status must be classified as such before the 15th day of the third month of the tax year (or they will be a C-Corp by default); they must be owned by U.S. individuals or certain qualifying trusts; they must have fewer than 100 shareholders, and they can only have one class of stock (i.e. no preferred stock).

Jurisdiction

While the structure of your business answers most of the important questions, finding the right jurisdiction for your business is important too.  Corporate laws, taxation and costs vary from state to state; therefore you must also choose the jurisdiction of organization, i.e., Delaware, Nevada, or your own home state. Nevada and Delaware do offer unique advantages to small businesses.

Delaware, for example, has market acceptance, a highly developed body of law, special courts devoted to corporate issues, extremely quick and friendly secretary of state offices and tolerable fees for company filings.  Given these factors, most venture capitalists and private equity investors will insist that you reincorporate in Delaware if you did not organize there in the first place.  If my client from the outset considers outside investors, I always suggest incorporating in Delaware.

Nevada is similar to Delaware in that the state has low fees and corporation-friendly laws.  Further, Nevada makes it extremely difficult to “pierce the corporate veil,” which shields your personal assets from corporate liabilities.

If you are operating a small company, then I always recommend incorporating in my client’s home state.  While the fees are often greater, if you form in Delaware or Nevada but you engage in business in another state, it is likely that you will have to qualify your business in that state and pay even more fees.  The only time I don’t recommend home state entities is when a client is purchasing rental properties out of state.  The incorporation state should be the state in which the property resides.

Conclusion

When choosing the right entity type and jurisdiction for your business, be sure not only to consider the present situation but also the future needs and potential longer-range situations.  There are benefits and challenges to each vehicle, but when all the details are considered, the best fitting one should become clearer. Before making this final first decision, experienced legal counsel and tax advisors can help focus the process.