2 Important Questions To Ask Before Electing S-Corp Status For Your LLC

I’ve been getting a number of questions regarding what’s best for a person’s business. The S-Corp or C-Corp? The LLC? A B-Corp, perhaps? When it all comes down to it, there’s really no perfect answer, and every case has to be looked at on an individualized basis. But one thing is for sure, there are bound to be questions as soon as a client learns about the possibility of electing S-Corp status for their LLC. For some reason, this idea of having an LLC that is treated like an S-Corp is some kind of revelation for our clients who feel like maybe, just maybe, this is a way to dodge the tax man or somehow outsmart the IRS.

While there are a number of important factors to consider, this is a quick blog post—not a one-on-one discussion with a business attorney, accountant, or tax attorney regarding your company. Accordingly, we’ve distilled the numerous factors down to just two of the most important.

  1. What is the Difference Between Electing S-Corp Status and Organizing as an S-Corp? The most important fact to keep in mind when considering an S-Corp election for your LLC is to remember that you are not reorganizing your LLC as an S-Corp—you are simply choosing a different tax treatment. The type of business entity you are organized as is a legal distinction while the type of entity you choose for taxation purposes is a tax distinction. So, if you have a single-member LLC without the S-Corp election, your business will be considered an LLC for legal purposes and a disregarded entity (or sole proprietorship) for tax purposes. Further, if you have a multi-member LLC without S-Corp election, your business will be considered an LLC for legal purposes and a partnership for tax purposes. Finally, no matter how many members your LLC has, if you elect S-Corp status, your business will be considered an LLC for legal purposes and an S-Corp for tax purposes.
  2. What are the Tax Benefits to Electing S-Corp Status? Well, the tax benefits depend on the number of members you currently have in your LLC. Most prominently, for all LLCs, being classified as an S-Corp for tax purposes can mean you no longer have to pay individual self-employment tax, which can turn out to be big savings. However, choosing S-Corp status also reduces your tax flexibility for a multi-member LLC because the partnership style tax status multi-member LLCs enjoy gives the members a lot more leeway. If tax benefits are the main focus of your reason to elect S-Corp status for your LLC, which they should be, you have to consider your individual needs and definitely talk to an accountant before making the election (but always have an attorney draft the necessary formation documents).

Image Courtesy: loop_oh

6 Must-Include Items in an Employee Termination Letter

Wrongful termination. Those two words should strike fear into the heart of any employer. And while they can often mean a big payout for a disgruntled employee (and her attorney), employers shudder at the fact that the person they just fired may end up being an even bigger thorn in their side once they’re no longer employed. However, a well-drafted termination letter can go a long way to helping avoid dealing with a wrongful termination claim—but here’s the catch—the employee termination letter has to be as close to perfect as possible. And here are six items you should make sure your lawyer includes in her termination letter.

  1. The Reason Why the Employee Was Terminated. I’m just going to jump right into the quagmire that scares a lot of employers. “Why include the reason for termination?” the employer asks. “Won’t that just subject me to liability for wrongful termination?” The answer is simple. You should include it because a well drafted reason for termination can go a long way to helping prove the reasons why the employee was terminated in the first place. However, be mindful not to go into too many details regarding the reasons for termination—but don’t be too vague either. If you try to be too specific, you may find you cannot possibly prove this reason in court if the employee does end up suing you for wrongful termination. And if you are too vague, you run the risk of damaging your credibility and looking as though the stated reason for termination is not the actual reason for termination.
  2. The Date of Termination and the Last Day of Work. This really needs no discussion, but these dates should be included so as to document some of the most important dates in the termination process. Also include the date the terminated employee must return all of your belongings and supplies, if necessary.
  3. Information About Any Prior Warnings Given. If you’re the type of employer who feels the need to give a number of prior warnings to employees before terminating them, you should include the dates you gave them and the reasons behind them. A well documented record of pas poor performance (for example), can go a long way in deterring any kind of wrongful termination suit.
  4. A List of the Benefits the Terminated Employee is Entitled To. A number of employers give their employees the right to avail themselves of healthcare benefits, among other things, after they’ve been terminated. If your company is one that allows for such continued benefits, be sure to tell your terminated employee about it. And also don’t forget to include information about unemployment benefits.
  5. Whether the Employee Was Discharged or Terminated. Pretty self-explanatory, all termination letters should state whether the employee was discharged or terminated.
  6. Whether the Employee Could Have Appealed the Termination. The question of whether you should provide some kind of appeal system for employees who have been terminated is a topic for another blog post. However, if you do provide a system for the employee to appeal her termination, make sure you specify the proper method for appeal in your termination letter and if the time to appeal has already passed, then discuss whether the terminated employee took advantage of the appeal system.

Image Courtesy: Thomas Leuthard

Why Your Home State May Be the Best Place to Incorporate a New Business

There’s one question I’m asked more often than any other when I’m counseling clients about business formation. What is the best state to incorporate a new business? There are the usual choices, of course. Delaware, Nevada, and Wyoming. These states all provide a number of benefits to the up and coming entrepreneur. Tax perks, rich history of corporate law, extra protections for corporations and the individuals who incorporate them.

But are those states really right for your business?

Any decision about where to form your new business entity obviously has to be made on a case by case basis. As an attorney, I’d be doing you a disservice to tell you that you absolutely must form your corporation or LLC in one particular state because, let’s face it, different business entities need different things and what works well for one company will be exactly the wrong thing for another.

What I can tell you, however, is to consider your home state as a frontrunner along with the usual top three choices. Our law firm is located in California—a state widely regarded to be, shall we say, less than friendly to small businesses. Except for tech startups. California is plenty friendly to those. In any event, California has high taxes, some foolish laws, and some courts have a penchant for trying to hold the officers and directors liable the debts of the business. Aside from all that—its a perfectly good place to incorporate your business.

So you’re a new business owner who wants to form a corporation. Say its a plumbing company. You live in California, you’re licensed in California, your employees all live and work exclusively in California, your shop is in California. You can see where this is going—you’re totally tied to California for your business. But you decide you want to incorporate your business in Delaware because a friend of a friend told you that’s the place to do it. Tax breaks, good law, whatever reason you have. If you decide you want to incorporate in Delaware, you’re going to have to pay for the incorporation there, file all of their paperwork, pay at least their minimum taxes, and so on. But, because you’re operating your business entirely in California, California is going to require you to register as a foreign corporation in California. Why? Because you’re transacting intrastate business here. And you’re going to have to pay for the registration here, file all of the paperwork, pay California’s taxes, and so on.

Sound like a good idea?

I didn’t think so.

That’s just one situation where it may be better to form your new corporate entity in the state where you’re actually conducting business. There are others, but that’s a topic for a one on one conversation with our clients. If you’re considering starting your own business and are looking for an attorney to help walk you through the process from start to finish, give us a call and we can put you on the right track—no matter what state you’re interested in.

Image courtesy: Robert S. Donovan

How to Pick the Perfect Name for Your Business

What’s in a business name? A lot, surprisingly. And it’s something far too many entrepreneurs fail to dedicate time to when starting a business. Sure, in the mind of a team putting together the next great internet startup, a name doesn’t really mean much when there’s the big picture things to think about: the business plan, the coding, and the website design and functionality. But a business name is something that should be at the forefront of any businessperson’s mind from the moment they take that first step toward incorporation. Hopefully this article will help to shed some light on the importance of picking a great name the first time—lest there be unforeseen repercussions down the road.

To many, the name of your business is just the thing you wrote down on articles of incorporation or the articles of organization at the time you formed your business. Maybe you spent a few minutes thinking about it—maybe you spent a few hours. But the real question is: Did you consider the branding implications, the marketing prospects, and the complete integration of your business around your name? Didn’t think so.

You see, the name is more than just the name of your business entity. For many entrepreneurs, it also extends to everything their company produces. The website address, the product name, and (what unfortunately becomes a sticking point for many businesses later on) the trademark. Because so much hinges on the business name, you want to make sure you get it right the first time. Changing a name because of trademark issues can be detrimental to your business—and having to settle for a less-than-perfect website address can spell doom for an entirely web-based startup.

So what should you keep in mind when naming your new business? Here are a few questions you need to ask yourself when choosing a name for your business.

  • Is Your Business Name Already Taken? When you decide to form a business entity, you’re going to have to register with some Secretary of State office. At the time of registration, there may be another company with your chosen name—at which point you’ll have to come up with a new business name. Instead of thinking you’ve found the perfect name from the beginning, why not save yourself from disappointment by picking a few possible names and ensuring they’re not already taken in your chosen state.
  • Are There Any Laws Against The Use Of Your Chosen Business Name? Some states have laws regarding what can or cannot be used in a business name. Generally, these laws are designed to prevent use of deceptive business names, but additional laws could cause problems too, so make sure you read the applicable rules and regulations regarding business names before you try and register.
  • Is A Domain Name Available For Your Business Name? Chances are you’re going to want a web presence for your business at some point. Do you really want to have to resort to a .net or .biz domain name? Or worse, has someone registered all of the top level domains for your chosen business name, leaving you to register a domain name that only vaguely resembles the name of your business.
  • Is The Business Name Able To Be Trademarked? This is a big one for companies that want to protect the goodwill associated with their name (which should be every company). If you’ve chosen a name for your business that can’t be trademarked, you may have a tough time trying to protect your business down the road. And if you’re taking your business around the world, make sure you can trademark your business name in places beyond just the United States. This applies to product names, too.
  • Will The Business Name Subject You To Trademark Infringement Claims? Have you decided to name your new company something deceptively similar to another company that already has a very strong presence in the field? If so, you may be inadvertently subjecting yourself to trademark infringement claims. Not a good thing. Make sure you’re not picking a name that is clearly designed to sound incredibly similar to your competitors.
  • Does My New Business Name Mean Something Weird In Another Language? This is kind of silly, but take a page from Ikea when naming your business (and your products) and try to make sure the name isn’t some vulgar word or phrase that could get your company into trouble when you branch out to foreign markets.

But, if you only take away one thing from this article, make sure that when you come up with your business name, you make sure your name is unique enough that you’re not infringing on anyone’s rights.

Image courtesy: Waag Society

5 Alternatives to the “Let Them Steal” Approach to Copyright Protection

I’m a bit of an amateur photographer on the side. My fiancé and I have long enjoyed heading out on weekends to picturesque locations around the Greater Los Angeles area to find an amazing photo opportunity or two. And, while I’m certainly not good enough to consider myself professional, I enjoy keeping up with the latest happenings in the sphere of professional photographers. Most of the topics are far outside the scope of this blog, but one post in particular caught my eye recently, and I felt it warranted a post from a lawyer’s perspective on copyright infringement.

Aptly titled “Let Them Steal,” professional photographer David duChemin takes a unique approach to a much-discussed topic: whether a photographer’s time is best spent hunting down and punishing those who steal her work. His answer was “no.” And that’s completely understandable given that, as a photographer, you’re in the business of taking pictures—not scouring the internet for someone who posted your latest landscape on Pinterest. But even if you don’t want to spend every waking hour you’re not honing your craft on searching for scrapers and plagiarists, there are a few ways to protect your work with a minimal time and monetary investment.

Watermarks
A watermark is the quickest and easiest way to try and discourage theft of your copyrighted work. Create some fancy typography, slap it on your image, and call it good. Big or small, it will discourage some people from stealing your work and it should help point people who view your photo (stolen or otherwise) toward your business. Or, you can spend a little extra time on your watermark and include pertinent information other than your name and the copyright symbol. Think about throwing in your website, the date the photo was published, and even the phone number of your studio. The more information you provide in the watermark, the more likely it will be that you may actually get a client if someone sees your work—regardless of whether it was stolen.

Demand Letters
While watermarks are a good passive way to try and deter some copyright infringement, demand letters, DMCA takedown notices, and civil suits require a bit of work in finding the infringer in the first place. But however you locate the infringer, whether through a Google image search, random browsing on Facebook, or by hiring an investigator, a demand letter may go a long way to convince a thief to remove the image. You can draft one yourself, citing to the applicable copyright laws and cases, or you can take all of the stress away and spend a couple hundred bucks on a copyright attorney to draft one for you. Just remember, if you draft a demand letter yourself, keep calm, be precise, and don’t make any ridiculous legal threats.

DMCA Takedown Notices
The DMCA (Digital Millenium Copyright Act) Takedown Notice has gained a lot of attention in the past few years. Maybe it’s because Google has directed some attention to it by replacing removed search engine results with a link to ChillingEffects, drawing the public eye to how broad and specious some of these notices are. But I digress. If you find that a site contains your copyrighted work and you want to use a less personal way to get the webmaster to take that material down, a DMCA takedown notice is a good way to go. But keep in mind that a lot of website owners may ignore your request, so be prepared to take additional steps if necessary.

Civil Suits
I’m a firm believer that a suit should only be filed as an absolute last resort. And when it comes to copyright infringement, I feel much the same way—only resort to a suit if every other avenue has been unsuccessful. Bringing legal action against each and every person who re-pins your photo on Pinterest will only lead to major public outcry against you, and is that what you really want? Save a civil suit for those individuals who are especially nefarious. People who are stealing all of your work, passing it off as their own, selling it, and refuse to respond to any of your demand letters or DMCA notices. And remember, if you want to claim for the maximum amount of damages in a copyright infringement suit, you’re going to have to make sure you’ve properly registered your copyrighted work.

Making The Item Freely Available
As a final alternative to letting people steal your work, consider just making the work available for free in the first place. Consider it part of your marketing materials—a photograph with your information attached to it that you freely distribute everywhere on the internet.

Image courtesy: Thomas Leuthard

2 Simple Ways to Protect Your Trademarks

If you’ve looked at any other pages about trademarks on our site, you’ll know we say the same thing over and over again. Trademarks are perhaps the most important asset your business has. Yet time and time again we hear from business owners that just aren’t willing or aren’t able to keep up with protecting their trademarks from infringement or dilution. Hopefully this post will introduce those business owners to a couple of great ways to protect their trademarks without having to sacrifice their spare time—if they have any—or was their money needlessly.

Monitor Your Trademarks for Infringers and Diluters

Trademarks are susceptible to two major forms of attack from other businesses, and the general public. These are commonly known as infringement and dilution. The details of each are too broad for this post, but in general, infringement means the violation of your rights as a trademark holder and dilution means, well, the dilution or tarnishing of the trademarked brand. Nevertheless, you want to avoid both from happening to your mark.

But how do you stop trademark infringement and trademark dilution? Before you do anything, you’re going to have to find out where the attacks are coming from. And in order to find out who’s attacking your mark, you need to monitor what other similar businesses are doing. After all, in general, it will be these similar businesses who are most likely to start chiseling away at your trademark rights.

While the easiest way to monitor your trademark is to find a great trademark monitoring service, you can also watch your trademark yourself. The route you choose depends on whether your time or your money is more valuable.

In any event, if you decide you want to monitor your trademarks yourself, there are a few free tools available that can help you out. The first is the, widely regarded as very user unfriendly, trademark search through the United States Patent and Trademark Office (USPTO). TESS, as it is commonly known, allows you to search through the USPTO’s trademark registry with a variety of options. How often you choose to search is completely up to you, but the general recommendation is usually once a month.

The next tool at your disposal is to track social media and domain name registrations. See what people are talking about. Check out newly registered usernames that sound incredibly similar to your best-selling product. Should only take an hour. Or three. Or ten. Luckily, there is a tool out there that can help speed things up a bit. KnowEm, a social media and username search engine (with a very rudimentary trademark search function) can help you keep track of who is using what username on social networking sites as well as which domain names have been registered. This kind of information can go a long way to helping you sort out who may be trying to plunder your trademark.

Finally, we have the good old search engine search. Google, Bing, Yahoo, whatever your favorite search engine is, use it. Conduct a search every so often to make sure your mark isn’t turning up in places you don’t want it to. You can even use Google Alerts to notify you when new content with your trademark—or something highly similar to it—appears in Google’s search results.

Hire An Attorney Before You Send Out That Cease & Desist Letter

The cease and desist letter. Favorite document of all those who think they’ve found a trademark infringer. Sent to intimidate those who may be violating a business’s trademark into submission. But are they really all they’re cracked up to be?

Imagine this scenario. You think you’ve found an infringer. You’re absolutely livid that this guy is totally ripping off the name of your product you’ve worked years to perfect and spent hundreds of thousands of dollars to produce and market. So you decide to draft a cease and desist letter to tell this guy to put a stop to his actions. In your haste, you adopt a pugilistic tone in hopes of making him shake in his boots. You send it off, and a few weeks later you get a response from the guy’s attorney. He’s responded to your cease and desist letter with one of his own—except this time he’s telling you his client has a senior trademark and he wants you to stop selling your product and change its name to something that’s not infringing on his trademark.

Yeah. That’s not a situation you want to find yourself in. But it happens to some business owners. They think they’ve found an infringer. They send off the letter. And whoops, it turns out they were wrong and now they either have to stop selling their product or they decide to fight a long and expensive trademark infringement suit.

And it can all be so easily avoided in two easy ways. First, keep your cool and don’t send off a cease and desist letter to every person you think is infringing or diluting your trademark. Second, contact a trademark attorney if you think you’ve found someone negatively impacting your trademark rights. At the very least, a cool head and a second pair of (well trained) eyes can go a long way to make sure you don’t inadvertently get yourself into trouble by acting too hastily.

Image courtesy: Steve A Johnson

The Problem With The Employee Probationary Period

A close friend of mine recently hired a new employee. Things were going swell, and the employee was working out great, but then that person decided they’d rather seek employment elsewhere. During the time that employee worked there, my friend decided the best bet was to test the waters with the employee—try out an employee probationary period whereby everything that employee did was highly scrutinized, given feedback, and, if necessary, terminated for cause. It turned out the employee left before the probationary period ended, but what if they hadn’t?

My friend may have had a terrible situation on his hands. Something no employer wants to have to deal with.

An implied employment contract.

Yes, even though he meant for the employee to be “at-will” and terminable at any time for any reason (any legal reason, anyway, but that’s a post for another day), by simply having a probationary period, my friend might have unwittingly created a contractual employment relationship that could have superseded the desired at-will employment terms.

So how does this work exactly? Well, you start the employment relationship with an at-will employee agreement. That’s fine. That’s what everyone wants. But then you tell your employee that for the first 60 days, you’re going to give her extra feedback and fire her only if warnings have been given in advance. Uh oh. You see, the problem is that some courts have found that an oral employment contract can exist, and if you haven’t structured your employee handbook or employment agreement carefully, you may run right smack into a court saying that your probationary period created an oral employment agreement

There’s the problem. And here’s the solution. Ditch the probationary period all together. You can still keep an extra watch on new employees and give them feedback without the need for probation. After all, you probably tell your veteran workers when they make a mistake and if you’re an effective boss, you know exactly how well every one of your employees does their job—whether they’ve worked there a week or a decade.

Of course, if you really love the probationary period and can’t possibly let it go, you can always make sure it doesn’t affect your at-will employment relationship with a few quick fixes. First, make sure all employment agreements are in writing and include a provision that prevents the formation of any oral employment contracts. Second, include the facts of the probationary period in your written employment agreements and make sure that you outline in specific detail that the conclusion of the probationary period does not create any additional obligations for you or your employee. Third, make sure you have a well-drafted employee handbook and that the handbook explicitly states that no additional benefits, such as vacation time, paid time off, etc., will entitle your employee to permanent employment as opposed to at-will employment. If you keep those three factors in mind, and contact an attorney who can help you make sure your employment documents are in order and legally sound, you will significantly lower the risk that an employee can turn a successful employment period into an oral contract for permanent employment at your business.

Image courtesy: Victor1558