Norton Law Corporation Trademark Assets

Buying Trademark Assets: Does the Seller Really Own Them?

When you buy a business these days, you’re going to want to make sure you’re also purchasing the trademark assets from that business. Any good trademark or business attorney will make sure the intellectual property, including trademarks, copyrights, and patents, are included in any purchase agreement. But beyond that, how can you really be sure that the rights you’re buying are actually owned by the company you’re buying them from? That’s the question we’ll try to answer in this post, with a focus on trademark rights and a few helpful tips for making sure the trademark assets are actually owned by who you think they are.

Of course, my standard disclaimer applies. This post is just for general informational purposes only, and while I’m a lawyer, I’m not your lawyer (unless you’re actually a paying client who has signed a retainer agreement with me and you’re reading this). Any time you enter into any kind of deal to purchase intellectual property from another person or company or a deal to purchase a company itself, always consult an attorney (and an accountant at the very least) before you enter into the transaction.

With that out of the way, you’re probably wondering what’s the deal with trademark assets not actually being owned by the company you think you’re buying them from. There’s a couple of common occurrences I’ve seen that leads to ownership issues.

The first is that the trademarks are actually owned by a subsidiary of the company that’s being purchased instead of the company itself—and for whatever reason, the subsidiary is not part of the deal.

The second is that the company acquired the trademark from someone previously and, due to chain of title issues, the prior owner didn’t actually own the rights to use the trademark. There are others, of course, but those are two of the more common reasons why a company may not own the trademark asset you think you’re purchasing.

So what is a purchaser to do to protect themselves? It starts with a list. You (or your attorney) need to create a list of the intellectual property you think you’re going to be purchasing. This should include the following:

  • Trademarks
  • Service Marks
  • Copyrights
  • Patents
  • Trade Dress
  • Trade Secrets
  • Trade Names
  • Domain Names.

And don’t just include those you think are truly owned by the company you’re buying, but include those that are owned by other companies or individuals and are licensed to the company you’re buying. Unless you’re going to completely overhaul the business, you’re going to want to keep using those licenses after you purchase the business.

Once you have your list of expected intellectual property you’re going to receive from the transaction, you’re going to want to cross reference that with the list the seller provides, since their list will be the most up-to-date. They are the current owner of the business, after all.

If both lists match, you’re sitting pretty knowing that at least both parties are contemplating the same IP being transferred during the sale. If not, you’re going to have to do some digging. It’s always best to find that some intellectual property asset will not be transferred beforehand than it is to go back and fix it later by finding the correct owner and entering into additional agreements (at additional cost, of course) to secure the assets.

Aside from the lists, you (again, your lawyer) will also want to take a look at the current states of the company’s intellectual property dockets. This is incredibly important for trademark, service mark, and patent assets, as successfully managing those types of intellectual property require a near-constant watch on upcoming deadlines.

If there are many assets contemplated as a part of the deal, chances are the seller will have a docketing system in place, and you should view the current one-year summary of the docket to see what deadlines are coming up. You don’t want to be the buyer who purchases a valuable trademark only to suddenly realize upon the deal closing that the deadline for renewal lapsed after the deal closed but before you could properly take up management the mark.

Aside from trademarks, there are other things to watch out for when it comes to other intellectual property assets, but those are issues for another post.

I hope this post was useful to you if you’re considering buying (or selling, I suppose) a business. As I often say, a trademark can be one of the most valuable assets of a company, and you want to make sure you’re getting what you’re bargaining for. If you have any questions or comments, please feel free to contact me or leave a comment below.

Benefit Corporation

The Benefits of a Benefit Corporation

Benefit corporations (commonly known as B-Corps) are a relatively new—around a few years now in California—way of organizing your business entity. Designed to balance the for-profit interests of a traditional C-Corporation with the corporate responsibility that all modern businesses should take part in promoting. It’s like a for-profit-non-profit hybrid! Keep in mind, though, you don’t get the tax exemption benefits from the IRS (and your state) like you do with a non-profit.

But why would you want to go with a benefit corporation over a traditional C-Corp, S-Corp, LLC, or even a non-profit?

Before we get into the benefits of B-Corps, let’s briefly discuss how to form one and how they work.

Forming a B-Corp is essentially the same process as forming a normal C-Corp. Articles of incorporation filed with the Secretary of State’s office and you’re good to go. Of course, you can still limit director liability as you can with a regular corporation, but you also have to specify the corporation’s public benefit purpose. Filing fees at the time of this writing are the same for C-Corps and B-Corps.

After formation is where running a B-Corp becomes significantly different from running a traditional business entity. First off, the California B-Corp statutes require transparency in your business. This means you’re mandatorily required to report certain corporate records, generally on your company’s website.

Another big change is that a super-majority (more than just over 50%, generally two-thirds vote) of shareholders is required to modify your B-Corp’s public benefit purpose, and to make other various corporate changes. And if you’re a dissenting minority shareholder, you may actually have the right in certain circumstances to have your shares purchased from you at fair market value.

Benefit corporations are required to provide a reports to shareholders with reports detailing the goings on of the company and how they’re meeting their requirements to further their public benefit.

Finally, because this is a benefit corporation we’re talking about, your company has to advance a general public benefit. This means that your B-Corp must make a positive impact on society and/or the environment. Along those lines, there is a third-party organization, called B Labs, that certifies benefit corporations, providing them with a variety of extra perks upon certification. And that’s the real reason why benefit corporations are great—the perks that come with being a Certified B-Corp and the fact that your company is being used (albeit forced) to do good for society as a whole.

Which leads us to the question of how you choose between a traditional corporate structure, a benefit corporation, or a non-profit.

The main question that I ask my corporate formation clients who have expressed interest in benefit corporations is what they want out of their business. Are they purely interested in making a profit? Are they interested in promoting a public purpose? Or is it a mix between the two—and how weighted to one side or another is it?

On a very basic level, here’s how the answers to those questions tends to group my clients.

If you’re purely interested in making a profit or if you’re starting a technology startup and you know you’re going to be seeking venture capital financing in the near future, stick with the C-Corp (or S-Corp in certain circumstances).

If you’re purely invested in helping society and promoting a public purpose, then form a non-profit.

If you’re somewhere in between, go for the benefit corporation—or the lesser known Flexible Purpose Corporation if you’re in California.

So which type of entity is right for you?

When it all comes down to it and you’re in the process of starting your new company, how do you choose which type of entity to base your company around? The best way is to sit down and have a chat with a business attorney to help you sort out which entity is the best based on what you’re interested in doing. While I’ve provided a few questions above, it really comes down to a lot of nuanced, individualized factors to determine whether a B-Corp is right or an S-Corp is right. And that’s really why talking to an attorney is paramount—you don’t want to find yourself spending the extra money down the road to change your corporate structure.

Online Sales Tax

Online Sales Tax: What Small Business Owners Need to Know

I’ve worked with my fair share of e-commerce companies and individuals selling their handmade products online. At some point, most, if not all of them, approach me with the same question. Do I have to collect sales tax? The answer, in true lawyer fashion, is always “it depends.”

Of course, this time, it depends greatly on the state where your business is located. Most states make businesses collect sales tax—but some don’t. So if your business is located in Alaska, Delaware, Hawaii, Montana, Oregon, or New Hampshire, you can stop reading right here. You’re exempt from collecting sales tax from your customers. Unless you have such growth that you’re expanding your distribution network by building warehouses in every state.

As we’ve seen with Amazon—which used to not collect sales tax from anyone outside of it’s home state of Washington—there is a war brewing over online sales tax collection. You see, as more and more businesses find it profitable to sell their goods online without a physical store, more and more cities and states lose out on their sales tax revenues. Which, while a good thing for the consumer since they’re saving a buck or two on their purchases, is a bad thing for the cities and states. Amazon apparently claimed for years that their very slight presence (a shipping facility) was not enough for the state to have control over their taxing. But a few years ago they became forced to collect taxes from citizens of states where there was a distribution center, including my home state of California.

For those of you with businesses in all other states, you’re most likely going to need to collect sales tax from your customers. But how much? Since I’m a California based small business attorney, we’re going to keep this California-specific. What if your business is operating out of Silicon Beach (Santa Monica, CA) or the greater LA area? At the time of this writing, sales tax in Santa Monica is 9.5% while the base CA sales tax is 8%. Which one do you charge?

While most companies would probably just charge the California tax, the answer is a little more difficult than that. And please keep in mind here that this is a very basic overview, but you’re supposed to charge the state tax rate plus the special district tax rate. As a result, if you’re in Santa Monica, you’re going to need to charge the higher tax rate to all sales in your district. But if you’re in Santa Monica and you sell your product to someone in San Francisco, then you only have to charge the California sales tax rate. Of course, there are also caveats for different types of items sold and county taxes, but that’s the general rule.

Oddly enough, although I’ve had this post calendared for a few months now, just today, Engadget posted a very comprehensive writeup about the battle going on over internet sales tax. Very topical indeed.

And on a side note, it’s been a few weeks since I’ve posted anything here. That’s because I’ve been working on a few different projects—all highly specific mini-sites designed to help elucidate the various aspects of trademark law. If you’re interested in reading any of them, here are the links:

  • TrademarkOfficeAction.net: A website dedicated to helping small business owners understand and respond to USPTO Office actions they’ve received as a result of their trademark applications.
  • TrademarkOppositionAttorney.net: A website dedicated to helping business owners and trademark registrants understand trademark opposition proceedings.
  • BrandProtectionAttorney.net: A website designed to explain, in broad strokes, how business owners can protect their brands through trademarks, trade dress, copyrights, patents, and trade secrets.
  • TrademarkRegistrationLawyer.net: A website dedicated to helping small business owners understand the trademark registration process and why registering a trademark is so important in today’s international economy.

So there you have it. A quick and dirty post about sales tax and a bit of information about some other side projects I’m pursuing in my spare time. I’ll be back to my weekly posts on the Norton Law Corporation Blog for Business Owners from here on out, though.

Norton Law Corporation Non-Compete Agreements for Independent Contractors

Independent Contractors and Non-Competes Never Mix

A shorter week equals a shorter post. That means it’s the perfect time to talk about an issue that comes up a fair amount. Can I get my independent contractors to sign a non-compete agreement? If you haven’t read the title, get ready for a surprise: NO. That’s right, you never want to have your independent contractors sign a non-compete agreement. I’ll explain why in a little bit, but first some backstory.

Employers love hiring contractors over employees for a ton of reasons. No benefits. No healthcare. No wage laws. No vacations. You don’t have to deal with those bureaucrats and their rules getting the the way of your business. In fact, most employers would love to hire only independent contractors. Too bad that’s just about impossible given the differences between employees and independent contractors. But that’s a story for another blog post.

Many employers, to avoid the extra costs of employees, misclassify employees as contractors. And that’s, for those of you who haven’t read my other post comparing employees and independent contractors, is a big no no. Misclassification just leads to a lot of fines and lawsuits and other nasty situations down the road, so don’t do it. And more and more governmental agencies are starting to take notice—much to the chagrin of the employers.

But here’s the thing. Somewhere along the way, employers felt their contractors were sharing trade secrets. After all, they were working for the competition, often at the same time. And truth be told, you should hope they are, since that may tip the scales to the independent contractor side over the employee side. Employers did not see this as a good thing, and so they asked their independent contractors to sign non-competes. As I stated in the intro, this is bad—very bad. Why?

Because non-compete agreements are documents only signed by employees—NEVER by independent contractors.

It all comes down to the question of who is a true independent contractor? One who checks all the contractor boxes in the employee versus independent contractor test. One who works for others while they’re working for you. And if you make that contractor sign a non-compete agreement, then guess what, they now only work for you—like an employee. But what’s so bad about that? Well, they’re supposed to be working for a variety of companies in the same industry in which they have expertise. After all, I assume that’s why you hired that independent contractor. You wanted someone with unique knowledge of the industry. And how did they get that knowledge? Probably by working for some of your competitors.

So what is a savvy business owner to do when she wants to hire an independent contractor? Well, as you’ve just learned, never have them sign a non-compete agreement. Instead, make sure they sign a confidentiality agreement (aka a non-disclosure agreement). An independent contractor agreement that lays out exactly what they’re to do and how much they’re paid for it is also great. Follow those up with an invention assignment agreement and you’re all set. After all, you don’t want their hard work (which you paid for) to wind up as their property. Those three documents are usually enough to keep employers out of trouble. As long as they stay out of their contractors way.

And for those who are hiring an independent contractor for mission critical activities? Double-check that you actually want an independent contractor and not an employee. If that’s the case, then slap that non-compete agreement in front of your contractor and tell them to sign it. Well, maybe don’t slap it in front of them, but you get the picture.

One final note. If you’re hiring someone and you want them to be classified as an independent contractor, take a look at our other blog post on the subject. 7 Tests to Determine if that Independent Contractor You’ve Hired is Actually an Employee. And if you need help drafting any of the necessary documents for your business (like employment or contractor agreements), feel free to contact me.

A few notes: Somehow this has become the most popular post on my website, which has led to a number of questions. Allow me to address some of the most common.

  1. Is the de facto rule that independent contractor agreements should never have a noncompete clause, no way no how, lest it automatically render the agreement invalid or something like that? No. There are some reasons to include one, but on the whole including a noncompete clause in an independent contractor agreement can lead to that independent contractor being classified as an employee. It is simply one of many factors to be looked at when trying to determine if an independent contractor is actually an employee in disguise. Furthermore, this post—like all of the posts on my website—is merely legal conjecture. It is not necessarily the black letter of the law nor should it be considered applicable to your unique situation. If you have a legal issue related to independent contractors and employees, contact an employment attorney.
  2. Does this post apply to me in my state/country in my unique situation? I can’t tell you that. Being a California lawyer, I can only talk about issues based on a California perspective (with the exception of my trademark and copyright law posts, which in certain circumstances are designed to cover the Federal laws dealing with trademarks and copyrights). So if you are in another state or country, you will need to look to that state or country’s own laws regarding the issue of whether a person is an independent contractor or an employee. As for whether I can answer you regarding your personal situation, that depends on the facts at hand and whether you are located in California.
  3. Does the presence of a noncompete agreement in an independent contractor agreement automatically render that agreement unenforceable or automatically mean that person is an employee rather than an independent contractor? No. Again, the presence or lack of a noncompete in an independent contractor agreement is just one of many factors to consider when tasked with trying to determine whether a person is an employee or an independent contractor.
  4. Is there ever a good time to put a noncompete agreement in an independent contractor agreement? Sure. If the independent contractor you’re hiring is doing something very similar to what kind of business you’re running before you hire her as an independent contractor and plans to continue doing the same after she’s finished her tasks with you, then you may want to have a noncompete in there. But just be aware that you may find that person should probably have been classified as an employee given their similar skill set to what you’re doing as well as the presence of the noncompete.
  5. Will you help me litigate my case on the issue of independent contractors and employees? No. Sorry. I have no interest in litigating. My practice is almost entirely business transactional (I draft contracts and other business documents as well as file and prosecute trademark and copyright applications) except for the rare trademark or copyright case that requires court action. Moreover, I am certainly not an employment attorney, and there are plenty of good attorneys out there who only handle employment law issues.
Norton Law Corporation Blog Etsy Business Trademarks and Corporate Formation

How to Protect Your Etsy Business

The idea for this post came from a couple of different sources. First of all, I’m getting married in just over a month, and my fiancee and I have been ordering quite a few things from the handmade capitol of the world over the last few months. Secondly, I recently read an article a couple weeks back about Urban Outfitters, H&M, and Forever21 allegedly ripping off the designs from a number of artists on Esty—I’d post the link, but I forgot to save it (and in true lawyer fashion, I also can’t really comment on whether those companies engaged in that kind of activity). So I figured, why not make a post on how shop owner on Etsy can best protect themselves not only from liability, but from other companies leaching off of their great ideas and unique designs.

Now, it should be noted that Etsy’s corporate counsel, Hissan Bajwa, wrote a post a year or so ago about the various types of business entities an Esty shop owner could own, but I feel like he may have left out a few things and wanted to go into a little more detail. Keep in mind that everything in this post is merely general advice, and none of it should be considered legal advice since (for most people reading) I’m not your attorney and I’m not basing any of this article on specific, individualized, facts but merely general observations.

The Best Legal Structure for an Etsy Shop Owner

What the best legal structure is for your business is going to be a question for your own personal business attorney. That’s right, you’ll need to evaluate what you’re selling, whether you’re working with anyone else, and what the taxes will be like depending on the type of structure you’re interested in (and that’s also a good question for a CPA, as most good business attorneys will tell you).

Let’s Talk Sole Proprietors

With that said, I’ve been shopping on Etsy for a long time, and I know that for most of the seller out there, who are working part time crafting their wares, a sole proprietorship is fine. You’re doing business as yourself (or under an assumed name, for which you’ll need a “Doing Business As” DBA recorded pursuant to your county’s rules), and as a result, if you run a shop on Etsy, you’re already a sole proprietor. From a tax perspective, you and your business are one in the same, and from a liability perspective, you’re also one in the same—which an lead to you being held personally liable for any lawsuits that may pop up against your business. Do keep in mind that you may be able to protect yourself with liability insurance, but be sure you really know what your policy says.

In short, a sole proprietorship structure is easy to run (all the money just goes to you), easy to maintain (you don’t need any specific filings or documentation except for a DBA), easy to form (automatic as soon as you start doing business), but you need to watch out for the liability problems or you could get seriously burned (you’re personally liable for everything done in the name of your business).

So, in an incredibly general way, I’m going to say that for most Esty sellers, a sole proprietorship is all you need—especially if you’re just starting out and don’t want to invest a bunch of money into a business you’re not sure is going to work—unless you’re selling items that could injure someone, including vintage items, food products, beauty and grooming products, certain types of furniture, or anything that could injure someone.

Partnerships Are Just…Meh

Now, the question when you decide to start working your business with another is whether to form a partnership or one of the more “sophisticated” business structures like a corporation or a limited liability company (LLC). This might just be personal preference talking, but I’m not a fan of the partnership structure unless it’s absolutely necessary (which does happen in very specific circumstances which are way, way outside the scope of this article). Essentially, you and another person enter into a business partnership, at which point I always recommend a partnership agreement—seriously, if you’re partnered with someone and you don’t have a partnership agreement, call an attorney and get one drafted now, this very instant, I’m not kidding—when you start operating the business together.

A partnership is kind of like a sole proprietorship, but for two people. Same as before, they’re easy to run (just split that money as stated in your partnership agreement, or equally if you don’t have a partnership agreement), easy to maintain (again, just file for a DBA and that’s all you’ll need provided you and your partner are still getting along), easy to form (just start doing business with someone else), and as with the sole proprietorship, easy to get totally screwed if someone sues the partnership. And why you may ask? Because in a partnership, both partners are on the hook for the entire amount of any liability the partnership incurs. So if your partnership is sued, and your partner can’t or won’t help pay, you’re going to be stuck holding the bag (though in all fairness, you can try and get the money from her later).

My feeling about partnerships for Etsy store owners is this: if you’re doing enough business that you’re in need of a business partner, skip the partnership, spend the money and form a corporation or an LLC.

Better Liability Protection Comes at the Price of a Corporation or LLC

We come to the last two types of businesses for Etsy shop owners: the corporation and the LLC. Now, there’s only one type of LLC (unless you count LLPs, which are like LLCs and partnerships mashed up and only used in limited circumstances), but there’s a whole slew of corporation types, from C-Corp to S-Corp to B-Corp. We’re going to talk about a few pros and cons of all of them, but a somewhat more detailed study, you may want to check out my other articles on corporations and LLCs.

For a lot of small business owners, the biggest issue I run into with corporations and LLCs is that entrepreneurs don’t like to pay for them. Most of the time, as long as you do yourself a favor and stay away from the non-lawyer legal service providers you see advertised on TV, you’re going to have to shell out around $500 to $1000 to get a corporation or an LLC formed after attorney fees and filing fees with the state you choose to incorporate in. For some business owners, especially Etsy sellers who are just getting started, that’s quite a chunk of change, and you’re probably wondering what you get for that.

What you get for that is a lot more liability protection in case something goes wrong and your business gets sued. This means that if the business is sued, you’re most likely going to be protected. It also means that you have to keep up with a lot more busywork to keep your business going. Extra documents will need to be drafted, meetings will need to be held, a separate set of taxes will need to be done, and so on. But all of that comes with the big perk that if your business is sued, you and your family aren’t going to have to pay for the damages out of pocket if you lose—your business is solely responsible. And because of that big benefit of a corporation or LLC, if you’re selling products that run a higher risk of hurting someone, do yourself a favor and talk to a business attorney (most of us are free to consult with) about whether you should go the corporation route.

On top of the liability protection, some of the corporation types also give you extra benefits. For smaller businesses, I say stay away from the C-Corp structure unless you’re interested in securing some kind of venture capital investment. However, an S-Corp can help you save money on taxes, and a B-Corp can help you save money on certain supplies and other necessaries to keep your business running since having a (Certified) B-Corp shows the world that your businesses takes social responsibility seriously.

Protect Your Handmade Items from the Prying Eyes of the Big Companies

While the first part of this post dealt with how to protect yourself in the face of liability, the second part of this article will deal with how to protect your products from “theft” by the competition. At the outset, it’s important to know that not everything can be protected and a full on, proper protection scheme will cost you a lot more than you’re probably making selling your products on Etsy, but I’ll give you a few hints and tips on how to protect your products without breaking the bank.

Also, every industry has a preferred type of protection, wether it’s copyright, patent, trademark, or trade secret, so I’ll be touching on all types of protection.

Don’t Copy Me…I Have a Copyright

Copyright protection is automatic for things that qualify for it. That’s right, you don’t need to file any paperwork, pay any fees, or anything like that if your items qualify for copyright protection. However, obtaining a copyright for many types of products is simply impossible, and if you want to go after someone for money damages who has copied your work, you’re going to have needed to register your copyrighted item with the Copyright Office arm of the Library of Congress.

So here’s how copyrights come to be. They need to meet two main requirements: originality and fixation in a tangible medium. First, something needs to be original to be copyrighted. It doesn’t have to be super original, just mostly original. Second, it needs to be fixed in a tangible medium. Say what? That just means it has to be more than just an idea, it has to be “touchable” for lack of a better word. There’s also a third requirement: the item can’t be functional.

With the requirements out of the way, let’s talk about a few items currently on Etsy’s front page that may be able to qualify for copyright protection. Jewelry, clothing and accessories, photographs, paintings, furniture, and eyewear. That’s a pretty wide range of products, all of which may be available for copyright protection provided any individual item from a group of items like that is able to meet the requirements for a copyright.

If You’re Trading Goods, You Need a Trademark

Trademark protection is another great way to keep the big companies at bay and protect your products. First things first, I’m a trademark attorney, so I always recommend that if you’re serious about your business, you really need to spend the few hundred dollars to trademark your company’s name. You don’t have to spend extra to trademark a logo or a slogan, but do yourself a favor and trademark the name of your company to give you that extra leverage to fend off competitors who may try to leach off your success. And even if you’re not worried about that, at least have a qualified attorney perform a trademark search to make sure you’re not infringing on the trademark of another. Seriously, I’ve seen it happen before, and a few hundred dollars now can save you tens of thousands later.

With that out of the way, trademarks are designed to protect brands and make sure consumers know where any given item is coming from. Most notably, business owners register trademarks for the name, logo and any slogans used by the business, along with the names they use to brand their products. However, beyond that, certain characteristics of the products themselves may be eligible for trademark protection under what’s known as trade dress. Trade dress extends trademark protection to the decorative, non-functional, non-essential portions of a product, which makes it an excellent way to protect certain types of products. Here’s a few examples of where trademark protection may be applicable: watches, clocks, clothing, jewelry, eyewear, and accessories.

Patents are Patently Expensive

Patents are the third category of intellectual property protection, and to be perfectly honest, they’re way beyond what you’ll likely need as an Etsy shop owner. They’re usually incredibly expensive and take a long time to obtain, and I really don’t recommend patents for most small businesses.

Keep Your Recipes a Secret, a Trade Secret

The final type of protection for your products is trade secret protection. Purveyors of food products, beauty products, and other consumables, its time to listen up. Trade secrets protect the recipes and formulas you use to create your products, but they can also be used to protect things like customer lists, supplier lists, and pretty much anything that makes you different from your competition. The catch? You need to keep your trade secrets a secret. Don’t tell anyone you don’t need to. Make those you do tell sign a non-disclosure agreement. And if you write any of your trade secrets down, keep them under lock and key and only let others see them on a need to know basis.

A Quick Conclusion to a Long Article

At over 2400 words, I think this is the longest article I’ve written on my site, but there was a lot of information to cover and I hope you’ve learned a thing or two about how to protect yourself and your Etsy business. A few things to keep in mind in parting.

Sole proprietorship is probably fine for many Etsy shop owners, but not all, so call an attorney if only for a quick (free chat) about business structures if you’re worried about liability or interested in taking advantage of the perks of a corporation or LLC.

Copyright and trademark protection may be available for your products, but don’t just assume. As far as trademark protection goes, take a look at the (growing) database of common trademark questions for some quick answers on whether your product may be trademarkable. And if you have a product or service to add, let me know and I’ll give you credit for it.

Whether you’re a sole proprietor using a DBA or a full-fledged corporation, trademark your business name, or at least spend the money on a professional trademark search to make sure you’re not infringing on the trademarks of another.

And that wraps it up. Good luck in your endeavor on Etsy and I hope your business continues to grow into a huge success. And if you’re already a shop owner on Etsy, feel free to share your shop in the comments below.

Norton Law Corporation Presents a Post About the Business Documents Your Company, LLC, or Corporation Needs

7 Documents You Need to Keep Your Business Legally Sound

I’m always a little surprised when savvy business owners come to me to make sure their business is operating legally, only to find they’re missing a number of key documents. To be perfectly honest, a lot of the documents only matter if you’re in the process of expanding your business, going to sell your business, looking to take on investors, or you’re going to register your company’s securities with the SEC. But, that being said, if you want to save yourself a lot of headaches (and a lot of money having attorneys fix things that are horribly, horribly broken) before you take those steps towards growth and expansion, and if you want to protect you and your family’s interests in the most comprehensive way possible, it’s always a good idea to make sure your business’s documents are in order sooner rather than later. Without further ado, the documents you’ll need:

  1. Articles or Incorporation / Certificate of Incorporation / Articles of Organization: These documents have many names depending on where they’re being filed and what they’re being filed for, but they all have pretty much the same purpose—to let the Secretary of State (or the equivalent Division of Corporations) know your business is registered as a corporation or a limited liability company (LLC).

    If you’re incorporating your business in California, for example, you’ll need to draft and file the articles of incorporation. There’s a form, but if you hire a half-decent business attorney, they’ll draft you articles that actually apply directly to your business rather than shoehorning you into what the state’s template provides.

    The Certificate of Incorporation is the document you’ll need if you want to incorporate your business in Delaware. It’s very similar to what you might file here in California, with a few tweaks (and a different name). If you’re not sure whether you want to incorporate in Delaware or your home state (not necessarily California), I wrote a nice article on that a few months ago: Why Your Home State May Be the Best Place to Incorporate Your New Business.

    As for the Articles of Organization, that’s the document you’ll file in California to organize your business as an LLC. Of course, there’s also a form for that—and you generally have to use it.

  2. Bylaws / Operating Agreement: As with the documents above, these two documents have different names, but essentially do exactly the same thing. They help you determine the ground rules for how your business is run. Bylaws are used by a corporation (no matter what kind: C-Corp, S-Corp, B-Corp, etc.) to specify such issues as how large the board will be, where the initial office will be located, what powers the officers and directors have, how shares may be transferred, and how shareholders and directors can vote.

    Now, if you’re the sole shareholder of your own private corporation, you’re probably thinking why in the world would I want to spend a few hundred dollars on a document like this when what I say goes. And that’s a fair question, but here’s a fair answer: in some states, you have to submit your bylaws to the Secretary of State/Division of Corporations/Whatever they’re called in your state at the time time you register your corporation. Even if that’s not the case, some banks will want to see your bylaws before you open an account, the professional licensing organization of your state may want to see them if you’re running a professional corporation, investors will definitely want to see them before they send any money your way, and the buyer will want to see the bylaws when it comes time to sell your business.

    Oh, and if you’re passing your corporation on to your kids when you die, the bylaws can help them easily make the transition from your ownership to that of your kids without too many struggles (provided it’s drafted properly). And best of all, if you’re a sole shareholder of your company and you want to protect your family from liability if your company is ever sued, a set of bylaws can go a long way in proving your company is it’s own entity and not just your alter ego.

    For the purpose of this post, an operating agreement is practically the same as the bylaws, except they’re used for LLCs.

  3. Minutes from Meetings: You’re holding regular shareholder/director/member meetings, right? Right? Well, don’t feel too bad if you’re not. There’s a ton of small businesses out there where regular meetings means once every five years. But while you may not think that the minutes from your regular shareholder meetings are that important, in truth, they really can be.

    Here’s the thing. Imagine your business is going along smoothly when all of a sudden someone sues you for some screw up of one of your employees. Maybe they hit someone with the company car while they were en route to the job site. That person has a valid case and sues your company and you. Normally, if the company has caused some kind of wrong, all of the liability rests on them, but there’s a theory in the law called piercing the corporate veil which basically means that if the plaintiff (the person who’s suing you) can show that your company is no more than just your alter ego, they can go after your assets too to satisfy their judgment debt if they win. And here you thought forming a corporation or an LLC totally insulated you from liability.

    But how can you protect yourself from such an attack? Holding regular meetings and keeping records of them. It doesn’t matter if they’re shareholder meetings, board meetings, or member meetings (if you’re operating an LLC), just make sure you have them and make sure they’re properly documented.

  4. Trademark Registration Certificate: Strictly speaking, this isn’t required, but you should really get one. Seriously, you’ll save a lot of money down the road, especially if there’s already someone else using your trademark and you don’t know about it.

    No matter what kind of business you own, your brand is your most valuable asset. I’ve said it before, and I’ll say it again until I’m blue in the face.

    I don’t care if you’re a cruise ship operator with vessels that cost tens or hundreds of millions of dollars—your brand may be just that valuable. After all, when someone is looking for a cruise ship, they’re not going to trust a company they’ve never heard of, they want the Disney cruise experience or the Carnival cruise experience—not the “some guys we’ve never heard of with a huge boat” experience. So spend the money now and trademark your business’s name (and it’s logo too if the logo is really nifty and a part of your brand’s image).

  5. Employment Documents: Planning to hire someone (or a few someones)? You’re going to need employment contracts, an employee handbook, and independent contractor agreements at least. And you’d better make sure you know the difference between an employee and an independent contractor, because if you misclassify someone as a contractor who’s actually an employee, you’re going to be in a world of hurt. And at the very least, make sure you know whether your employees are classified as exempt or non-exempt.

  6. Distributor / Vendor / Service Contracts: From E-Commerce sites to plumbers, everyone needs basic contracts to help them run their business. Whether you’re distributing someone else’s goods or selling your own goods or services, it’s always a good idea to have your agreements properly documented—and that means in writing. Oral agreements, while technically enforceable in court, are always an uphill battle, so put your contracts in writing.

  7. Non-Disclosure Agreements (NDAs): Sharing your business information with others can be a good idea, but having them steal that information for their own uses later can be disastrous. That’s where NDAs come into play, when you’re showing off some aspect of your business to a third party (including your employees and independent contractors), you want to make sure they’re not going to divulge the information they’ve gleaned to another, or worse, use that information to further their own business interests. Just make sure you don’t give one of these to a potential investor (from a legitimate investment firm or VC) or you’ll look like a real novice in the startup and small business world.

After all of that, you’re probably thinking there can’t possibly be any more documents that may come into play during the life of your business—but there are. Copyright licenses, trademark licenses, commercial leases, industrial leases, equipment leases, retail leases, franchise agreements, term sheets, share purchase agreements, merger and acquisition documents, and the list goes on. As you can see, this was by no means meant to be an exhaustive list of what kinds of documents you need for your business, but it should give you a better understanding as to why hiring a business attorney sooner rather than later can save you a lot of headaches down the road. These documents aren’t going to write themselves, and only an attorney (or a very, very, very skilled businessperson) should undertake drafting, revising, and negotiating them.

3 Reasons Why Your Startup Shouldn’t Be An LLC

One of the earliest legal decisions you’ll need to make as the owner of a startup is deciding what type of entity your new company is going to be. Will you choose a C-Corp? An LLC? Something a bit more eccentric, like a B-Corp? There are a number of options out there, and picking the wrong one can spell disaster for someone hoping for a high growth rate fueled by venture funding.

For most startups, there are three different corporate structures to consider: the C-Corp, the S-Corp, and the LLC. The three are primarily differentiated by their tax treatment, but that’s a story for another article, and I have posted an introduction to LLCs and a primer on Corporations before, so check them out if you want to learn more about those entities, how the differ, and what they’re best suited for. Spoiler: the C-Corp is the best entity for a startup.

Now onto the matter at hand. Why are LLCs are terrible for tech startups? There are tons of reasons, but I’ve distilled them down into three.

  1. Investors Don’t Like LLCs. Venture capitalists can be a funny bunch. On the one hand, they’re always trying to discover the next great thing that’s going to turn into a huge success. On the other hand, they’re ultra-conservative (as much as possible, anyway) with their investments. And they have good reason to be—especially those who are investing other peoples’ money. As a result, investors don’t like LLCs because they’re different than the standard C-Corps they’re used to investing in, which means more money must be spent on due diligence, including evaluating each LLC’s unique operating agreement and drafting the often complex LLC documents; the partnership style taxation of most LLCs means some tax-exempt investors can’t invest in LLCs and all investors can still be taxed on the LLC’s income even if they’re not getting a cut of it in any given year (due to reinvestment, etc.); and investors living in other states may have to declare income, and subsequently be taxed on it, in not only the state where they live, but they state where they’ve invested in the LLC. The upshot of this is that because most investors have issues with LLCs, it makes it much more difficult to find investors for your new startup.
  2. Unlike Corporations, LLCs Are Difficult to Manage the Larger They Get. With a C-Corp, where stocks are issued instead of membership interest when someone acquires an equity stake in the business, a corporation can easily manage how its stocks are being distributed. Stocks are simple and easy to manage no matter how many shares are being issued. Instead, with an LLC, the company is left trying to cut the pie into smaller and smaller parts with each new investor, leading to all kinds of tax complications. Also, LLCs are predominantly governed by their individual contracts, and as more investors get on board, the contracts will become longer and more complex, leading to higher legal fees with each new transaction (except for those lawyers who help startups for flat fees).
  3. Taxes, Taxes, Taxes. I’ve already touched on some of the major tax issues, including taxation in states where passive investors reside and where the LLC is located, but tax problems can also arise each and every time a new investor comes in, depending on how they want their preferential treatment structured (liquidation preference, etc.). The tax code also doesn’t recognize LLC membership interest for reduction in capital gains taxes under Section 1202. And to top it all off, when it comes time to sell your company, you’re going to be stuck with taxes and, unlike with a corporation where you can swap the stock of your company for that of the acquirer in certain circumstances in order to help defray those taxes, with an LLC, you’re left hanging out to dry by the tax code with no option but to pony up the cash to pay the tax bill.

So, as the founder of a new startup, what are you to do? The common solution to the problem with LLCs is to just not use them for startups. While ease of operation and need to not follow any of the traditional corporate formalities may seem like a boon for founders in the early stages, the problems with LLCs escalate as they grow. As a result, if you’re bootstrapping your company, you can freely choose any entity you like (though I recommend doing so at the suggestion of your startup attorney and your accountant). But, if you have any desire to raise funding on a large scale down the road, you’re going to want to consider an alternative structure.

For some reason, those who have navigated away from an LLC tend to be drawn towards the S-Corp. Maybe it’s because someone told them they were a great way to protect themselves from taxes and “all the rich people use them” as tax shields, or something like that. And while an S-Corp is certainly better than an LLC in terms of running a startup driven by investor financing, there are still some problems you can run into. Namely, foreign investors and corporations cannot invest in the S-Corp, and as far as growth goes, you’re stuck at a maximum of 75 investors—so much for rapid growth with lots of investors. As a result, if you’re starting out and planning to bootstrap your operation entirely, an S-Corp is a solid choice for your business structure. But if you’re hoping to build the next great startup with a shower of VC money coming your way, think again.

Which leaves us with the C-Corp. The ideal structure upon which your startup should be based. Investors (and their lawyers) are used to them, they’re easy to deal with, there’s a ton of law about how they work, and it just makes sense.

Now, which state should you incorporate in? Delaware? California? Nevada? Your home state?

3 Reasons You Shouldn’t Copy and Paste Your Contracts

Three Reasons Why You Shouldn’t Copy and Paste Your Contracts (And Terms Of Service!)

A contract is a legally binding agreement between you (or your business) and another party. While it may seem like a written contract template you found online is perfect for your business, chances are it’s not. While most of the information in the contract may apply to your business, if even a small factor is off it can spell disaster for your business relationship. Here are three reasons why you shouldn’t copy and paste a contract from the internet.

The Contract Doesn’t Apply to Your Business

So you’ve found a contract online that you think applies to exactly what you need for your business. Just change the names and call it good, right? Wrong. Even if you do find a template online that you think matches, chances are there are more significant underlying issues you’ll need to address if you’re hoping for a solid written contract. If the title matches, that’s great, you’re off to a wonderful start, but does the governing law provision match where you do business? Does the term of the contract work with the type of business you’re conducting? Did you mean for that binding arbitration provision to be in there when you find yourself litigating against a customer who won’t pay you? Finally, contracts are often construed against the drafter in court—and if you’ve merely lifted a contract from another, you run the risk of being caught not knowing what a contract you supposedly drafted outlines. These are just a few of the ways a contract you find on the internet may not be applicable to your business.

The Contract Template May Not Be Properly Drafted

If you read the first point, you know that a contract you find online probably doesn’t apply to your business how you want, but did you know not all contracts you find online are properly drafted? Often, especially if the template you found wasn’t actually drafted by an attorney, the provisions of the contract could be improperly drafted and quickly severed by a court in the event of a dispute. Worse, the contract may not include what’s known as a severability provision, or a section of the contract that ensures if a court finds one section of a contract invalid, the whole contract is not invalidated along with it. Without a provision like that, you could find yourself in deep trouble should one provision be stricken—taking the rest of the contract along with it.

You’re Probably Plagiarizing Someone Else’s Hard Work

This is a point that applies particularly to terms and conditions of use or privacy policies on a website. Because so few people actually bother to read the terms of service, most website owners think they can get away with a simple copy/paste job from a similar site’s terms of service. This may have worked years ago, but people are starting to wise up. Essentially, copying and pasting the terms of use seems like a fine idea because, really, how different is one site from another. Unfortunately for many website owners, the differences are just enough that they can find themselves in hot water for copyright infringement. All websites are copyright of their respective owners, and any savvy site owner knows at least a few of the visitors to her site are there for the sole purpose of scraping that site’s content. Numerous tools are available for webmasters to help them track down people who rip content from their sites, and if they catch you stealing their (or their attorney’s) hard work it could spell legal trouble in the long run.

Photo courtesy: Thomas Leuthard

How to Protect Your Business’s Trade Secrets

Regardless of your chosen business type, chances are your business has secrets you want to protect. These secrets can be anything from a distributor or an account, to a secret formula used in your manufacturing process, to new product designs that are still in the development phase but not yet ready for sale. These types of secrets are often called trade secrets, generally defined as confidential or specialized information that unique to a particular business—and often one of the keys to its profitability. Given the importance of trade secrets to a business, it’s no wonder state laws provide numerous protections for businesses’ trade secrets.

But just because something is important to your business, or is considered secret by you and your staff, doesn’t mean the law defines it as a trade secret. While it varies somewhat state to state, trade secrets are generally defined as a business secret the business uses reasonable efforts to protect, that confers an economic benefit from remaining unknown to the public. Some of the most commonly cited examples of trade secrets are the secret recipes for Coca-Cola soda and KFC’s secret recipe.

On a very general level, trade secrets are fairly similar to patents, in that both work to protect a design, formula, or other “invention” of a business from being used by the public at large. However, the difference lies in the way these protections work. For a patent to provide protection, the business must register the patent with the USPTO, whereby it gains protection from use by anyone else at the expense of limiting that protection to a set term of years. And you give up the secrecy of the patented item, since you have to publish the patent for all the world to see. A trade secret, on the other hand, stays protected indefinitely as long as it stays secret—so don’t go around sharing your business’s secrets, lest your legal protection for those secrets be terminated.

Now that you know the importance of protecting a trade secret, you need to come up with a way to keep your secret a secret. One of the most common ways for a business to protect its trade secrets is to ensure employees don’t take divulge the secret to anyone, or take it with them when they move on to a new position at a new company. Typically, employers require their employees, and even their contractors, sign a non-disclosure agreement, preserving the confidentiality of the trade secret. It varies from state to state what the penalties for violation of such an agreement would be, but generally an employee who is found to violate a valid non-disclouse agreement will be faced with financial penalties.

Non-diclosure agreements can help a business protect its trade secrets, but what if that secret gets out into the wild—or worse, solely into the hands of a competitor. Well, if a trade secret is stolen or violated in another way, the business may be able to bring a state law claim against the offender. The remedies available to a company who had its trade secret misappropriated are state specific, and would be beyond the scope of this general overview of trade secrets. However, common to most jurisdictions are financial damages and injunctive relief, including compensation for the economic harm and possible punitive damages.

We hope you found our primer on trade secrets to be useful. Remember to keep your business’s secrets safe under all circumstances, and they will be protected for years to come.

Photo courtesy: mugley

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10 Things to Consider Before Buying a Business

Starting your own business entity from scratch is definitely not for everyone. While running any business involves a ton of hard work and dedication, starting from square one involves even more. That’s why so many business owners choose to purchase another person’s business that’s already running strong. But before you sign that check to purchase an existing business, have you done your due diligence and made sure that everything the seller or the business broker told you is correct? We’ve complied ten of the top considerations to check in your due diligence process to ensure the business you’re buying is all its represented to be.

Current and Accurate Financial Information

You’re buying a business to make money. That much is given. But is the business you’re purchasing actually as successful as the seller’s made it out to be? For starters, you’ll want to have the financial statements for the last three to five years audited. Also, check any credit or analyst reports that may be available on the business. Read through schedules of inventory, accounts receivable and payable, and check for any additional indebtedness.

Make Sure the Business is in Good Standing

All too often, a business owner forgets to submit annual or biennial documents to the state’s Secretary of State, causing the business to be suspended. Do yourself a favor and make sure the business is still in good standing. And while you’re at it, read through the Articles of Incorporation (or Organization), the Bylaws (or Operating Agreement), and all other documents contained in the corporate binder, including minutes and additional records.

Check for Employment Law Violations

Employment law is an absolute quagmire for a lot of employers. Minute differences between exempt and non-exempt employees as well as the failure to update an employment handbook can spell disaster for an unaware employer. So be sure to check through all of the employment records for current and former employees of the business to determine their categorization, benefits paid, and any workers’ compensation or unemployment insurance claims they’ve made, among other things.

Taxes Paid

Taxes, like employment laws, can be a tricky situation for a business owner to navigate. While many businesses employ attorneys or CPAs to fulfill their accounting needs, far too many believe they can do their taxes themselves and fail to meet requirements set forth by the IRS or state or local taxing authorities. When you’re going through the company’s financials, be sure to look through all tax filings s well, and focus your attention to any tax liens or discrepancies that could spell trouble later.

Look for all Necessary Licenses or Permits

Many businesses must maintain active licenses or permits with various state and federal agencies for them to conduct business legally. Unfortunately, quite a few of those businesses—particularly the smaller ones—often neglect their licensing requirements. If you’re contemplating the purchase of a business where a license or permit is required, make sure the business has it, and it is up to date.

Examine the State of Physical Assets

There are few businesses that can get away with having little to no physical assets as a part of their business model. While a schedule of assets can take you a long way to understanding the types and status of the assets the business owns, that is only the first part of the puzzle. You’ll also need to look to any equipment leasing contracts the business has with manufacturers or dealers, any UCC filings for the equipment, and lists of all purchases and sales of capital equipment.

Intangible Assets such as Intellectual Property

While physical assets are often thought of as one of the most important factors in the purchase of a business, intangible assets, such as intellectual property, can often be more valuable than the physical assets of a business. What are intangible assets? We’re primarily talking about trademarks, patents, and copyrights the business owns. Be sure to check if the business’s name and product names are trademarked (and still actively maintained). Go over methods for protecting trade secrets with the managers. Comb over patents and licensing agreements to make sure they’re valid.

Vendor, Supplier, and Other Contracts

A business is often only as good as its supply chain. And as an integral part of that supply chain, you need to be sure that your contracts with vendors, independent contractors, or any other suppliers of materials or labor are all valid and intact. Start by getting a list of all of the third parties the business deals with on a regular basis. Check to make sure their contracts are all valid and there are no breaches between the parties. Also, while you’re checking these contracts, take a look at any real property leases or mortgages.

Environmental Issues or Other Litigation

One of the most hot-button issues currently for purchasers of new businesses is whether the previous owners have any environmental problems that may pop up later. From pollution to exposure violations, even the smallest environmental issue can spell big trouble for the business. Be sure you check out any types of hazardous materials the business uses as well as how those materials are handled and disposed of. Also, check for hazards in the form of litigation that could harm the company later on, including any current or threatened litigation by or relating to the company.

Get as Much Customer Information as Possible

A business will not have any success without a strong customer base. And any business that is worth its price will have a detailed list of customer information on hand for your perusal. If possible, read through a list of customers to find out who they are, where they live, and what products they purchase. The more you know about your customer base, the better position you will be in when it comes time for you to take the reins of the company from the seller—meaning you’ll be able to enjoy profits as quickly as possible.

Photo Courtesy: Sebastiaan ter Burg

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