Setting up the right legal structure for your business may seem like a boring detail that you don’t need to spend much time on. But, in reality, selecting the right entity for your company is one of the most critical decisions you can make as a business owner.
That said, there are all sorts of myths surrounding business entities, and this can cause confusion and lead to costly mistakes. To this end, here are 4 of the most popular myths about business entities and how you can avoid falling for them.
Myth #1: Small businesses don’t need a business entity.
Although it’s possible to run a business without a business entity, doing so puts you—and everything you own—at risk. Without the proper entity set up, there’s no separation between your business and personal assets, so your personal assets would be at risk in the event your business goes into serious debt or gets hit with a lawsuit.
For example, if your company is structured as a sole proprietorship or general partnership and you go out of business, your business creditors would come after your personal assets to pay off your business debts. The same is true if your business is ever sued.
By structuring your business as a limited liability company (LLC) or a corporation, however, you can shield your personal assets from liabilities incurred by your business. When properly set up and maintained, such structures establish your company as a separate legal entity distinct from you as an individual, preventing you from being held personally liable for the company’s debts or legal disputes.
Meet with us, your Family Business Lawyer™ for help selecting, setting up, and maintaining the entity structure that’s best suited for your particular company, no matter how big or small it may be.
Myth #2: There’s no need to set up an entity for your business until it’s profitable.
It may seem like a good idea to delay setting up your business entity until you are actually earning revenue, or even making a profit, but in reality, you should have your entity in place from the very start. This is true not only because liability can arise well before you are profitable, but also because incorporating your business is likely to lead to even more income and profit.
For example, having the proper entity in place in the early stages allows you to receive credit in your business’ name, and raise money from investors. Not to mention, the act of incorporating itself shows that you take your company seriously, which can inspire increased interest from customers, vendors, and financial backers.
Myth #3: A corporate entity offers absolute liability protection.
When properly created and maintained, entities like an LLC or corporation can shield your personal assets from creditors, lawsuits, and other liabilities incurred by your business. However, the protection afforded by these entities is not absolute.
In fact, there are a number of circumstances in which a creditor can come after your personal assets to settle a claim against your business. When this happens, it’s known as “piercing the corporate veil.”
While the corporate veil can be pierced if you commit fraud or negligence, in most cases, it happens due to innocent mistakes. These errors can include inadvertently mixing your personal and business finances, personally signing off on a business loan, or failing to abide by administrative formalities.
As your Family Business Lawyer™, we will support you with maintaining your business records and keeping up with the required corporate formalities. In fact, we offer special maintenance packages that make meeting these requirements a snap, while maintaining the maximum level of protection for your personal assets.
Finally, while a corporate entity can protect your personal assets from liability, these legal structures do not offer any protection for your business assets. To safeguard your business assets, you’ll need to invest in the proper business insurance, which is always your first line of defense.
Myth #4: Incorporating in Delaware or Nevada is always best.
You may have been told—perhaps even by another lawyer—that establishing your corporate entity in Delaware or Nevada is your best bet for tax purposes. But for most businesses, incorporating in these states is completely unnecessary—and it may even cost your company in the long run.
Although many companies do incorporate in these states, it’s for very specific reasons, such as to raise investment capital or take advantage of favorable securities laws to go public. However, unless you are actually doing business in these two states, your company isn’t going to receive any significant tax benefits or additional asset protection by incorporating there.
While Nevada and Delaware do not have state personal- or corporate-income taxes, that doesn’t mean your business will avoid state-level taxes entirely. The fact is, if you are a resident of, or doing business in, a state that has state income taxes, you must still pay those taxes, even if you are incorporated elsewhere.
Plus, if you incorporate outside of the state where you live or conduct business, you must file as a foreign registrant in your home state. Such double filings can result in extra filing fees and administrative expenses that make out-of-state incorporation financially unfeasible.
However, there are instances where it might make sense to set up your business entity in states like Delaware or Nevada, or even Wyoming or South Dakota. Contact us, your Family Business Lawyer™ for advice on the best location for establishing your entity and for support in navigating the requirements for maintaining the entity in each state you do business in.
We Can Help
Setting up the right entity for your business isn’t something you should take lightly or try to do all on your own—there’s far too much at stake. As your Family Business Lawyer™ we will offer you trusted advice on the legal entity that’s most advantageous for your business. while also ensuring that your entity is properly set up, with all of the necessary agreements and other resources in place.
Additionally, we can provide you with a variety of business systems, which will not only make your operation more efficient, but also establish a clear separation between your business and personal finances, which is a vital part of maintaining your entity’s liability protection. Finally, as your Family Business Lawyer™ we will also make sure that you are in full compliance with the various state laws and administrative formalities required to maintain your entity and safeguard your personal assets. Contact us today to learn more.
This article is a service of Sahmra Stevenson, Esq. Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.
As you grow your company, you may discover that it’s time to move beyond leveraging your personal credit to fund your business, whether through business or personal credit cards, and look for outside investors or lenders.
When it comes to securing funding for your business, you must first decide what form of investment is right for your company: equity or debt. More specifically, are you looking for an investment in exchange for an equity stake in your company, or would you be better off getting a loan to fund your business?
EQUITY INVESTMENT: SELLING SHARES IN YOUR BUSINESS
Equity investors provide capital, either in the form of cash (preferable) or in kind with services, in exchange for a percentage of your company’s profits. Generally speaking, equity investment is only feasible when you have a clear plan for exiting your business, so your equity holders will be able to earn a return on their investment when your equity becomes saleable. If you are not yet at the place where you have a clear strategy for exiting your business, you (and your investors) will likely be better off securing a loan to fund your business.
If you are at the early stages of your business and not yet clear on its value, you may want to structure that investment in the form of what’s called a SAFE investment. SAFE stands for “Simple Agreement for Future Equity.” Basically, a SAFE is an agreement between an investor and your company that provides rights to the investor for future equity in your company.
In exchange for the money invested through the SAFE, the investor receives the right to purchase stock in a future equity round (when one occurs), subject to certain conditions set in advance in the SAFE. SAFEs were created to be a simple replacement for convertible notes, and they are designed for startups seeking initial funding.
A SAFE makes sense when your company is likely to raise money in the future through an established valuation, but your company is in too early of a stage to be valued appropriately. For more information on SAFE investments, check out this video from the seed-money startup accelerator Y Combinator.
You definitely want to bring on a trusted legal advisor like us if you decide to fund your company with complex investment structures, such as a SAFE, or if you are going to raise capital by selling equity in your company. With our support and guidance, we can ensure that you have the proper legal and financial systems in place to secure your investment.
DEBT INVESTMENT: BUSINESS LOANS
Oftentimes, the best place to start looking for outside investment in your company is by reaching out to your friends and family for a loan. Before you take on a loan from a friend or family member, be sure to document the loan with a promissory note.
A promissory note is basically a legal agreement that you are promising to pay back the money you borrowed under certain terms. The promissory note should have clear terms regarding how you will repay the loan and the specific terms under which you will repay, such as the interest rate you are paying on the loan and over what time period the loan will be repaid.
If you don’t have any friends or family who are interested in investing in your business, you may choose to fund your company with a loan from a bank. The best way to do this is to have a relationship with a local banker, who can get to know you and your business. From there, the banker can help you tap into different small-business financing options, generally through loans from the SBA, or Small Business Administration.
It’s never too early in your business lifecycle to establish a relationship with a business banker. Ideally, contact the local business banks in your community, and go meet one or more of the bankers at each of the banks to find a relationship that feels most supportive to you and your business.
When you receive funding from a business bank, make sure the loan is provided to your business, and not to you personally, whenever possible. And it’s most ideal if you can avoid a personal guarantee of the loan, though not always possible. A personal guarantee means that if your business fails, you will be held personally liable for the balance of the loan, and the bank can come after your personal assets to satisfy the terms of the loan.
Once your business has established income, you may be able to qualify for a loan for your business without a personal guarantee. Yet, in the early stages of your business, this likely won’t be possible. However, you should always ask to get your business loan without a personal guarantee required—the worst case scenario is the banker says no.
GAIN CONFIDENCE AND CLARITY WITH LIFT SYSTEMS
Building relationships with investors and lenders can be a great way to fund the future growth of your business. That said, developing such relationships will require you to confront any remaining insecurities or fears you may have about whether or not you are personally worth investing in.
On that note, having solid legal, insurance, financial, and tax (LIFT) systems in place will make you far more confident going into these relationships. If you’ve yet to put LIFT systems in place, contact us, as your Family Business Lawyer™, to take our free LIFT 20-Point Assessment.
Just taking the 20-Point Assessment is a huge benefit, as it shows you the gaps in your foundation that need the most attention. From there, you can meet with us to conduct a more thorough audit of your business, so you can eventually implement the full LIFT Foundation System & Toolkit into your operations.
With a solid LIFT foundation for your company in place, you can finally gain genuine confidence about your business’ long-term success. Armed with that clarity, you can devote all of your energy and passion into growing your business into something truly meaningful for yourself, your clients, and your family.
This article is a service of Sahmra A Stevenson, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.
Given that intellectual property (IP) can make up a significant portion—sometimes up to 90%—of the total value of today’s companies, it’s essential that you do everything you can to protect these intangible assets. And one of the first IP elements you’ll want to protect are your company’s brand name and logo.
To safeguard these brand assets, you’ll need to secure trademarks. A trademark can protect words, slogans, symbols, and other distinguishing features of your brand by allowing you to prohibit other businesses from using the same—or highly similar—branding as yours.
Yet not all trademarks offer equal protection. For example, you can gain what’s known as “common-law” trademark rights for free simply by being the first business to use your particular brand name in commerce. However, as you’ll see below, common law trademark rights are extremely limited and will prove highly inadequate for most companies.
For maximum protection, you should register your trademark with the U.S. Patent and Trademark Office (USPTO). Although registering with the USPTO typically costs around $300 per mark, doing so provides you with numerous advantages compared with common law marks. Some of the leading advantages of registering your trademark include:
01 | NOTICE OF OWNERSHIP
Registration of your trademark provides your company with official documentation and public notice that you are the valid owner of the mark and have the exclusive right to use it across the entire U.S. This is in contrast to a common law trademark, which requires a company to actually use the mark in business to gain ownership, and that ownership is limited to the local area where the business is located.
02 | PREVENTS OTHERS FROM USING A SIMILAR TRADEMARK
Once your trademark is registered, it’s listed in the USPTO’s database, and no one else can register a confusingly similar mark in connection with similar goods and services. To this end, the federal government is essentially assisting you enforce your rights and preventing infringement before it can start, without any additional action needed on your part.
03 | PROTECTS YOU FROM INFRINGEMENT
Because the USPTO will not allow you to register a similar trademark to any others that are registered, this also prevents you from accidentally infringing on another company’s mark. This can not only save you from a financially ruinous lawsuit down the road, but also prevent you from having to completely reinvent your brand from scratch if your mark is too similar to one that’s already registered.
04 | GIVES YOU THE RIGHT TO SUE IN FEDERAL COURT
Having a registered trademark gives you the right to sue for infringement in federal court, where you will receive the presumption of being the valid owner of the mark. The presumption of ownership shifts the burden of proof to the defendant who might try to claim they have common law trademark rights as a defense. Under this burden, the defendant must prove that he/she was first to use the mark and their use has been continuous, which can be extremely difficult, requiring extensive documentation, and/or witnesses.
05 | OFFERS ADDITIONAL LEGAL REMEDIES
Registering your trademark can increase the number of remedies available to you if you sue for infringement. Depending on the circumstances, you can go after the defendant’s profits, seek statutory and punitive damages, as well as collect attorney’s fees and court costs. Such remedies typically aren’t available with only common law rights.
06 | ALLOWS YOU TO PUBLICLY DISPLAY YOUR REGISTRATION
Registration grants you the right to use the ® symbol with your trademark branding. Unregistered marks are only allowed to use the ™ symbol. This designation gives your company more credibility and prestige, while letting competitors know you’re serious about protecting for IP.
07 | ENABLES YOU TO APPLY FOR TRADEMARK REGISTRATION IN FOREIGN MARKETS
While federal trademark registration is usually not enforceable outside of US borders, registering does provide you with a basis for applying for trademarks in many other countries. Having trademarks in other countries can be especially important, with the rapid globalization of the marketplace and widespread use of the internet.
08 | EMPOWERS ENFORCEMENT OF TRADEMARK BY U.S. CUSTOMS OFFICIALS
Federal registration allows you to record your trademark with U.S. Customs and Border Protection. This empowers Customs officials to block the importation of infringing or counterfeit goods and allows you to bring a counterfeiting case to federal court.
ENFORCING YOUR RIGHTS
It’s important to keep in mind that outside of prohibiting others from registering a confusingly similar trademark, the USPTO will not enforce your trademark rights or bring any legal action against an infringer—that’s up to you. That said, if you discover potential infringement, we can help you enforce your ownership rights, and do everything we can to maintain your trademark rights without a lawsuit. Indeed, we often write letters that not only resolve the conflict, but also inspire the other party to join you in an ongoing joint venture that can benefit both parties.
While federally registering a trademark is a fairly simple process—and one you could do on your own—it’s typically a good idea to just let us handle it for you, so you can stay focused on the business of your business, while we handle the underlying structures that support you to grow your business. As your Family Business Lawyer®, we can not only help you secure the proper trademarks, but we can also work with you to develop a comprehensive strategy to protect all of your other intellectual property, as well as support the ongoing strategy of building a great business and a great brand.
This article is a service of Sahmra A Stevenson Family Business Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.
Using independent contractors (ICs) can give your company an edge in today’s thriving gig economy, but if you are not careful, contractors can also be a serious liability. In fact, working with ICs comes with a number of unique legal and financial risks that can be potentially ruinous to your business if not handled properly.
Beyond getting sued or hit with hefty fines for misclassifying an employee as a contractor, you must also be careful to properly secure ownership of anything an IC creates for you. This is particularly true when it comes to your intellectual property (IP).
And whether you know it or not, IP is one of your company’s most valuable assets. Indeed, a recent study found that up to 80% of the value of today’s typical business is made up of different forms of IP.
Do You Actually Own The Work You Are Paying For?
Unlike employees, with whom you generally own automatic copyrights to everything they produce while working for you, ICs typically retain full copyrights to their work—unless they’ve signed a written agreement stating otherwise. Indeed, if you don’t have properly drafted agreements in place, you may not even own the work you pay ICs to produce for you.
Fortunately, it’s fairly easy to secure full ownership of these works by using the proper legal agreements. However, this is only possible if you actually put these agreements in place with every IC you work with—and yes, this means every single person, even those you have worked with for years without a single problem.
When it comes to using legal agreements to secure ownership of the work you hire an IC to produce, you have a couple of options. One option is to include a work-for-hire clause in their independent contractor agreement.
A work-for-hire clause states that you, not the IC, own all copyrights to the deliverables he or she produces for you under the agreement. Such a clause effectively makes it as if you created the work yourself, and as such, it allows you to use the work in any way you wish.
Just be sure to have the IC sign the agreement before he or she starts working. If not, it may be too late to acquire full ownership. Additionally, work-for-hire clauses only cover certain types of materials. According to the U.S Copyright Office, in order for a work-for-hire to apply, the work being created must fall into one of the following nine categories:
- a contribution to a collective work, such as a magazine or anthology
- a part of an audiovisual work or movie
- a translation
- a supplementary work, such as a forward, editorial notes, appendix, bibliography, or chart
- a compilation created by selecting and/or arranging preexisting works
- an instructional text
- a test
- answer materials for a test
- an atlas
If the work you hire an IC to create does not fall into one of these categories, a work-for-hire clause would not give you full ownership. This catches many business owners by surprise, who falsely assume having such a clause is all they need. However, if the work you are paying for doesn’t fit into these categories, you will need a different type of agreement to secure ownership of the IP—and as you can see, the type of work covered by work-for-hire agreements is fairly limited.
For works that fall outside of the work-for-hire domain, you will need to include an assignment clause in the contractor’s agreement, in which the IC transfers some, or all, of their copyrights to your business. Without this clause, the IC would retain all rights to the work, even if the agreement contained a work-for-hire clause.
Adding an assignment clause to the IC’s agreement is fairly simple, and for maximum protection, you can even include such a clause alongside a work-for-hire provision. It’s as easy as simply adding a brief clause in the agreement stipulating that if the work is not deemed a work-for-hire, the IC assigns all copyrights to your company.
Non-Disclosure & Non-Disparagement Agreements
In addition to work-for-hire clauses and copyright assignment agreements, all of your agreements with contractors should also include non-disclosure and non-disparagement agreements, which would keep an IC from disclosing details about their work with you to outside parties, especially your competitors. A non-disclosure agreement could cover trade secrets, confidential business information, and financial information about your business, and even whether the IC worked with you.
Although you may not think of it this way, one of your most valuable items of intellectual property is your reputation. A non-disparagement agreement assures you that an IC is unlikely to tarnish your reputation after working with you.
Don’t Go It Alone
Although work-for-hire, copyright-assignment, non-disclosure, and non-disparagement clauses and agreements are not difficult to create, because each project is unique, there is not a specific template or generic form that would cover every job. What’s more, the wording of each agreement is also important, and some states require specific language for work-for-hire agreements to be legally valid.
Given this, you should steer clear of generic legal agreements you find online, and always have us, your Family Business Lawyer™ review your IC agreements, even if they were drafted by another lawyer. Whether you need your existing agreements reviewed or need help creating new contracts, as your Family Business Lawyer™, we will support you in developing the proper legal agreements that will give you the most comprehensive ownership rights possible with every contractor you hire.
Furthermore, we can perform an IP audit for your company. This audit is a comprehensive, systematic review that identifies all of your IP assets, and evaluates all of the potential risks and opportunities associated with those assets. An IP audit will not only identify your IP assets, it can also help ensure you have all of the necessary IP protections, such as trademarks, copyrights, along with the proper legal agreements governing those projections to ensure you own the full spectrum of rights related to your IP. Contact us, your local Family Business Lawyer™ firm today to get started.
This article is a service of Sahmra Stevenson, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.