Chapter 10: Legal Concerns -Staying Out of Court

Learning Objectives:1. Understand the importance and necessity of professional

legal advice from the start2. Decide which legal form is best for your business and you3. Explore the good, the bad, and the ugly of partnerships4. Review the advantages of forming a Limited Liability

Company, S Corporation and a C Corporation5. Explore nonprofit opportunities6. Understand legal escape routes7. Explore family business issues8. Review patent protection.9. Understand copyright laws10. Take action to protect your trademark or service mark11. Investigate and explore licensing your invention

Hire An Experienced Attorney

Create the right business structure Review advertising and marketing materials Organize your human resources department Research and protect you in regards to product liability Review all contracts and agreements before you sign Protect intellectual property through proper use and

development of trademarks, service marks, copyrights, and patents. License your product

Handle collection and bankruptcy problems Plan your exit strategy Write partnership agreements and buy-sell

agreements

Action Step 45: Interview Lawyers

Concentrate on those with experience in your industry

Contact the state bar and review info on each attorney

Interview potential candidates looking for someone you can get along with

Discuss fees and costs upfront It may be expensive but there is no

substitute for good legal help

Reducing Your Legal Costs

Lawyers either charge by the hour or work on a retainer fee based on prepaid hours

Be prepared for each meeting by conducting basic legal research in advance

Online sources are not a substitute for professional legal advice

Many sites provide excellent information but always use experienced legal council when conducting business transactions

Which Organizational Structure is Best for You? Things to Consider:

International exposure & plans for business growth

Tax implications & liability issues Litigiousness of customers, employees &

businesses Family structure & family member involvement Relationship with potential partners Capital requirements & exit strategy Employment issues Possible tax losses which can be carried forward Taking your firm to a public offering

Evaluating Business Structures: Sole Proprietorship

Many small businesses begin this way If you start a business without partners you are a

sole proprietor unless you form an LLC or corporation Relatively easy paperwork but multiple licenses may

be required Consider tax and legal issues including unlimited

liability Some perceived advantages may actually be

disadvantages Being your own boss leads to long work hours &

makes you the final and perhaps only decision maker

Evaluating Business Structures: Partnerships

Only an accounting entity –not a shield from legal trouble Taxed like a sole proprietorship Main advantage is (hopefully) financial & moral support A limited partnership limits the liability of partners who

do not have a management role Formal agreements are optional but recommended and

should consider the dissolution of the partnership Consider “Key person” life or disability insurance Understand that friendship alone will not solve business

problems Discuss values, work ethic, dreams & work-life balance

issues Remember you are liable for your partner’s actions

Questions for Partner Discussion

Management and control Dispute resolution Financial contributions Time contributions Demise of the partnership New partners Communication styles Participation of family members as

employees and their input into the business Ethics

Evaluating Business Structures: Limited Liability Companies

No limit to the number of investors Allows profits to be distributed other than

proportional as a “pass-through” tax entity Provides the tax flexibility and ownership of

partnerships coupled with the limited liability features of corporations

Required documentation is less than articles of incorporation and usually less costly

Consult competent tax, legal and accounting advisors before converting to an LLC

Corporations - Consider the Following Reasons to Incorporate:

1. You limit your liability2. To change your tax picture3. To upgrade your image4. To have the opportunity to channel

some heavy expenses5. To guarantee continuity6. To offer internal incentives7. To raise additional capital

C Corporation or Limited Liability Company (LLC)?

A C corporation may be advised over an LLC if: You expect to have multiple investors You plan to raise money from the public You want to set up a single-member LLC but your

state requires two or more members You want to provide extensive fringe benefits to

owners-employees You want to entice or keep key employees by

offering stock options and stock bonus incentives Your accountant has reviewed the issue of self-

employment taxes and weighs in on the decision

Evaluating Business Structures: Subchapter S Corporations

Semi-corporate bodies Limit an owner’s liability while allowing

losses to pass-through to personal income taxes

Refers to the section of the IRS code that describes how the entity will be taxed

Maximum number of shareholders is 100 Status may be dropped when there are tax

advantages to being a regular corporation Timing is important – consult your tax

attorney

Evaluating Business Structures: Nonprofit Corporations

Limited liability and unlimited life Many nonprofits have to raise financial resources Many sell products to support nonprofit activities Oftentimes hard to distinguish the from profit-

making firms Steps to form a 501(c)(3):

Choose a name & file articles of incorporation Apply for IRS & state tax exemptions Draft bylaws, appoint directors & hold a board

meeting Obtain licenses & permits

Family Businesses Who Can Help

Family Firm Institute & Cox Family Enterprise Center Loyola University of Chicago Family Business Center

8 Facts About Family Owned Businesses 80% of the world businesses More than ½ of the nation’s Gross Domestic Product 60% of all public companies in the US 60% of total US employment, 78% of new jobs and 65% of all wages Many were started after WWII More than 25% expect the next CEO to be a woman More than 30% survive into the second generation

You expect to have multiple investors You plan to raise money from the public You want to set up a single-member LLC but your state requires two or more members You want to provide extensive fringe benefits to owners-employees You want to entice or keep key employees by offering stock options and stock bonus

incentives Your accountant has reviewed the issue of self-employment taxes and weighs in on the

decision

Trademarks, Copyrights & Patents: 10 Things You Should Know to Protect Your Product and Business Name

A trademark is a brand name for a product A service mark identifies services instead of products Trademarks must be used properly to maintain their

value A trade name is the name for a business Incorporation does not give you the right to use a name There are many advantages to registering your mark Use a professional search to make sure you do not

conflict with the rights of another business A product’s packaging or trade dress may be

protectable and registered as a trademark Trademarks may be stolen in foreign countries State & federal registration information is available

Trademarks, Copyrights & Patents: 10 Things You Should Know to Protect Your Artwork, Ads, Writings & Software

Copyright protection exists in any original expression of an idea that is fixed in any physical medium

Copyright protection encompasses a bundle of rights A website may embody works protectable by copyrights U.S. copyrights last for 95 years or more There is no single rule about copyright infringement Copyrights generally do not have to be registered A copyright notice is not required for copyright

protection Copyright ownership issues can be complex Obtaining & enforcing copyrights in foreign countries

requires compliance with the laws of the country Info can be found at www.copyright.gov

Trademarks, Copyrights & Patents: 10 Things You Should Know to Protect Your Business

A patent is a right granted to inventors Patents may only be obtained for new & original inventions Patent applications are subject to a patentability search A patent notice can enhance the ability to collect damages

from an infringer U.S. patents must be applied for in a timely basis and are

only valid in this country There is no single worldwide patent Despite judicial decisions and proposed changes, patents

remain very valuable to most technology companies Additional info from the U.S. Patent and Trademark Office International Intellectual Property Laws are a major concern

Ten Tips for Landing a Product Licensing Deal

Know Your Stuff: You have to be an expert in the field Know the Downside: Present a realistic analysis Present Like a Pro: Written form with Powerpoints Get it Protected: Most companies want a patent Submit Smart!: Use an attorney & be protected Analyze Your Targeted Licensee: Do research first Don’t Reinvest Procedures: Follow established

protocol Find a Champion: Find someone excited about your

idea “No” is an Opportunity: Learn from their concerns Multiple Baskets: Look for multiple bidders

Think Points for Success

We remember what we want to remember. Get everything in writing.

If your business is small and you like it that way, keep it simple. Take steps to protect yourself.

Most growth businesses need infusions of cash. Your structure may hinder or help your ability to get funds.

Do not pay more tax than you have to, but pay what is due. Have an accountant structure your business according to your needs and the law.

Think Points for Success

Even if you incorporate, a banker may still want a personal guarantee for loans which may be in place for years.

Protect your business through proper adherence to the laws regarding intellectual property .

Success of your family business is dependent on communication.

Whatever business structure you choose, work hard, persevere, and hope for a little bit of luck!