Transcript Selecting a Legal Structure of Your Business

Legal Issues affecting
Small Business Owners
Presented at City of Chicago’s Small Business Expo
July 17, 2009
Daliah Saper
Saper Law Offices
312-527-4100
[email protected]
www.saperlaw.com
DISCLAIMER
Outline of Today’s
Presentation:
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I. Choosing a legal and accounting team
II. Choosing a business entity
III. Trademarks and Copyrights
IV. Important Contracts
I. Choosing a solid legal and
accounting team.
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Someone who you can build a long term relationship
with.
Someone who has an understanding of your
industry.
Someone who can anticipate your legal needs.
Someone who can serve as a resource and a
person with whom you can network.
Find this person through referrals, other business
owners, call the Chicago Bar Association.
About Saper Law:
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Saper Law is an intellectual property and
business law firm with significant transactional
and both federal and state litigation
experience. We primarily specialize in the
following areas of law:
Trademarks
Defamation
Copyrights
IP
Trade
Secrets
Corporate Matters
Internet and Cyber Space
Entertainment
Licensing
Advertising
Media
Sponsorship and Advertising Agreements
Business Contracts
II. Choosing a Business Entity
Considerations when choosing a
business entity:
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Cost / Maintenance
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Tax Liability
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Pass-through taxation / Double taxation, and other
issues determined by your accountant.
Legal Liability
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State filing fees, annual filings, etc.
Personally liable or Protect your own assets with a
corporate shield.
Ownership / Management
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Shareholders or Partners? Differing degrees of
flexibility. Who do you want to be the decisionmakers?
Types of Business Entities:
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Sole proprietorship
General partnership
"C" Corporation
"S" Corporation
Limited Liability Company
Sole Proprietorship
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Few recurring costs beyond state business
license fees and fees to maintain business
name. (No state filing necessary.)
Individual and business are identical.
You file taxes for the business on Schedule C
of your personal income tax return.
Not protected from personal liability.
Sole Proprietorship: Example
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Grandma’s homemade sweaters that she
sells on eBay and to family and friends.
Jimmy’s grass-cutting services.
Any business can, in theory, be a sole
proprietorship.
General Partnership
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Two or more legal entities (persons or other
businesses) form a general partnership.
Each partner is liable for any of the other
partners’ mistakes.
All partners are considered self-employed for
purposes of income tax.
The partnership itself doesn't pay any taxes.
General Partnership: Example
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Two dentists working together in an office.
Flower shop owned by two friends.
Two people wanting to make a movie.
"C" Corporation
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$175 fee in Illinois.
Limited liability unless a court finds that you do not
follow corporate formalities and the corporation is
really an "alter ego" - Piercing the Corporate Veil.
Can have multiple classes of stock.
Double taxation - Income is taxed at the corporate
level and shareholders have to pay taxes whenever
they receive income from the corporation.
“C” Corporation: Example
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Many big companies you have seen (Sony,
Apple Computer, etc.)
"S" Corporation
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$175 fee in Illinois.
Most complex to create and administer, but if you
have a good legal and accounting team, this can
alleviate much of the headaches associated with an
S Corporation.
Max 75 shareholders, only one class of stock,
shareholders must be domestic individuals.
Allows shareholders to claim share of corporation's
income on personal tax form, eliminating "double
taxation."
Piercing the corporate veil.
“S” Corporation: Example
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Small video production company.
Any of the small-business examples from
before (flower shop, etc.) can be set up as an
“S” Corporation.
Limited Liability Company (LLC)
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$500 fee in Illinois.
LLCs enjoy the tax and liability benefits of
corporations and the management structure
of a partnership.
Percentage interests instead of shares.
Very flexible - operating agreement can be
specifically tailored to the type of business.
Piercing the corporate veil.
Limited Liability Company:
Example
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Film productions
Professional service organizations
Real estate ventures
Small businesses with more than one partner
Which business entity should I
choose?
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Frances makes pottery and sells it at flea
markets.
Joachim wants to start a car wash.
Pathik wants to open a restaurant.
Three college friends (Maria, Arman, and
Winston) want to start a software company.
Simple Steps for Setting up a
Business Entity
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1) Decide which state you want to form your
company in.
2) Choose a name for the company (and
make sure it’s available, (this is different than
a trademark search)
3) Fill out the appropriate form(s).
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www.cyberdriveillinois.com
Intellectual Property Considerations
What is a Trademark?
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A Trademark is a distinctive sign, symbol, or indicator which is used
to identify the particular source of products or services. Trademarks
may also be used to distinguish a particular product from other
similar or competing products.
Trademarks will typically take the form of a:
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name,
word,
phrase,
logo,
symbol,
design,
image,
even smell!
……..or a combination of these elements.
Common Law v. Registered
Trademarks
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You have a Common Law Trademark as soon as you start
selling your products or services.
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BUT: common law trademarks only afford the business owner
protection in the area in which he or she has conducted business
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The Symbol
™ represents an unregistered trademark.
Common Law v. Registered
Trademarks Cont.
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Federally Registered Trademarks – The symbol
® is a notice to
the public that a particular trademark is federally registered.
 A Federally Registered Trademark is much more valuable than a
Common Law Trademark because it allows the business owner
to assert his trademark against a subsequent user ANYWHERE
in the United States.
 Even if the business hasn’t started transacting business in the
other States.
CHOOSING A GOOD
TRADEMARK
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The strength of any particular trademark will depend on the marks
capability to distinguish itself from that of other goods or services.
Generally, the strength of a mark is categorized along a spectrum of
distinctiveness along five terms (from most to least distinctive).
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Fanciful – Marks that have been invented for the sole purpose of acting as
a trademark.(Kleenex, Xerox).
Arbitrary – Utilizes a device that has a common meaning but no relation to
the mark itself (Apple).
Suggestive – Marks that suggest a particular quality or characteristic of the
goods and services (Microsoft, Netscape).
Descriptive – Devices that merely describe the services or goods on which
the mark is used (Container Store).
Generic – Devices that actually name a product and are incapable of
trademark (Modem, E-mail).
What are the steps to getting a
trademark registration?
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Conduct a trademark search
Prepare the Application (First use?
Description? Class?)
Submit the Application (All electronic)
Wait for an Examiner to review your file
Correspond with the Examiner (Office
Actions)
If all goes well, you’re on to publication, and
then hopefully registration.
Search Process
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The first step in the registration process is to search the USPTO to
see if anyone is claiming trademark rights in a particular mark.
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A simple knock out search can be done through the USPTO
website www.uspto.gov. Through this website you can search
for any and all registered and to be registered trademarks.
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Due to the immense number of Federally Registered Trademarks
you can also hire a search company that will search all possible
trademark databases before you file, as well as after you file---to
catch any infringers.
ITS VERY IMPORTANT TO CONDUCT A TRADEMARK
SEARCH
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Intent to Use v. Use Based
Trademarks
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Federal trademark rights and protections are ultimately based on
actual use in commerce.
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Intent to use – Filing an intent to use trademark application
allows the applicant to file for trademark protection before
committing all of the costs of marketing and promoting the mark.
An applicant who files an intent to use application must make
actual use of the mark before it can be registered.
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Use Based – According to the USPTO an applicant filing a use
based application must actually already be using the mark in
commerce in connection with the goods and/or services identified
in the application.
Trademark Protection
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After your trademark has been registered you’re not done...
 Maintenance – Trademarks must be maintained through proper
use and due diligence. This involves keeping your mark active
in the stream of commerce and ensuring that your mark does not
become generic.
 Watching – Many trademark owners list their marks with various
trademark watching services. These services are particularly
helpful when a company seeks to expand their enterprise in the
USA and abroad.
 Enforcement – Enforcement consists of pursuing adverse users.
A particularly cheap and effective method of enforcing against an
adverse user is by having an attorney file a “cease and desist”
letter. While litigation may prove necessary it should be avoided
whenever possible.
What is a Copyright?
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A copyright gives an author or other creative person
certain protections in their work as soon as the work is
created. To get a copyright the author’s work must be:
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Fixed in a “tangible medium”—you have to be able to read it, see
it, or hear it. For example, an impromptu speech that isn’t written
down is not copyrightable.
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Original—you made it up all by yourself.
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Minimal creativity—the work is the product of at least a minimal
level of creativity. (Pretty low standard)
Questions about Trademarks?
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Any questions before we move on to
Copyrights?
What Kinds of Works are
Protected?
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Literary works
Musical works, including any accompanying words
Dramatic works, including any accompanying music
Pantomimes and choreographic works
Pictorial, graphic, and sculptural works
Motion pictures and other audiovisual works
Sound recordings
Who usually seeks copyright
protection?
Some examples:
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Designers
Artists for their paintings, drawings, sculptures, etc.
Photographers
Authors for novels, textbooks, plays, movies
Business owners for manuals, website content, advertising,
etc.
Musicians for musical compositions
Software Developers for their computer code
Etc.
What Kind of Legal Rights do
Copyright Owners Get?
Copyright owners enjoy the exclusive right to:
 reproduce the work
 prepare derivative works based upon the work
 distribute copies of the work to the public by sale or other transfer
of ownership, or by rental, lease, or lending
 perform the work publicly
 display the copyrighted work publicly
 in the case of sound recordings, to perform the work publicly by
means of digital audio transmission
 in the case of a “work of visual art” the author has certain rights
of attribution and integrity
Sounds Great! How do I get a
copyright?
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You technically have a copyright as soon as
you “fix it into a tangible medium” BUT, and
this is a big BUT:
You must register you work with the United
States Copyright Office in order to enforce
your rights.
Common Myths:
Q: Isn’t putting a © symbol next to what I create
enough?
A: No…this just puts people on notice. You
still need to register in order to sue.
Q: What if I put my work in a self addressed
envelope and mail it back to myself?
A: No again. You still need to register your
work in order to sue.
So how do I register?
Depending on what you are copyrighting, you
will need to fill out one of several forms
available at www.copyright.gov
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The cost of a copyright application online is
$35.00.
In some cases, you can register a series of works
for one application fee.
How long does a (C) last?:
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Copyrights do not last forever. Depending on
the type of work, the copyright will last for 70
years after you die, or 120 years from its
initial creation. Once the copyright expires,
the work enters the “public domain.” Think
the Mona Lisa…
What if I want to use someone
else’s work?
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You will always need to ask permission to
use any part of (even if it’s a little teeny itty
bit) of a film/video/music/photograph/text/
game/ that’s not yours.
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Well…almost always.
When Can I get away with NOT
asking for Permission?
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Works for which the copyright has expired. (tough to figure out
unless its really really old)
Works clearly and explicitly donated to the public domain.
Works that have not been fixed in a tangible form of expression
(for example, choreographic works that have not been notated or
recorded, or spontaneous speeches or performances that have
not been written or recorded).
Works consisting entirely of information that is common property
and contains no original authorship (for example, standard
calendars, height and weight charts, tape measures and rulers,
and lists or tables taken from public documents or other common
sources).
IMPORTANT CONTRACT
ISSUES
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As they relate to “Licensing” and Intellectual
Property.
Employee vs. Independent Contractor
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Now its time to discuss ownership rights
when you a) hire an employee and b) when
you hire an independent Contractor.
What is a “Work Made for Hire”
The Copyright Act defines a “work made for hire” as:
(1) a work prepared by an employee within the scope of his or her
employment; or
(2) a work specially ordered or commissioned for use as a contribution to a
collective work:
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as a part of a motion picture
as a part of other audiovisual work,
as a translation,
as a supplementary work,
as a compilation,
as an instructional text,
as a test,
as answer material for a test, or
as an atlas
Employees
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Any work created by your employees are
automatically owned by…..
YOU, THE EMPLOYER.
No extra paperwork needed.
Employee
The implications of this:
Since you, the employer own the work, your
employee can’t then use what he/she created
later at a new job…or even to post it on
his/her website or include it in a portfolio.
He/she can only do these things if he/she:
GETS PERMISSION.
Independent Contractor
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If you are hiring a freelancer or an
independent contractor, the independent
contractor retains ownership of everything
he/she creates.
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This is true even if the client pays the IC
$$$$$$ for the work.
Unless….
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Work for Hire Agreement
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A smart business owner will ask the
Independent Contractor he hires to sign a
written “work-made-for-hire” agreement.
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That way, even though the Independent
Contractor created the work, the business
owner owns the copyright.
Work for hire..continued
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A lot of the times, the commissioned work
doesn’t exactly fit the “work-for-hire”
requirements.
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In that case, the business owner should ask
the IC to also “ASSIGN” his/her rights---in
writing.
Assignment vs. Licensing
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Assignment means you give the client ALL of
your copyrights.
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If you don’t want to give up ALL your rights,
you may LICENSE part of your rights.
Case Studies and War Stories
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Artist using pictures of works in the public
domain—from postcards purchased at the Art
Institute.
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Documentary Film using the song “Happy
Birthday”
Continued…
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Using photographs from Facebook for
advertisements. (Rights of Publicity issues.)
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Photographer for Trump Tower—poor
licensing contract.
Questions?
Daliah Saper
Saper Law Offices, LLC
312-527-4100
[email protected]
www.saperlaw.com