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Download this step-by-step outline on how to start a successful business. With Docstoc CEO, Jason Nazar.
HOW TO START A BUSINESS With Docstoc CEO, Jason Nazar Download this step-by-step outline on how to start a successful business. 1 Table of Contents Ideation ....................................................................................................................................................... 3 Protecting Your Ideas and Intellectual Property ........................................................................ 7 Business Planning ................................................................................................................................ 30 Setting Up Your Business .................................................................................................................. 32 Corporate Identity ............................................................................................................................... 49 Business Operations ........................................................................................................................... 51 Service Based Businesses ................................................................................................................. 54 Building a Physical Product ............................................................................................................. 59 Home Based Business ........................................................................................................................ 61 Raising Money and Financing ......................................................................................................... 62 HR Essentials ......................................................................................................................................... 63 Sales .......................................................................................................................................................... 68 Marketing ................................................................................................................................................ 72 Working With Vendors ...................................................................................................................... 78 Setting Up Your Business Dashboard........................................................................................... 79 Legal Considerations .......................................................................................................................... 81 Buying a Business ................................................................................................................................ 91 Resources for Small Business........................................................................................................106 2 Ideation Preparing: - Do things that make you uncomfortable, go new places, meet new people - Be curious, ask questions - When you see a clever product/service/approach, consider what the questions are that could have led to its creation. Most common approach: - Fill a need that’s already there, in an industry that always exists, and do it better Summary: Look very closely at businesses that exist, and their customers. Are there inefficiencies, could it be more attractive? Consider how you can take that business and make it different, faster, more targeted in some way. Consider, what is it about the business that customers love and/or want, and what are the things that they don’t need/want. Focus on building out the former. People want the same product, but not necessarily delivered in the same way. Move beyond old or traditional methods, listen to your customers and give them more of what they really want. Example: Walmart took something that already existed (retail super-store) and reduced their margins and costs, and passed along the savings to consumers. The same market/product, but with a different approach creates untapped possibilities Vetting: You can either, 1) Share your ideas with others to see their responses a. Danger: People stealing, passing along your idea 2) Take your idea and run with it, test-running a prototype to get customer feedback a. Danger: No previous vetting and feedback on your idea Things to consider: 1) What field or concepts are you passionate about? a. When going gets tough, your passion for the business will drive you. 2) What type of business can you afford? 3 a. How much do you have saved up? Starting a business can take 2-3 years to become profitable, sometimes even longer. b. Some types of businesses can run on less, while others need a large initial investment to get off the ground 3) Remember your idea and business model will probably pivot a. The best businesses have pivoted to stay alive (Twitter, etc.) Resources Lee Ann Obringer (Marketing Consultant, How Stuff Works Contributor) How Business Ideas Work (Article) Key Points: - Do you have the basic skills? o Accounting, Marketing, Management, Enthusiasm - Identify your talents - Find business ideas that fit your talent o Business types: Manufactured Distributed Services o Strategies: Inventing a new product for a new market Inventing a new product for an existing market Improving on a product for an existing market Selling an existing product to a new market - Evaluating your ideas o The best way to get started, possible income vs. addition costs - External deciding factors o Time Commitment o Family o Zoning restrictions o Lifestyle compatibility o Personal satisfaction and enjoyment •••• Jay Adelson (co-founder of famous websites including Digg and Revision3) Ways to Validate a Business Model (Video) Key Points: 4 First remember: There is always risk, and you might need to make several different products until you get it right. To reduce risk: - Research potential customers and users - Build a very basic prototype for testing if possible - Find questions that are common between customers, follow-up with specific ways that your business will fit in •••• Ari Mir (CEO of Lunch Money) 4 Ways to Vet Your Idea (Video) Key Points: 1. Passion 2. Fulfilling a need 3. Opportunity 4. Chances of Success •••• Entrepneur.com Authors Starting a Business: The Idea Phase (Excerpt from Start Your Own Business book) Key Points: - There’s never a “bad” time to start a business. Even in a down economy, there is less business competition and possibly better deals on equipment. - With a few exceptions, many new businesses won’t be completely new. They will come from improving upon an idea, or targeting a market share that’s underserved in an already existing business category. - Consider the things you’re best at, and the things you’re worst at. What could make either of those aspects of your life easier, happier, more efficient, give you more time? - Listen to your own or others’ frustration and serve them. - Don’t take the one-size-fits-all approach, customize ideas to your times and community. Run the general idea by people, see how they respond. - Just do it. You’ll be told “no” more than you’ve ever heard it in your entire life. People will warn you about risk. But remember, if you are curious, flexible, and persistent you can mitigate risk •••• 5 Seth Godin (founder of Squidoo and prominent business author) Vetting Your Business Idea (Conversations with Godin by BusinesWeek editor Jessie Scanlon, Bloomberg BusinessWeek) Key Points: - Are you pursuing a freelance venture, or an entrepreneurial venture? o Freelancers keeps costs low, make money for the work they do. Entrepreneurs raises money, hire people to do the work, and focus on growth - Sticking to or obsessing about a great or new business idea can be dangerous o Not enough focus on growth, distribution, sales, the market - Avoid costly focus groups - Prototyping is valuable - Try not to seek investment too early, before the capital will go directly to building something that will generate profits •••• 6 Protecting Your Ideas and Intellectual Property ● What you will learn in this course ○ How to define, protect and share your “ideas” ● Applicable to situations involving: ○ Potential and actual business partners ○ Employees ○ Independent Contractors ○ The World at Large ● What is Intellectual Property and what can/should you protect? ○ Many people have great ideas, but what separates those who can turn their ideas into money from those who can’t includes a strategy to define the idea enough so that it can become an asset that can be protected. ○ “Intellectual property” is an blanket term for a group of intangible personal property rights. More detail about each later but for now, IP includes: ■ Copyright for Works of Authorship, like books, movies, paintings ■ Trademark for Brands and Logos, like Coca Cola, Nike, Docstoc ■ Patents for useful Inventions, like the light bulb, or what is called Velcro ■ Trade-Secrets and Confidential Information for valuable business Information you want to keep confidential ○ a product or service may be protected simultaneously by more than one kind of intellectual property. For example, computer software products may be protected by: ■ Patents, for the way the software functions. The steps carried out by the software may be protected by a patent. ■ Trademarks, for the names used with the software. POWERPOINT® is a well-known software brand. ■ Copyrights, for lines of computer program code and screen displays. ■ Trade secrets, for the undisclosed confidential portions of the program code ● Trade Secrets and Confidential Information are different than other IP ○ At some point other IP becomes known to the world at large, but you want your trade secrets and confidential information to stay secret amongst a select group either forever or until you decide that it should be public. ○ You want people ■ to know your brand and logo ■ buying and using your patented invention, and to get a patent you have to disclose to the Patent and Trademark Office all the parts of your invention, and that disclosure becomes public ■ to be exposed to your copyrighted work, which means you have to publish the work 7 ○ Coca Cola (the brand), wants people buying its soft drink, but it doesn’t want them to know the secret formula ○ But, you might want what starts off as a trade secret or confidential information to later become public. For example: ■ You have a great idea for the name and logo of your new company or product but before you: ● put a lot of money into protecting that brand with trademark protection ● put a lot of money into the design of the brand ● put a lot of money into marketing and promoting the branded product or service ● and start making that name and logo public ■ you want to consult with a marketing and branding expert ● You want that expert to keep secret ○ the proposed brand ○ the proposed product or service ○ the results of any brand testing ■ Then, after that, if you still want to use the name and logo you can ● file an “intent to use” trademark application (which we will talk more about later) ● start using the brand name and logo publicly, and it will no longer be a secret. ● but you still might want the expert’s brand testing results to be a secret ● Trade Secrets and Confidential Information ● Let’s talk more about the different kinds of IP and protecting your ideas, and let’s stick with Trade Secrets and Confidential Information for now. ○ Definition of Trade Secrets: ■ Information that ■ has independent economic value, from ■ not being generally known to, or and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and ■ reasonable efforts are taken to maintain secrecy ● [resource - Uniform Trade Secrets Act, though each State might have a variation; http://ipsection.calbar.ca.gov/Publications/TradeSecretsTreatis e.aspx] ○ Definition of Confidential Information: ■ Information ■ maintained in secrecy ● examples: ○ business information ○ customer requirements ○ identities of vendors & suppliers ○ pricing and costs data ○ test plans and results 8 ○ pre-release products & prototypes ○ specifications ○ software and documentation ○ products and software subject to restrictions on reverse engineering and/or disassembly ○ “Trade Secrets” are defined and protected by law in most states without needing to enter into written agreements, BUT it is wise to enter into written agreements ■ formality reinforces and makes people think about their obligations ○ Confidential Information protection does require a contract, and it is better to have a written contract than an oral one. ■ CI which is not a trade secret could be reverse engineered without a contract prohibiting that, because reverse engineering in and of itself is not improper, but reverse engineering when a contract prohibits reverse engineering allows you to file suit. ● (Remember the point above - one factor in order to make something a trade secret is the information is not being generally known to, and not being readily ascertainable by proper means . . . ○ For example: ■ The secret Coca Cola formula ■ Undisclosed Source Code ● How do you protect your Ideas and Confidential Information (and better protect your Trade Secrets) and when do you share or disclose your ideas, Trade Secrets, and Confidential Information? ○ Don’t leave them lying around for anybody to see ■ remember, reasonable efforts must be taken to maintain secrecy -and- ○ Enter into written NDA’s ○ Then you can share with those who have a need to know. ● NDAs to protect your Ideas and Confidential Information (and better protect your Trade Secrets) ○ Defined: ○ A non-disclosure agreement (NDA), also known as a confidentiality agreement (CA), confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement, is a ■ legal contract between at least two parties that ■ outlines confidential material, knowledge, or information that ● the parties wish to share with one another ● for certain purposes, ■ but wish to restrict access to or by third parties. ■ It is a contract through which the parties agree not to disclose information covered by the agreement. 9 ■ An NDA creates a confidential relationship between the parties to protect any type of confidential and proprietary information or trade secrets. ■ As such, an NDA protects nonpublic business information. ○ What is it used for? ■ NDAs are commonly signed when two or more companies, individuals, or other entities are considering doing business and need to understand aspects of each other’s business for the purpose of evaluating the potential business relationship, or while engaged in a business relationship they share or have access to the CI (or Trade Secrets) of the other. [resource: Our Form NDA’s; Doc Complete screen grabs] ■ NDAs can be "mutual", meaning all parties to the NDA are restricted in their use of the CI they receive, or they can be restricted to the use of material by a single party. ■ Employees [resource: Confidentiality and Invention Assignment Agreement] ■ Independent Contractors [resource: NDA with IC] ○ Who will not sign? ■ Most potential investors, such as VC’s ● because they are privy to so many ideas and opportunities, many that are very similar, and they don’t want to be dragged into court by anyone who thinks the VC shared the idea with someone else they invested in ■ Professionals, such as attorneys and accountants (typically because they are already bound to maintain confidentiality) ○ Pros and cons (The Jason philosophy vs. the more guarded philosophy) ■ Some common issues addressed in an NDA include: ● who the parties to the agreement are; ● definition of what is confidential, i.e. the information to be held confidential. NDAs will typically include a list of types of items which are covered, including: ○ unpublished patent applications, ○ know-how, ○ financial information, ○ oral representations, ○ customer lists, ○ vendor lists, ○ business practices/strategies, ● the disclosure period - information not disclosed during the disclosure period (e.g., one year after the date of the NDA) is not deemed confidential; ● the exclusions from what must be kept confidential. Typically, the restrictions on the disclosure or use of the confidential data will be invalid if ○ the recipient had prior knowledge of the materials; 10 ○ the recipient lawfully gained subsequent knowledge of the materials from another source; ○ the materials are generally available to the public; or ○ the materials are subject to a subpoena, but a good NDA requires the receiver of CI to notify the discloser right away about a subpoena so the discloser can try to prevent the disclosure, or ensure that the information is treated secretly and not publicly revealed, including be making sure that information filed in a court case is “sealed”; ● provisions restricting the transfer of data in violation of national security; ● the term (in years) of the confidentiality, i.e. the time period of confidentiality ○ Trade Secrets should be kept confidential for so long as they are Trade Secrets; ● the term (in years) the agreement is binding; ● permission to obtain ex-parte (fast and without notice to the other party) injunctive relief from a court to have the court order that the receiver of CI not disclose it, or take efforts to get it back, or limit its further improper disclosure; ● the obligations of the recipient regarding the confidential information, typically including some version of obligations: ○ to use the information only for enumerated purposes; ○ to disclose it only to persons with a “need to know” the information for those purposes; ○ to ensure that anyone to whom the information is disclosed further abides by obligations restricting use, restricting disclosure, and ensuring security at least as protective as the agreement; ○ to use not less than reasonable efforts to keep the information secure. ■ Reasonable efforts is often defined as a standard of care relating to confidential information that is no less rigorous than that which the recipient uses to keep its own similar information secure; and ○ types of permissible disclosure - such as those required by law or court order (many NDAs require the receiving party to give the disclosing party prompt notice of any efforts to obtain such disclosure, and possibly to cooperate with any attempt by the disclosing party to seek judicial protection for the relevant confidential information). ○ the law and jurisdiction governing the parties. The parties may choose exclusive jurisdiction of a court of a country. ● Copyright 11 ○ Define by example first: ■ A book [Link] ■ This course ■ A movie or TV script [Link] ■ A movie or TV show [Link] ■ a musical composition [Link] ■ a musical recording [Link] ■ a video game [Link] ■ software code ■ A painting, drawing, photograph, sculpture, architecture ○ Original works of authorship ○ fixed in a tangible medium of expression ○ from which they may be perceived, copied, or communicated ○ To be protectable, the work must have originality ○ Ideas themselves are not copyrightable. Only the manner of expression of an idea is protected by copyright, rather than the idea itself ○ Has to be “fixed.” If you tell a friend an idea, that isn’t protected by copyright. Fixed means the author has put the work in some tangible form which can be seen, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. ○ Copyright is a legal concept, enacted by most governments, giving the creator or other rights holder of an original work exclusive rights to it, usually for a limited time. ■ Generally, it is "the right to copy", but also gives the copyright holder ● the right to determine who may ○ adapt the work to other forms, ○ perform or publicly display the work, ○ financially benefit from it, ○ transmit or display by radio or video ● and the right to sell, license, or assign these rights to others. ○ Fair use is a limitation and exception to the exclusive rights. ■ Examples of fair use include: ● commentary, ● criticism, ● news reporting, ● research, ● teaching, ● library archiving and scholarship. ■ Fair use allows the legal, unlicensed citation or incorporation of copyrighted material in another author's work under a complex four- factor balancing test.[Link] ● The purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes 12 ● The nature of the copyrighted work ● The amount and substantiality of the portion used in relation to the copyrighted work as a whole ● The effect of the use upon the potential market for, or value of, the copyrighted work ○ What doesn’t qualify for copyright? ■ Titles of books, movies & songs ■ short phrases and slogans (though slogans may qualify for trademark) ■ History or facts, like telephone directories or recipes, but if there is originality in the expression, like a cookbook with photographs, or a cute story about the recipe of food item those aspects may qualify ■ the design of useful articles, unless the pictorial, graphic or sculptural features of the design exist independently from its useful purpose. ■ Procedures, concepts, systems, methods and the like ■ Works in the public domain ○ Length: How long does copyright last? In the US: ■ Generally, for the life of the author, plus 70 years ■ If the author is anonymous or a company, for the longer of 95 years from publication or 120 years from creation. ○ Automatic. Copyright protection arises automatically when an original work is fixed in a tangible medium of expression. ○ No registration is necessary; but, registration affords additional rights, including ■ the right to bring an infringement suit in federal court, ■ entitlement to statutory damages (actual damages can be difficult to prove) ■ entitlement to recovery of attorneys’ fees in certain circumstances. ○ Registrations are generally classified according to the nature of the work, including ■ serial works, ■ literary works, ■ works of the performing arts, ■ sound recordings, and ■ works of the visual arts ○ [Show how to apply for registration] ○ Creative Commons Licenses and [Site] ○ [Resource: Copyright license] 13 ● Trademark and Tradenames (United States) ○ Define: ○ A trademark ■ identifies goods or services ■ in a way to distinguish them from the goods or services of others. ○ It can be any ■ word, ■ name, [Coca Cola] ■ abbreviation, [FedEx] ■ Acronyms [KFC] ■ slogan [“We Make Every Small Business Better” “It’s finger lickin good!”, “It’s the real thing” ], ■ symbol [prince glyph, nike swoosh], ■ device, ■ color [corning pink insulation], ■ shape [life savers, coach hang tag], ■ smell, ■ sound combinations [nbc tones], ■ product containers [absolut vodka] ■ or any combination of these ○ They can be protected under ■ federal law ■ state law, and ■ common law. ○ Think of a trademark as a person’s name. Hearing the name of a person you know conjures up the person’s face, voice, and personality. ○ The mark creates an association with a source. ○ Similarly, marks give a product an identity and a familiarity, whether good or bad. ○ When you see the mark Coca-Cola®, you know the signature red and white label will guarantee that the product is the REAL THING, and that each bottle will taste the same as the bottle you had last year and will have next year (except if they tinker with the secret formula). Without marks, you might wander the grocery store aisle wondering if the soda you bought last week will taste the same as soda you buy this week. ○ Common law - use of a mark provides protection commensurate in scope to the extent of the use of the mark. ○ Federal registration of the mark on the Principal or Supplemental Register affords additional rights. Registration on the Principal Register entitles the owner to use the mark and to exclude use of the trademark by others throughout the United States if such use would likely lead to confusion by the public, or tarnishes or dilutes a mark. 14 ○ Registering a trademark with the U.S. Patent and Trademark Office (PTO) notifies others that the owner of the mark claims exclusive rights to use the mark in association with products and services identical or substantially similar to those of the mark’s owner. ● Some types of marks: ○ Tip: Consider the following in connection with protecting choosing and protecting “your” domain names and preventing others from cybersquatting and using similar or typosquatting domain names. ■ The more generic your trademark the more difficult it will be to protect against others using it, including in domain names ■ The more generic your domain name the more difficult it will be to protect against others using similar ones for domain names or the same or similar as trademarks ○ Coined or “made-up” marks ■ such as Google®, Exxon® and Prozac® are marks that do not convey any information about the product or services on which they are used. ■ They are unique and easy to protect because a similar competing mark likely would confuse the consumer. ■ Conversely, they are more difficult to market because they require a substantial marketing effort to explain what the product or service is to the consumer. ○ Arbitrary marks ■ are real words that are unrelated to the products on which they are used. For example, Apple® is an arbitrary trademark for certain computers and other devices. ■ Like coined marks, arbitrary marks they are strong from a legal protection standpoint and, since they are actual words, they are slightly easier to market than coined marks. ■ Because they convey no information about the product, though, arbitrary marks still require significant marketing effort to inform the customer about the product ○ Suggestive marks ■ hint at aspects or qualities of a product, but do not directly describe it. For example, Explorer® for a sport utility vehicle suggests qualities of the product. ■ Suggestive marks are fairly strong from a legal protection standpoint, yet much easier to market than coined or arbitrary marks. ■ Suggestive marks strike the best balance between the dual goals of finding a mark that is easy to protect and easy to market. However, the dividing line between suggestive and descriptive marks is often not clear. ○ Descriptive marks ■ immediately and directly convey something about the product. American Apparel® and The 99 Cent Store® both directly describe the products or services with which they are used. 15 ■ Because they describe aspects of a product or service, they are seemingly easy to market but difficult to protect. ■ Descriptive marks are poor at indicating the source of a product and in distinguishing a product from competing products because they describe the product but are not distinctive enough to be associated at the outset with one company. ○ Descriptive marks are not protectable until they have developed “secondary meaning.” After a sufficiently long period of use in connection with a product, or after a significant marketing and advertising effort, a descriptive mark no longer just describes the product, but secondarily indicates to consumers that the product comes from a particular company ○ Generic terms ■ so highly descriptive that they are not capable of functioning as trademarks. In contrast to descriptive marks, which merely describe aspects of a product, generic terms immediately describe an entire class of products. So while Ivory® is a trademark, SOAP is a generic term that is incapable of functioning as a trademark. ● What is US Trademark registration and what does it do? o Registering a trademark with the U.S. Patent and Trademark Office (PTO) notifies others that the owner of the mark claims exclusive rights to use the mark in association with products and services identical or substantially similar to those of the mark’s owner. o Registration on the Supplemental Register is for marks that are capable of being distinctive but have not yet become so and afford no exclusive rights, but preclude others from obtaining a registration. o The symbol ® is used to give notice that a trademark is federally registered. o The symbols ™ and SM are used to give notice that a trademark or service mark is considered by its owner to function as a mark to indicate the source of the goods or services. o State trademark registrations may also be obtained, but they typically provide no more protection than is already available to the trademark owner under common law. o With one exception (intent to use), trademark rights in the United States flow from use, not from registration. o Registration of the mark makes those rights stronger and easier to enforce. o In the U.S., the trademark registration process involves the following steps: ■ Filing of an application in the PTO; ■ Examination of the application by the PTO, which includes a search of the PTO’s records (and, where conflicts are found, argument with the PTO regarding likelihood of confusion); ■ Where no conflicts are found, publication of the application in the PTO’s Official Gazette; ■ A 30-day period begins, during which third parties can file opposition proceedings against the published application; 16 ■ Where no oppositions are filed and the mark already is in use by the applicant, issuance of the trademark registration certificate. ● The intent-to-use exception ○ The exception is that U.S. applications may be based on a good-faith intention to use the mark rather than actual use. Registration cannot occur until use in the U.S. begins. ○ Where an application is based on “intent to use,” the PTO will issue a Notice of Allowance. This notice indicates that the PTO will issue a registration as soon as the applicant demonstrates use of the mark. ○ After the Notice of Allowance is issued, the application may be maintained for up to three years by filing extensions every six months, along with a fee and an explanation of why the mark is not yet in use. Some enforceable rights arise during this “intent to use” process, provided the registration eventually issues. ● Conducting a Search ● Why ○ Before you choose a domain name, a name for your company, a name for your goods or services, and a logo design, and before you pour money into branding and marketing you should conduct a search to try to make sure that your proposed mark will not infringe on the marks of others. ○ You don’t want to get sued for infringement ■ If you are sued by a trademark owner for using its trademark, at the least you can be forced to stop using the trademark. Depending on how long and extensively you've used the business or product name, it could be costly -- you could have to change products, brochures, letterhead, business cards, signs, advertisements, and your website. ■ And, if you infringe on a federally registered trademark, you will be presumed to have known it was federally registered, even if you did not. This means that you will be found to be a "willful infringer." ● Willful infringers can be held liable for large damages and payment of the registered owner's attorney fees. ○ You don’t want to have to re-brand ○ You want to increase your chances of having the PTO grant you a registration for your mark by not attempting to register a mark that is already registered or in use. ● What ○ You should search not only for your proposed mark but also for other marks that are logically close, such as synonyms and variant spellings, such as colour and color, barbeque and barbecue, donut and doughnut, and check for typo’s too. ○ If your search turns up any marks or names that are the same or similar to your proposed mark, name or domain name, ask these questions: ■ Is there a likelihood of confusion? ■ Will you offer goods or services that compete with the goods or services being sold under the similar name? 17 ■ Will you offer goods or services that typically are distributed in the same channels as the goods or services being sold under the similar name? ■ Could your business or website divert business away from the business, products, services, or site with the similar name? Is your domain name so similar to the other domain name that users might end up on your website by mistake? ■ Is the other name well known, even if the goods or services are not similar? ○ If the answers to all these questions are no, you can feel reasonably free to register the domain name and work on your trademark registration application and file that. ○ If you answer yes to any of these questions there may be some risk of a legal challenge down the road. You might want to consult with a trademark attorney. ○ ○ Note that you will need to look at international clearance and registration issues if you plan on expanding or conducting business outside of the US. ■ Example: Budweiser by Anheuser-Busch [Link] vs. this Czech beer in 23 European countries where [Link] Anheuser-Busch cannot use the Budweiser mark. ○ Consider expanding product lines ■ Example: Apple computers [Link] vs. Apple Music (the Beatles) [Link] where Apple computers may originally been in a different class of goods and services, but eventually expanded to music, and after several lawsuits over the years has licensed the right to use “Apple” in connection with music for over $500million. (Never mind Fiona Apple) ● Search tools ○ search engines (Google, Bing, etc.) ○ http://www.trademarkia.com/ ○ US PTO ○ fee-based search engine such as Thomson's SAEGIS database at www.thomson- thomson.com. ○ search domain names being used by Web-based businesses at any domain name registrar. You can find a list of domain name registrars at ICANN.org, ○ State Secretary of State for state registered trademarks (not all States have state registered trademark searches on-line) ○ [Resource: Search screen grabs] [Registration Process] ● How to Register a Trademark in the US ○ Once you have decided to federally register your trademark, you can file the necessary forms to apply for federal trademark registration with the United States Patent and Trademark Office online. The cost is between $275-375 per mark for each International Class in which you seek registration, depending upon the filing method you chose. 18 ○ The USPTO estimates that filling out the form should take about 15-20 minutes, although first time filers are likely to take longer. A federal application must contain at least four things, in addition to the filing fee: ■ (1) the owner's name and address, ■ (2) a clear drawing of the mark (which can be automatically generated from text if you do not have a logo); ■ (3) a description of the goods or services for which the mark is or will be used and the corresponding International Class number(s); and ■ (4) the filing basis. There are five filing bases: ● (1) use of a mark in commerce under §1(a) of the Trademark Act, 15 U.S.C. §1051(a); ● (2) bona fide intention to use a mark in commerce under §1(b) of the Act, 15 U.S.C. §1051(b); ● (3) a claim of priority, based on an earlier-filed foreign application under §44(d) of the Act, 15 U.S.C. §1126(d); ● (4) ownership of a registration of the mark in the applicant’s country of origin under §44(e) of the Act, 15 U.S.C. §1126(e); or ● (5) extension of protection of an international registration to the United States, under §66(a) of the Act, 15 U.S.C. §1141f(a). 37 C.F.R. §2.34. ○ You can register your trademark for use in connection with more than one set of goods or services, but you will have to pay an additional filing fee if the goods and services you list fall into more than one International Class. ○ The USPTO has available a searchable index of identifications for goods and services that they recommend you use for your application, but you can also type in something else if your product or service does not fit into one of these categories. If your business does not clearly fall within one category of goods or services, you may want to consider filing in more than one class, as this will give you greater protection and flexibility. ■ A downside to seeking registration in more than one class, aside from the additional filing fees, is that you are more likely to encounter a conflict with someone else who is using the mark or a similar one in another field or industry. ○ There are two different filing bases for a new trademark application: ■ use based, or ■ intent-to-use. ○ If you have already begun using the trademark in interstate commerce, you should file a use based application. To do so, ■ in addition to filling out the application, you must supply the USPTO with a specimen showing the mark as it is used in connection with your goods or services, as well as the date(s) on which you first used the mark anywhere and in interstate commerce. ○ If you have not yet begun using the trademark, you should file an intent-to- use application. You will be required to submit a specimen and date of first use later in the application process before your mark is allowed to register. ○ If this process sounds too complicated for you, you can hire an attorney to do it. Trademark registration is usually fairly straightforward for attorneys who specialize in it, so it is relatively inexpensive. 19 ○ ○ Within about 3-6 months after you file the registration forms an attorney with the USPTO will examine and research your application. ○ There are several categories of marks that the USPTO will refuse to register, including ■ "immoral, deceptive, or scandalous" marks (such as those including foul language), ■ those that disparage or falsely imply a connection to other people or entities, and ■ marks that are confusingly similar to others that are already registered. ○ The USPTO attorney may contact you to resolve any issues in your application, by issuing what's called an "Office Action." If you receive an Office Action, you will have six months in which to respond to any issues raised by the examining attorney. If the issues raised in the Office Action are too complex, you may want to hire an attorney to draft your response. ○ If the USPTO approves your application, it will publish your trademark in the Official Gazette, and anyone who believes that they would be damaged by its registration (such as a senior user of a confusingly similar mark) will have thirty days in which to oppose registration of the mark. ■ If no one opposes (or requests an extension of time to oppose) within those thirty days, the USPTO will either approve your mark for registration (if you have already submitted an acceptable specimen of use) or issue a Notice of Allowance (if your application is still based on an intent-to-use). If the USPTO issues a Notice of Allowance, you will have six months from the date on which it was issued to either submit an acceptable specimen, or request an additional extension of time in which to do so. You can request up to five 6-month extensions of time in which to submit a specimen of use. The registration process can easily take 1-2 years, but once it is approved your rights date back to the day on which you filed your application. o After a registration has been obtained, it must be maintained. ■ Unlike with patents and copyrights a registered trademark can, theoretically, last forever as long as a trademark's use is continuous Section 8 Affidavit(s) of Continuous Use, as required. ■ In the fifth year after the initial registration issues, the owner must prove to the PTO that the mark is still in use. If proof is not submitted, the PTO will automatically cancel the registration. ■ Trademark registrations must be renewed every 10 years. Evidence that the mark is still in use must also be submitted with the renewal application. Section 9 Applications for renewal ○ Failure to Continue to use ■ In the U.S., failure to use a trademark will result in abandonment of the mark, whereby any party may use the mark. An abandoned mark is not irrevocably in the public domain, but may instead be re-registered by any party which has re-established exclusive and active use, and must be associated or linked with the original mark owner. 20 ■ If a court rules that a trademark has become "generic" through common use (such that the mark no longer performs the essential trademark function and the average consumer no longer considers that exclusive rights attach to it), the corresponding registration may also be ruled invalid. ● Trademark Symbol Tips: o Do NOT use the circle ® until a federal registration has issued. Not even when you have filed your application for a ™ registration. Otherwise it is considered fraud and a registration might be denied. o Use ™ until the registration issues. o The ® should be adjacent to the registered mark only. Like Docstoc® Premium. Not Docstoc Premium® [Link] o Use the applicable ® or ™ symbol in a visible and conspicuous manner at least in the first use. ■ This may be helpful in asserting that an infringer - someone who has used your mark without authorization and improperly under the law - had actual or constructive knowledge that the mark is registered or in use so that you might be able to prove intentional infringement. ● Policing It is imperative for a trademark owner, especially one of a registered mark to police against misuse or infringement, or they might lose their mark, or the value might be significantly impaired [Resource: Cease & Desist letter] ● Infringement o Using a trademark in a way that is likely to confuse the purchasing public as to the source of a product or service. o The concept of “likelihood of confusion” is central to whether a use is infringing and is a function of the similarity between the two marks and how closely the relevant products or services are related. ■ (Section 43(a) of the Lanham Act (15 U.S.C. § 1125 (a)), which encompasses claims for trademark infringement of both registered and unregistered marks, imposes civil liability on any person who uses any mark which is “likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection or association of such person with another person, or as to the origin, sponsorship or approval of his or her goods, services or commercial activities by another person. . . . ”) o the courts will typically look to a number of factors, including: (1) the strength of the mark; (2) the proximity of the goods; (3) the similarity of the marks; (4) evidence of actual confusion; (5) the similarity of marketing channels used; (6) the degree of caution exercised by the typical purchaser; (7) the defendant's intent. 21 ● Fair Use ≠ Trademark Infringement o A descriptive defense of “fair use” can be asserted as long as the mark is used in a sense and not as a trademark, so that the use of the term is in its original “primary” or descriptive sense. The underlying purpose behind the fair use defense is to ensure that a monopoly is not created in the marketplace based on the unavailability of a trademarked term. o Apple computers cannot sue a fruit market for advertising the sale of apples ● Nominative use ≠ Trademark Infringement o occurs when use of a term is necessary for purposes of identifying another producer's product, not the user's own product, such as for comparative purposes, so long as the use does not suggest endorsement, affiliation or sponsorship ● Artistic expression involving another’s mark is often protected under the First Amendment. Parody falls into this category. Satire does not. The difference is that parody ridicules the mark or the source; satire uses the mark to ridicule something else. o The basic idea is that artistic and editorial parodies of trademarks serve a valuable critical function, and that this critical function is entitled to some degree of First Amendment protection. o Jim Henson’s Spa’am character does not tarnish this brand - Henson’s parody wasn’t ridiculing Hormel’s SPAM to sell more of its competitive products. In fact, it found Spa’am to be a likeable, positive character and that there was no evidence that the character would call the quality of Hormel’s meat into question ● Dilution of famous marks. o Dilution is a type of damage to a trademark where there is no competition between the owners of the two marks. ■ The Federal Trademark Dilution Act of 1995 defines dilution as “lessening the capacity of a famous mark to identify and distinguish goods or services, regardless of the presence or absence of . . . likelihood of confusion, mistake or deception.” 15 U.S.C.A. § 1127. ■ In deciding whether a mark is famous, the courts will look to the following factors: ● (1) the degree of inherent or acquired distinctiveness; ● (2) the duration and extent of use; ● (3) the amount of advertising and publicity; ● (4) the geographic extent of the market; ● (5) the channels of trade; ● (6) the degree of recognition in trading areas; ● (7) any use of similar marks by third parties; ● (8) whether the mark is registered. ● Kodak, Exxon, and Xerox are all examples of famous marks. ■ Under state law, a mark need not be famous in order to give rise to a dilution claim. Instead, dilution is available if: ● (1) the mark has "selling power" or, in other words, a distinctive quality; and 22 ● (2) the two marks are substantially similar. o Dilution of a trademark can be shown by either ■“tarnishment” or ■“blurring” of the mark ● Tarnishment. Sellers of commercial products trying to attract attention to their commercials or products by poking fun at a widely recognized mark risk diluting that mark by tarnishment. Tarnishment happens when the mark becomes linked to products of inferior quality or the mark is portrayed in an unsavory context likely to evoke unflattering thoughts about the owner's product. In such situations, the trademark's reputation and commercial value might be diminished because the public will associate the lack of quality or lack of prestige in the defendant's goods with the plaintiff's unrelated goods, or because the defendant's use reduces the trademark's reputation and standing in the eyes of consumers as a wholesome identifier of the owner's products or services. ○ This is tarnishment [link] This is not [link] ○ the court here holds that even without any evidence of actual consumer impact, a “semantic association” between a famous mark and a mark used to sell “sexual toys, videos, and similar soft-core pornographic products” is sufficient to establish tarnishment. So this [link] tarnished this [link] ○ Here, although the courts recognize a parody defense, the precise contours of such a defense are difficult to outline with any precision. There was no reason to think anyone would believe Coca-Cola manufactured the cocaine poster, but the court nevertheless issued an injunction preventing the defendant's use, finding that the posters were likely to dilute and tarnish Coca-Cola's distinctive trademark for its "wholesome" product ● Blurring of a mark occurs when an advertiser’s distinctive mark is used on other, unauthorized products. The mark loses its distinctive ability to identify the source of its products. Think of “blurring” as the whittling away of a trademark’s selling power through unauthorized use by others. Are the marks similar? Blurring is more likely to occur in the mind of the consumer if the products are similar. Competition isn’t a factor, but it helps. ● Domain Names If you believe that someone has taken a domain in bad faith, you can either sue under the provisions of the Anticybersquatting Consumer Protection Act (ACPA), or you can fight the cybersquatter using an international arbitration system created by the Internet Corporation of Assigned Names and Numbers (ICANN) called the Uniform Domain- Name Dispute Resolution Policy (UDRP). 23 ○ The ACPA defines cybersquatting as registering, trafficking in, or using a domain name with the intent to profit in bad faith from the goodwill of a trademark belonging to someone else. ○ ICANN’s UDRP arbitration system is considered by some to be faster and less expensive, and the procedure does not require an attorney. For information on the ICANN policy, visit the ICANN site and http://www.icann.org/en/help/dndr. ● Advertising Keywords are rarely found to infringe. [Resources: Trademark Useage Guidelines; Trademark license] ● Patents ○ You will probably need a patent lawyer to help you patent your inventions. This is a highly specialized field. ○ United States patent laws do not require you to have a prototype in order to apply for a patent. You must be able to describe the invention so that others could both make and use it. ○ Broadly defined, ■ inventions are any discovered product or composition or method, whether or not patentable. ■ abstract ideas, natural phenomena and laws of nature are not patentable. ■ When inventions go beyond an abstract idea and meet certain requirements, the invention becomes eligible for protection under the patent law. ● The subject matter of the invention must be patent eligible, ● the invention must be useful, ● it must be new or novel, ● it cannot be obvious and ● it must be described with the particularity required so that ○ people of skill in the relevant field can ■ understand what the invention is, ■ make it and use it ■ without engaging in undue experimentation. ○ Under U.S. patent law, a patent gives the holder the right to exclude others from making, using, selling, offering for sale, or importing the invention during the patent term. 35 U.S.C. § 271. ○ The term is 20 years from the filing of the application subject to the payment of maintenance fees. ○ Then, after the patent expires, the invention may be used freely by anyone. ○ A patent being an exclusionary right does not, however, necessarily give the owner of the patent the right to exploit the patent. For example, many inventions are improvements of prior inventions that may still be covered by someone else's patent. If an inventor takes an existing, spring loaded patented mouse trap design, adds a new feature to make an improved mouse trap, and obtains a patent on the improvement, he or she can only legally build his or her improved mouse trap with 24 permission from the patent holder of the original mouse trap, assuming the original patent is still in force. On the other hand, the owner of the improved mouse trap patent can exclude the original patent owner from using the improvement. This improvement is sometimes called a blocking patent. ● Types of Patents: ○ “Utility Patents” are the most common type. ■ They are available for any new and useful process, machine, manufacture, or composition of matter, or any new, useful, and non- obvious improvement thereof. [Slinky iPod] ○ “Business method patents” are utility patents that claim the processes involved in conducting business, that is, methods of conducting commercial activities as distinguished from scientific activities. ■ in order for a business method to be patentable it must produce a “useful, concrete and tangible result.” ■ There has been a good deal of controversy and uncertainty about what types of business methods might qualify for patents. ○ In considering the requirement of utility for patents, there are a few main factors to review: ■ novelty, ■ operability of the invention, ■ a beneficial use of the invention, and ■ practical use of the invention. ■ Example: ● Velcro ® - Hook & Loop - http://www.hookandloop.com/extra/VelcroPatent02717437_1. PDF Velcro ® brand hook and loop was invented by a man named George de Mestral in the 1940's while hunting in the Jura mountains in Switzerland. Mr. de Mestral, a Swiss engineer, discovered tiny hooks on the cockleburs that were stuck on his pants and in his dog's fur. Under the scrutiny of the microscope, he observed the hooks engaging the loops in the fabric of his pants. After nearly eight years of research (apparently it's not so easy to make a synthetic burr), de Mestral successfully reproduced the natural attachment with two strips of fabric, one with thousands of tiny hooks and another with thousands of tiny loops. Though the first Velcro was made out of cotton, de Mestral soon discovered that nylon worked best because it didn't wear with use. Later polyester was used. Velcro® a combination of the words velour and crochet. It's important to note that Velcro is the name of a company, not a general term for the fastening system. Recall our discussion about Trademarks. "Not all hook and loop fasteners are genuine Velcro brand products!" according to Velcro's company website. Except, of course, very few people say "hook-and-loop fastener," just as no few people say "re-sealable zipper storage bag" instead of Ziploc. Because the patent has expired and anyone can manufacture hoop & loop products this is one reason why Velcro fights to protect its name: anyone 25 can make a hook-and-loop fastening product, but only one company makes Velcro. An old product but people keep thinking of new uses. Hook & Loop + iPad = ? (e.g., Car Dashboard for GPS Map?) http://www.youtube.com/watch?v=N9uxxqKGmYg (lic. required?) ● Requirements for a patent: ● Patentable Subject Matter Congress intended that everything made through human intervention is patentable, so it is more helpful to define what cannot be patented. Generally, there are three categories of subject matter that can NOT be patented: (1) laws of nature; (2) natural phenomena; and (3) abstract ideas. ● Utility The claimed invention must be “useful” for some purpose. An invention that is inoperative is not a “useful” invention and, therefore, does not deserve patent protection. For a claimed invention to not meet the utility requirement it must be “totally incapable of achieving a useful result.” An invention that fails the utility requirement does so because either ■ an applicant fails to identify any specific utility for the invention or fails to disclose enough information about the invention to make its utility immediately apparent to those familiar with the technological field of the invention. or ■ the applicant’s asserted utility for the invention is not credible. Such as a Star Trek type transporter. (Beam me up Scotty.) An assertion by the patentee regarding utility will be credible unless: ■ the logic underlying the assertion is seriously flawed; or ■ the facts upon which the assertion is based are inconsistent with the logic underlying the assertion. ■ Credibility as used in this context refers to the reliability of the statement based on the logic and facts that are offered by the applicant to support the assertion of utility. ● Novelty This is where Trade Secrets and NDA’s might become important too, because if you disclose what your invention is before your provisional or full patent application is filed you might not be able to obtain a patent on your invention. ■ If the invention in question was described in a patent issued anywhere in the world prior to the patent applicant inventing it, then no patent can be obtained. ■ If the invention in question was described in a printed publication published anywhere in the world prior to the patent applicant inventing it, then no patent can be obtained. 26 ■ If the invention were publicly known in the US, but not necessarily patented or published, prior to the patent applicant inventing it, then no patent can be obtained. In each of these three cases the earlier reference of knowledge is prior art that prevents a patent from now issuing. Now some more rules: ■ If the invention in question was described in a patent issued anywhere in the world more than 12 months prior to a US application being filed, then no patent can be obtained ■ If the invention in question was described in a printed publication published anywhere in the world more than 12 months prior to a US application being filed, then no patent can be obtained ■ If the invention in question was publicly used in the US more than 12 months prior to a US application being filed, then no patent can be obtained. ■ If the device, machine or compound in question was offered for sale in the US more than 12 months prior to a US application being filed, then no patent can be obtained In each of these four cases the earlier reference, knowledge or event is prior art that prevents a patent from now issuing, but this time not because the invention was not new, but rather because an application was made in the US too late! To complicate matters more this is the law relative to novelty that will be in place up to and including March 15, 2013. Effective March 16, 2013, the United States becomes a first to file country, and the law of novelty substantially changes. ● Nonobviousness Even if an applicant can demonstrate patentable subject matter, utility and novelty, a patent will not be granted if the invention is trivial or if it contains only obvious differences from prior art. An invention is obvious if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains. The obviousness inquiry is highly fact specific .For a patent to be nonobvious it must display “ingenuity beyond the compass” of a person of ordinary skill in the art. The ultimate question of obviousness has an “I know it when I see it” quality that is hard to break down into objective elements. ● Adequate Description The applicant still must describe the invention with enough particularity such that those skilled in the art will be able to make, use and understand the invention that was made by the inventor. 27 ○ An inventor's notebook is used by inventors, scientists and engineers to record their ideas, invention process, experimental tests and results and observations. It is not a legal document but is valuable, if properly organized and maintained, since it can help establish dates of conception and reduction to practice. The information can improve the outcome of a patent or a patent contestation. ● Patent Searching: A United States patent search is normally the first step in the patent application process. Such a search is used to determine whether the time and expense of moving forward with a patent application is worthwhile. The patent process can be expensive. You don’t want spend a lot of money preparing and filing an application when there is easy to find knock-out prior art that will prevent a patent, or make any patent that is obtained narrow. Many inventors don’t thoroughly examine the patents found, and they may miss opportunities to use the prior art found to focus in on what may be unique and patentable. If no prior art is found a patent search might result in a better, stronger patent application and process because the initial application is critical. All aspects of an invention must be disclosed; nothing new can be added without compromising the filing date (aka priority date). After reviewing the results of a search your initial disclosure can be written to carefully define the invention to focus on what is most likely the patentable features or components. Anyone can do a patent search using the online Patent Office database, but this database only contains patents issued since 1976, so such a search is not complete. Google has a patent search engine, but the results provided are organized by a Google algorithm that may or may not cause the most relevant patents to be forced to the top of your search. Google might be best used initially. But when you want to look for specific things Google might not be totally useful. And it has been reported that there are some holes in the database. Plus the most recent patents are not available on Google. So although you cannot rely on Google, you still must use Google because Google’s database covers patents that are issued all the way back to US Patent No. 1, which is broader than what you will find on the USPTO. So while you might not find everything, and while it is difficult to specifically narrow your search, you might still want to also use the Google database to see if there are old references that might be on point. After you find a relevant patent you might want to use Free Patents Online for the PDFs and to access related patents, which is much easier because most everything at that site is hyperlinked. 28 Now that I’ve told you all that - a patent search is like looking for a needle in a haystack. That is why after you do some in the initial searching yourself, if you haven’t found a knock-out patent that you can’t draft claims around, you might want to hire a reputable professional patent searcher, who is also admitted to the patent bar and who prosecutes patent applications in the field of your so- called invention. You don’t want a mechanical engineer patent specialist searching for bio-tech patents. 29 Business Planning 10 Questions to Consider When Starting a Business Do You Need a Business Plan o Raising Money o Understanding my strategy o Will a ppt do? Your business model o Product vs. Service offering o Target Customer o Segmentation o Monetization o Competition o Differentiation o Sales/Distribution Strategy Inside Sales External Sales Reps Components of a Business Plan o Exec Summary o Market Research/Opportunity o Competition o Product/Offering description o Strategy (price/marketing) o Team o Accomplishments o Financials Business Plan Decks o Purpose o Size o Key Components Financial Modeling o 3 Year Projections o Research exact expenses o Rev Projections (Don’t be too conservative, but don’t be ridiculous) Key Financial Terms o Sales/Gross Profit o COS/COGS o Net Profit o OpEx o CapEx o Net Income o Profit Margin o CPA o CPM 30 o G&A o Amortization o Budgeting o Assets o Liabilities o Equity o Long-term Debt o Short-term Debt o Current Assets o Current Liabilities Example of real business plans o DebtMarket Know your audience o Research who you are pitching to o What have they invested in before o How can you connect with them 31 Setting Up Your Business Choosing the Right Structure o Sole Proprietorship (limited to one owner) Easy and inexpensive to create and operate. A sole proprietor is essentially doing business as themselves or under a fictitious business name (FBN or “dba”), but the business and the person are, for legal and tax purposes, one and the same. Profits and losses are reported on the sole proprietor’s tax return (owner and business are treated as a single entity). Thus, business losses can be used to off-set other income for the owner. A sole proprietor has no liability protection from court judgments or business debts and therefore their personal assets at risk even if the activity or debt that creates the risk originates with the business. Additionally, the entity’s existence is tied to individual owner. To set up a sole proprietorship the owner simply needs to offer their products or services for sale and obtain the appropriate business licenses. If the sole proprietor will operate under a name other than their own (e.g., “Evergreen Yard Care” as opposed to “John Smith Yard Care”) a Fictitious Business Name (FBN or “dba”) must be applied for (usually with the county in which the business will operate). o General Partnership (must have two or more people involved) Easy and inexpensive to create and operate Profits and losses are reported on the owners’ tax returns (partnership does file an informational return) No liability protection from court judgments or business debts (personal assets at risk) Any partner may bind the partnership as a whole, and each partner is liable 32 Each partner is entitled to full information and disclosure of partnership business (fiduciary duty owed between partners) New partners usually limited to approval by all partners (or other terms as stated in a partnership agreement) Entity existence is in question upon death or leaving of a partner (depends on partnership agreement or state law); entity existence may be set for fixed period of time in partnership agreement o Limited Partnership (LP) Limited personal liability for business debts for Limited Partners who do not participate in management of partnership General Partners are personally liable for business debts Limited Partners may not participate in management to maintain limited personal liability Management requirements can be as costly and complicated as operating as a corporation o LLP Limited to partnerships between certain licensed professionals (law, medicine, accounting) Partners are not personally liable for malpractice of other partners Proportionate share of profits reported on individual tax returns of partners Personal liability for partners for many types of business debts o LLC An LLC is a form of business entity that offers liability protection for the owners and a pass-through tax structure. The owners of an LLC are called “members” and they own a “membership interest”. For a lot of small business owners, the relative ease of creation and maintenance of an LLC, as opposed to a corporation, makes it the most appealing option of the business entity choices. 33 One of the benefits of an LLC is the limited liability protection for the owners. This liability protection shields the owners of the LLC from liability for business debts and court judgments against the LLC. Under common circumstances, a member of an LLC risks only the share of capital they paid into the business. This is different from sole proprietorships and partnerships (general partnerships and general partners in a limited partnership), where an owner’s personal liability is not limited and their assets are also at risk even though the debt or liability stems from business activities. But, the liability protection does not extend personal guarantees made by an owner or torts personally committed by an owner. Another benefit that many business owners find attractive about LLCs is the option to elect a pass-through tax structure. A pass-through tax structure allows for the LLCs profits and losses to be reported on the owners’ tax returns and not at a separate corporate level. But, LLCs also have a choice of tax election – partnership (or sole proprietorship if a single member LLC) or corporation. How profits and losses are distributed among the owners is flexible. Example: John and Mary decide to start a coffee shop. They decide on an LLC structure, and both contribute $50,000 to fund the venture, with Mary working at the coffee shop full-time while John will keep his current job and only work at the coffee shop on weekends. In the Operating Agreement they agree that for the first three years Mary will receive 70% of the profits and John will receive 30%. After three years they will share in the profits equally. An LLC can choose to pay members either through a salary or a share of the LLC profits. Only active members (members active in the management of the business) may be paid a salary. Inactive members must be paid a share of the profits. 1. Payments made as a salary are called “guaranteed payments”. 34 Salaries paid to members may be deducted as a business expense, but, salaries must be reasonable in light of the work performed by the member. Example: John and Mary both hold a 50% membership interest in their coffee shop business. Mary works full- time and receives a salary (guaranteed payment) of $40,000, and John, who works on weekends, receives a salary (guaranteed payment) of $10,000. For the past year the business, which has no expenses other than the above salaries, receives revenues of $100,000. After compensating Mary and John, the LLC has $50,000 in profit that is distributed to Mary and John - $25,000 each. All states allow for single owner LLCs. The management structure of an LLC is also much more flexible than a Corporation. An LLC can be managed by a single member, jointly by one or more members, a non-member manager, or a combination of members and non-members. Compared to corporations, setting up an LLC is quite simple. In most situations and states, you typically need to file one document for creation of an LLC, and need only create one additional document: 1. Articles of Organization – the document used to create the business entity (to be filed with the state) Though states differ on their requirements, the Articles typically identify information about your LLC; e.g., name of LLC, name and address of registered agent, LLC principal place of business, type of management (member-managed or manager-managed) and intended duration of LLC. 2. Operating Agreement – the document that identifies the internal operating and management procedures of the business (is not filed with the state) The Operating Agreement sets the rules under which the LLC will be run. Some of the details the Operating Agreement covers are: capital contributions, profit and loss allocation and distribution schedule, ownership 35 interest percentages, tax election, restrictions on ability to transfer membership interests and rules related to admitting new members, management type and management members, member voting rules and member buy-out provisions. It is not a required document for formation, but is recommended for LLCs that have more than one member. States differ as to the fees associated with setting up an LLC. Most states charge an initial filing fee and an annually recurring maintenance fee. Some states, such as California, also impose an annual tax that is calculated based upon the LLC’s annual income. (E.g., in California the initial filing fee to set up an LLC is $70, and a $20 fee must be paid when the initial Statement of Information is filed 90 days after formation, and then every two years thereafter. Additionally, an annual $800 minimum tax is due within 75 days of formation and every year thereafter (the actual amount of the minimum tax due each year will depend on the amount of the LLC’s net income). Though an LLC provides limited liability as discussed above, the owners must observe a legal distinction between the LLC and the members personally. In other words, the members must treat the LLC as a separate and distinct entity from themselves and not operate it as a sole proprietorship or partnership. Recommendations to keeping the member’s identities separate from that of the LLC: 1. Adequately fund the LLC; 2. Do not commingle personal and LLC funds, e.g., maintain separate bank accounts; 3. Maintain insurance in the name of the LLC to cover business activities; 4. Maintain business records that evidence operation as an LLC and not as an extension of the members; 5. Do business under the LLC’s name and not the members’ personal names (e.g., enter into contracts under the name of 36 the LLC, with an authorized manager or member signing on behalf of the LLC); 6. Comply with state annual information statement filing requirements; and 7. If previously the business was operated as a sole proprietorship or a partnership, transfer all existing contracts to the LLC. LLCs are often a great choice for small businesses due to the general ease of formation and maintenance while providing limited liability protection and a flow-through tax structure. Businesses that will own real property that is likely to increase in value may find the LLC the best option due to the avoidance of double taxation because of the flow-through tax structure. Example: A business formed as a corporation that owns real property that increases in value will likely have to pay tax on the increased value of the property when sold at both the corporate and shareholder level. An LLC avoids this because the business pays no tax at the LLC level and the increased value of the property (the profits) and any tax liability pass on to the individual members to be reported on their tax returns. Some situations, however, where an LLC may not be the best option are: 1. Business owners seek to attract outside investors. Investors tend to prefer investing in a corporation, where issuance of stock certificates is a familiar and relatively uncomplicated process. 2. Business owners have the intention of selling interests in the business to the public. Businesses that intend on going public would be better served forming a corporation. 3. Business owners that have an interest in offering ownership interests to key employees. The process of awarding ownership interests to employees is much smoother for corporations than for LLCs. 4. Concern over self-employment taxes may make an “S” Corporation a more advisable option. Rules for payment of 37 self-employment taxes for “S” Corporations are well established, where there are some ambiguities for LLCs. Though a complicated issue, the possibility is that under an LLC a member may be required to pay a “self-employment” tax on 100% of income from an LLC, where the IRS limits the self- employment tax for money received by an owner of an “S” Corporation for compensation for services performed and not profits. o Corporations Corporations are a readily familiar business entity structure that has been around for a long time. Corporations are governed by state law, thus the 50 states each have different rules governing the corporations formed and located in their states. Legally, a corporation is a separate entity from the persons who own it. Owners of a corporation are called “shareholders”. The shareholder owns shares of stock in the corporation. To form a corporation, each state requires that Articles of Incorporation (or Certificate of Incorporation in some states) be filed with the state (usually with the Secretary of State’s office). Articles of Incorporation 1. The articles of incorporation identify certain information about the corporation, and the information is generally available to the public. Such information includes: Corporation’s name; The name and address of the corporation’s registered agent; The stated purpose of the corporation; and The number of shares authorized. Bylaws 1. The corporate bylaws provide the internal operating procedures for the governance of the corporation. 38 2. Provisions within the bylaws provide rules and guidance on issues such as: Meetings (Board of Directors meetings (special and annual), Shareholders meetings (special and annual), notice requirements and quorum requirements). Voting rights. How many directors the corporation will have and how they will be elected and replaced, their duties and powers and how they will be compensated. The titles of the officers (common, and sometimes required, titles are: President, Secretary and Treasurer). Who is authorized to sign contracts, inspect corporate books and records (and when), tax elections and fiscal year election, how the bylaws can be amended. Shareholders The shareholders own the stock in the corporation, and one person can own all of the stock, or many people can own shares of the corporation and thus own a percentage of the corporation based upon how many shares the corporation has issued. As a shareholder a person has a right to participate in certain corporate functions, including: Amend the Articles of Incorporation; Elect and remove directors; Amend the bylaws; Approve mergers and the sale of corporate assets; and Dissolve the corporation. Though the shareholders have the above rights of participation in certain corporate functions, the management of the corporation is the responsibility of the Directors (who are elected by the shareholders). 39 Moreover, the day-to-day operation of the corporation is the responsibility of the Officers, who are appointed by the Directors. Directors The directors manage the corporation. They decide the direction the corporation will take and oversee the business operations. Officers Officers see to the day-to-day operations of the corporation. Officers are appointed by the directors and many states require that a corporation have at least a president, secretary and treasurer. Additionally, in most states one person can hold all required offices. The most notable feature of a corporation is that the owners of a corporation are not personally liable for the business debts and court judgments incurred by the corporation. 1. As a separate entity, the corporation can be sued in its own name, and can sue in its own name. 2. The liability shie
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