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7 min read

3 Reasons Why Your Single-Member LLC Must Have an Operating Agreement

By Chris Daming, J.D., LL.M. on Mar 30, 2021 7:45:00 AM

Have you ever asked yourself, “Okay, but do I really need that for my business?” If you’re like most small businesses, you’ve got a limited budget and a seemingly never-ending to-do list. Your work compels you to question what’s “necessary” to make sure you can get everything else done.

When it comes to filing for a single member LLC, you’re probably asking yourself: “Do I really need this agreement for my business?” “What’s the worst that could happen without it?” “Is this just more useless paper pushing? You’re saying I need to write a contract to myself?”

As lawyers, we get these kinds of questions regularly. And if you’re asking these questions, good. It means you’re thinking seriously about building a sustainable business. I’ll admit that it does seem strange at first to have to create an operating agreement and articles of organization when you’re the sole owner of your startup.

But there’s a ton of good reasons why you’re going to want to get this agreement finalized, let me explain.

Single-member LLCs

Single-member LLCs, or LLCs with only one owner, are one of the most popular kinds of businesses. Many people choose this type of entity to take their passion project or side hustle to the next level. For the purposes of this post, we’ll assume that you’ve decided a single-member LLC is perfectly right for your business.

Because there’s only one member, a single-member LLC can be less complicated to run than a typical multi-member LLC. And it requires considerably less paperwork than a corporation.

As an LLC, there are two key documents required for formation.

The first is your Articles of Organization, which needs to be filed with the state where your business is formed in order for your business to be legit. This document states your legal name, the company’s purpose, registered agent, estimated the duration and planned management structure.

The exact details for the Articles of Organization vary from state to state, but in general, it is merely just stating exactly what your company is, how it will be managed, and who will be running it.

The second document is your Operating Agreement.

What's an operating agreement?

An operating agreement is a contract between LLC members similar to a partnership agreement or a shareholders agreement. It shows the structure of the organization. It sets out the members’ duties, rights, and responsibilities in the operations and finances of the LLC.  Most importantly, it covers what happens when a member wants to leave the business and how and when a member can transfer or sell their LLC interest.  

The debate around single-member LLCs and operating agreements

So the question you must be asking yourself, the thing all of us single member small business owners ask ourselves, is “why would I need an operating agreement with myself?” Well, there is an excellent really good reason… for protection!

So if you are starting a business you want to make sure you have all of your legal paperwork in place. In researching your state’s requirements you might even discover that you’re not legally required to have an operating agreement for your LLC. (But, in many states, you are required by law!).

Does this mean you’re off the hook and can skip this step?

Nope! Regardless of whether you’re legally required to have the agreement, it’s truly a necessary document for your business. While we talk about a lot of other reasons below, here’s the most obvious one—who owns your business?? If you set up Widgets, LLC, and 5 years down the road you’re trying to sell it—imagine going to a prospective buyer without any proof you actually own that business!

Your Articles of Organization—that doc you file with the state—doesn’t say you own it. It might say you’re the registered agent, but that doesn’t mean you own it. That’s what the operating agreement, among many other things. Let’s talk about some other reasons.

First, we’ll go over why your single-member LLC needs an operating agreement. Then we’ll cover the topics that are usually included in an operating agreement.

Why have an operating agreement?

1. It can secure your liability protection. That’s right. An operating agreement helps protect your personal assets from your business assets. This is crucial to understand, as it’s the primary main reason that your single-member LLC needs an operating agreement.

Even if an operating agreement isn’t required in your state, running your company without an operating agreement could jeopardize your LLC status.

Think about it. The main benefit of an LLC is the liability protection it offers. It’s probably the reason why you created your LLC in the first place.

In case you’re confused, let’s quickly go over what we mean by liability protection. LLCs protect your personal assets, such as your home and bank accounts, against people who sue your business for some reason (like damaging property or breaching a contract).

In order to keep this liability protection, you need to keep your business affairs and personal affairs separate. This includes not “commingling funds,” which means not treating your business finances as personal finances. It also includes respecting various business formalities, like keeping and maintaining meeting minutes. If you don’t keep your business and personal stuff separate, then you risk someone “piercing the corporate veil” in court, which means they could legally get around your liability protections for not treating your business like a business.

An operating agreement is a key business document that shows your business operates like a legit company. Without the operating agreement, your state might not acknowledge you as an LLC, and which means someone could sue to go after you without there being any shield to protect your personal assets.

You’ve already put in the time and effort to form your LLC to get liability protection. So just go ahead and get an operating agreement to secure make that liability protection secure.

2. Your state’s default rules kick in. If you don’t have an operating agreement, your state’s default rules apply. Default rules are set by states so that, if a contract does not specify certain terms, there are rules set in place to fill these gaps.

Default rules are made with the intention of allowing results that people like you normally or usually would prefer. But since they’re made for the lowest common denominator of situations, they can sometimes give businesses unwanted results.

An example is helpful here. Your state might have a default rule that gives someone, like a spouse or child, the right to inherit the assets of your LLC in the event of your death or incapacitation. But this right to inherit assets might not be coupled with the right to manage it.

So, if you want a specific person (like someone who knows the business and has worked there a long time) to take over your LLC in the event something bad happens to you (like someone who knows the business and has worked there a long time), then you need to state that in your operating agreement. If you don’t, you could have a situation where you become incapacitated and your 2-year-old daughter is expected to take over the company and run it.

3. Banks and investors may require it. They might want to see your operating agreement as proof that you own your LLC. Your state registration document alone might not prove that you own your LLC. So, it’s best to come prepared and have your operating agreement at the ready.

What’s in a single member LLC operating agreement?

Now that you understand the importance of having a single member LLC, you’re probably wondering what it entails and how to get started. Here is a list of what your operating agreement should cover.

  • The name, location, and purpose of your LLC. Name and location seem evident enough, but you also want to be sure to explain the purpose of your LLC. You don’t have to be extra specific. In fact keeping your statement generalized leaves the door open for you to take on new ventures without having to refile.
  • Your LLC’s registered agent. The registered agent is the person who is responsible for receiving and taking care of important documents on behalf of your company.
  • The term of your LLC. Unless you have a specific time frame for the business, you can just state the duration as perpetual.
  • Information about LLC membership. This section requires more thought. Here‘s where you can list yourself as sole member and manager. You also state the rights and duties of each member (even when it is just you), including any capital contributions, any voting rights each member might have, and management structure. This may all seem silly since you are the only member, but it is an important part of getting your single member LLC in place.
  • How profits and losses are distributed. Here you will want to clearly state how all profits and losses will be accounted for and distributed.
  • Accounting and record-keeping information. You will need to state who is responsible for the accounting and record-keeping (you, an independent accountant, or an accounting firm) and what accounting method you’ll you will use (cash or accrual).
  • Indemnification and limitation of liability. These statements help to limit the amount you can be financially responsible for in the case of a lawsuit against your company.
  • Dissolution. This is the plan for what to do when things… well, don’t go as planned.  How to dissolve your LLC and designate who will maintain control of the LLC in the event of your death or demise.

What to do if you add another member to your LLC?

Most of us small business owners dream of the day when our business expands past what we can manage by ourselves. If you find yourself in that fantastic position and you are ready to add another member to your LLC, you will need to redo the above paperwork in accordance with the agreement between yourself and the new partner.

Do You Need a Lawyer For This?

If you get to this point and ask, "What next?" The biggest question is, "Do you need a lawyer to help you with all of this? To help you setup the LLC? Draft the operating agreement?" Sometimes, yes (especially if you have multiple owners). But more often than not for single-owner businesses, you don't need a lawyer to start your business. Read our post to find out what best applies to your scenario. Or alternatively, you can get an editable operating agreement (and a lot more) by using Legal GPS

Topics: Limited Liability Company
12 min read

Do You Need a Lawyer to Start a Business?

By Chris Daming, J.D., LL.M. on Feb 25, 2021 3:22:39 PM

Legal can feel overwhelming when you’re starting a business. Some people spend days researching if they should be an LLC or an S Corp. Others try to go to 1-hour classes that cover legal issues when starting a business. But ultimately, almost everyone always hears the same thing -- “You need to hire a lawyer.” 

Well…  here’s the truth. Most of the time, that’s simply not true. 

Think about it for a second-- if something happens again and again and again -- millions of times -- isn’t there a way that you could figure out how to do it on your own rather than needing to hire a specialist?

Turbotax and Quickbooks did exactly that with taxes and bookkeeping. Yet, CPAs and Accountants still play a valuable role for many companies. 

Just like in any business, there are times when "bringing in the experts" makes a lot of sense. But as a business owner, you've probably figured out that there are constantly new tools or concepts you need to learn to remain viable.

In this post, we'll "pull back the curtain" and help you make the best decision for yourself and your business.

 

Whether You Need a Lawyer or Not is a Balancing Act


Finding out if you need a lawyer is all a balancing act -- just like with every decision you make as a business owner.

Imagine for a second that you’re a grocery store owner. Your one objective is to ensure the store never gets sued for slip-and-falls. So, you hire a “cleaning team” that is on standby to clean up any spill. You station an employee in every aisle to monitor the possibility of a spill. And you discontinue selling hundreds of products, like anything with a glass jar, because if someone dropped it, then it would spill.

Great news! After you implemented those measures, you were never sued again for slip-and-falls. But the bad news is that you went out business within a few months because your expenses were through the roof.

Everything is a balancing act. And if you understand the “why” behind when hiring an attorney makes sense, when using online legal tech makes sense, and when doing neither makes sense, you’ll be able to make a much more informed decision.

 

Start with Why Legal is Important

So first, you’ll want to know why legal even matters -- if legal was negligible to businesses, then it would almost never make sense to hire anyone nor spend any time on it.

Think of starting a business like a basketball game. You’re a player in the game. And you get really good at playing -- specifically, dribbling and shooting. Maybe your athleticism and defense are like operations, and dribbling and shooting are like marketing and sales.

So what’s left? The rules. You have to know the rules to be able to play. No matter how good you get, if every possession you travel, step out of bounds, or foul -- you’ll be awful.

"Legal is like the rules of a game."

Legal is like the rules of a game. It eliminates ambiguity. Except business laws have a rule book about 1,000x bigger than the rules in the NBA. Imagine focusing all your energy on learning how to shoot, assuming you can carry the ball (without knowing to dribble) anywhere you go -- when you play your first game, you’ll be at a huge disadvantage and have to stay in one place.

That’s like legal -- if you don’t know what entity is right, you might end up paying way too much in fees and taxes or, alternatively, opening yourself to liability in the future. You might lose your brand if you infringe on someone else’s trademark. You might lose your company if you comply with certain government regulations. 

 

Why Does Legal Matter So Much in the Beginning?


If you wait too long, then when you need the contract, it’s too late. No one’s soon-to-be ex-spouse is going to agree to a prenup when she’s about to get a divorce. And no one will agree to a contract after the conflict has already occurred. 

Waiting too long to write down your agreements means -- you start your company, agree generally on terms with your co-founder, employee, contractor, advisor, etc. -- but never write it down. It’s “too long” when a problem pops up and you don’t have an agreement to resolve the conflict. 

Think of it this way -- if you have a co-founder, what happens when one of you thought a voting decision was majority but the other thought it was unanimous? Or if a contractor thought he was just designing a couple pages of your website and not the back-end or other pages you assumed were included? 

Most entrepreneurs assume people will do what they say in the beginning until they’ve been burned. Then you learn that it’s not necessarily someone trying to be malicious. Instead, it’s most often a case of miscommunication where one person thought they only needed to work 20 hours a week for the company but the other person thought everyone was working full-time. 

If you “wait too long” and the problem presents itself without a written contract, it’s too late and the costs to fix the problem are exponentially higher.

 

Why You Might Not Need a Lawyer

First a caveat. My goal in this guide isn’t to talk anyone who was planning to hire an attorney out of doing so. Those are roughly about 1 in 4 businesses. It’s the other 3 in 4 businesses I seek to educate -- those who probably wouldn’t have hired an attorney anyway. To say, “If you wouldn’t anyway, here’s some things to think about, maybe sometimes you should, but sometimes it’s probably fine to not hire one.”

Biggest Reason Not to Hire a Lawyer: Cost

The biggest reason lawyers can make less sense generally is cost. If you have unlimited capital, then you can save time by hiring a great lawyer (in the same way you’d hire an expert for everything else, like SEO, marketing, design, sales, etc.).

If you have no money, then hiring a lawyer doesn’t make sense for two reasons: (1) you can’t afford it; and (2) if something went wrong early with your company, you’d be considered “judgment proof” -- meaning if someone sued you, they wouldn’t be able to get any assets from you (so they probably wouldn’t sue you). 8 million businesses start with less than $5,000 so it’s okay to start without a lot of money -- most people do. 

But if you’re somewhat in the middle, then read the rest of the points to learn more about when lawyers make more or less sense.

Single Owner Businesses Often Don’t Need a Lawyer

This is a big one. Many times if you’re the only owner of the business, you might not need a lawyer initially. 

A huge part of initial legal problems people encounter that attorneys could help prevent is in 2+ owner businesses. If you have more than one owner, it’s still worthwhile to understand how law works--knowing the “why” and general “how” behind it all will save you money and make you a smarter business owner. 

But with 2+ owner businesses, hiring a lawyer is usually the smart move with maybe an exception if it’s your spouse and the company is a hobby with little-to-no liability problems.

Service-Based Businesses Often Don’t Need a Lawyer

The vast majority of US businesses are service-based businesses. In general, service-based businesses face less liability. If you’re in a field with high malpractice concerns, you’re exposed to more liability but at the same time -- insurance often covers that.

The most common service-based businesses are freelancers, with more than 57 million in the US. If you’re not sure where your business falls, it’s almost definitely a service-based business.

On the other hand, if your business creates and sells goods, your exposure to liability greatly increases. More regulations apply (e.g. Consumer Product Safety Commission, health departments, and many others). You have more patent and copyright issues. 

Recap

If you read this and find that you’re a service-based business with one owner, chances are that regardless of your income, you might not need a lawyer.

But if you’re a business with two or more owners, definitely consider strongly hiring an attorney. Same goes for goods-based businesses. So then the question, how do you find a good one? We cover that here.  (LINK: I’m Convinced I need a Lawyer -- How do I find a good one?)

If you’ve made it this far without necessarily needing an attorney, let’s look at specific “starting a business” legal issues that most of the time don’t need an attorney but sometimes do. 

And if you’re feeling overwhelmed, you can always use tools like Legal GPS to help you “do legal” on your own without needing to hire an attorney. 

 

Why You Might Not Need a Lawyer:
Specific Legal Issues


It's not just number of owners, amount of capital, or type of business (i.e. service-based or goods) that affects the analysis. It's also specific types of legal issues that sometimes need a lawyer's help, sometimes not. Let's go over the most common issues when starting a business.

Sole Proprietorship, LLC, S Corp? Nonprofit or L3C -- Where do I Start?

Starting off, it can feel overwhelming trying to figure out what legal entity is best for your business. And a lot of times the more you learn about it, the more complex it becomes (I once had an entire semester of law school on just LLC v S Corp v C Corp that only scratched the surface of the topic). 

But this gets into the “rules of the game” concept. For the vast majority of the businesses, the rules are a lot easier to learn and identify what applies. For a few of them, the rules can be 100x more than others.

If you have multiple owners or your business, starting off, makes more than about $100,000/year in the first year, your rules exponentially increase and you want to consider hiring an attorney. Same goes if you’re a tech startup that plans to seek venture capital and pay equity compensation.

Cost Analysis: 

To hire an attorney to help you pick the right entity, it should cost somewhere between $500-$4,000, depending on your level of complexity.

Chances are that if it's simple enough to be resolved for about $500, it's also simple enough that you could DIY, but not always.

 

Company Formation Documents (e.g. Operating Agreement)

When you start off, no matter what entity you choose, there are certain forms and contracts your business needs.

If you choose to be a sole proprietorship and want to do business under a different name, you have to file a d/b/a (sometimes called “fictitious name registration.”). 

For an LLC, it’s Articles of Organization (sometimes called “Certificate of Formation”) and an Operating Agreement.

And for corporations, it’s Articles of Incorporation (a/k/a “Certificate of Incorporation”) and bylaws, possibly a shareholder’s or buy-sell agreement (if 2+ owners), and a few other documents depending on a number of factors. 

Do you need a lawyer for help with any of those documents? As every lawyer says, “It depends.”

If you have 2+ owners, it almost always makes sense to hire a lawyer. The amount of variations in a customized operating agreement for multi-member LLCs are exponential -- the fact that it should take a specialized attorney 8-16 hours to write a customized operating agreement (even when starting from a template) should speak volumes. Same goes for shareholder agreements for 2+ owner corporations.

But if you’re the only owner -- the variations in an operating agreement are much, much less. You should still have one, but most people could do it on their own. 

Cost Analysis:

As a single-member LLC, you should expect to pay between $500-$1500 for help with these documents. For multi-member LLCs & corporations, it will likely cost anywhere between $1500-$10,000. 

 

Common Contracts Every Business Needs

Most new businesses business starting off need most or all of these contracts:

  • NDA
  • Terms of Use/Privacy Policy for Website
  • Services Agreement (sometimes called "independent contractor agreement")
  • Lease
  • Purchase Order

It's important to get the right templates for these -- but in general, most of these are exactly that -- templates. For NDAs, there are very few changes companies make. But you can learn more in our Complete Guide to Nondisclosure Agreements.

For the terms of use and privacy policy, this depends on the purpose of your site. Most websites are like a "business card website" where you advertise what you offer and your services.

But -- are you selling products or technology through your site? And not using a third party website builder like Shopify? In that case, you have a more unique situation where more customization with a lawyer's help might be smart.

The lease is a potential exception -- if you're renting out a commercial space for a high dollar amount, having an attorney review your lease is probably smart. But if you're working in a coworking space or similar arrangement, the leases are always the same -- and always provided by the landlord, not you. 

Cost Analysis:

Most simple agreements drafted by an attorney cost between $300-$1,000/document. A custom set of terms of use and privacy policy agreements will likely cost between $1,500-$5,000. And a lease is highly situation-specific. 

Trademark Issues Related to Choosing a Business Name

Most new businesses overlook trademark implications that exist from the start. When you register your business, it can't infringe on another business's trademark. Just because your name was available in your state doesn't mean it's not infringing on a trademark. 

Example

The names "Google Legal, Inc." "Google Schools, Inc." etc. are available for any corporation to form in Missouri. But, Google has a trademark for the name "Google" across the United States -- so if you formed, spent money on branding, a website, a logo, building goodwill, etc. on any of those names, eventually Google would discover and require you to stop doing business under that name.

 

I use the example of Google because it's painfully obvious -- but that same scenario would hold true for any other company that had already trademarked the same or similar name that you formed your business under. 

So -- do you need an attorney to help you avoid that? Not necessarily. Instead, you can do a trademark search on your own and in most cases, be able to identify potential problems. Then later, if your company really starts to take off, it might make sense to hire a trademark attorney to button everything up. But you don't want to be paralyzed by the prospect that you could be doing something wrong -- and as a result, never even start the business. 

 

How do I Choose the Best Solution to Help Me "Do Legal"?

You have a few options.

Unlimited Capital + No Time

If you have unlimited capital and no time, then hiring an attorney almost always makes sense. It can be useful to understand the background to legal aspects of your business, but most importantly you want to make sure you hire the right attorney. 

 

Limited Capital + Wanting to Know the "Why"

If your capital is limited and you like to understand the “why” (like in Simon Sinek’s best Start with Why) and “how”, then using Legal GPS to help you “do legal” on your own makes a lot of sense. Legal GPS “pulls back the curtain” on how easy and intuitive a lot of legal aspects are in the beginning and gives you the tools to empower you to do it all on your own.

It takes a little more time initially but saves you considerable time and money in the long term and helps you make better deals understanding all the components, including legal aspects, that are involved. 

 

Limited Capital + Don't Want to Spend Another Minute on Legal

Companies like Legal Zoom and Rocket Lawyer can be effective if you don’t think care as much about the “why”, know exactly what you need to do legally, and don’t want to spend another minute learning about legal. They have limitations because they offer “starting a business” help in piecemeal fashion -- meaning you’d need to know how all the pieces and packages they offer fit together. But if you know all that, they could save you time in the same way hiring an attorney does so.

37 min read

7-Step Ultimate Guide to Trademarks for Businesses

By Chris Daming, J.D., LL.M. on Feb 23, 2021 2:39:17 PM

This guide helps you determine if you should register your mark for trademark protection. You’ll want to know (1) if you should do it, and then (2) determine if your mark is eligible for registration. Once you know that, we'll go over how to perform a trademark search, how to register your mark, and steps to take after registering to ensure you retain trademark protection.

And we'll do it all in 7 easy steps!

Step 1: Does your Brand Matter to your Business?

First, you'll want to determine if you even want to learn all this. Registering a mark only makes sense for certain businesses ("Mark" means service mark or trademark, so we'll use trademarks to simplify everything).

Specifically, it makes sense if your brand matters to your business.

By using a mark to represent your brand you are telling the public that they can expect a certain kind of quality from a product that has that mark. Registering your trademark gives you legal protections in your mark that ultimately help protect your brand. These include:

  • You have protection throughout the United States.
  • You are presumed, by the courts, to be the owner of the mark.
  • The public is notified that you are the owner of the mark through the USPTO’s database.
  • Registration stops others from registering a mark similar to yours.
  • You can stop others from importing goods with your mark into the U.S.
  • You can sue for damages when others use your mark.
  • You can use your U.S. registration as a basis to register in other countries.

If your brand matters, then the next step is to make sure your Brand would be eligible for trademark protection.

 

Step 2: Is your BRAND eligible for trademark protection?

Are you using an identifying name, sound, color, smell, logo, or symbol to communicate your brand to the public? Are you using your mark in “interstate” commerce (in more than one state?). Do you plan to do this in the future? If you answered yes to these questions you probably have something you can trademark. 

Are you using anything to identify your brand to the public?

First determine if there is any name, logo, symbol, or sound that you are using to identify your brand to the public. Consider some examples:

  • Nike uses both the famous swoosh and the block lettering spelling out “Nike” as their company trademark;
  • The Simpsons trademarked both the words “The Simpsons” and the “D’OH!” sound that Homer makes;
  • Tiffany’s jewelry has trademarked their name and the Tiffany blue color they use on their packaging.

If you are using something to identify your brand to the public you meet this qualification. This is true even if that “something” is your own personal name (think of Coco Chanel, Louis Vuitton, or Vera Wang).

Are you using the mark in interstate commerce?

The next step if to consider whether you are using this mark in interstate commerce. This question is simply asking whether you are using your mark, in business, across state lines. Here are some examples:

  • Your business is online in your home state of Indiana and you have a customer in another state;
  • You have a retail store in Missouri that ships your products to a retail store in Illinois;
  • You work from home in Kansas and sometimes travel to other states to meet with clients.

If your business operates across state lines and you use your mark in those interactions, you are engaged in interstate commerce. This also means that you have a mark you can register.

If you are not currently using the mark in interstate commerce, you may still have something you can trademark. The USPTO allows marks to be registered for future use. Do you have a legitimate (or “bona fide” as the USPTO calls it) intent to do so in the next three to four years? If the answer to this question is yes, then you also meet this qualification.

If your "Brand" is eligible for protection, now let's see if your mark that identifies your brand and company will be eligible.

 

Step 3: Is your mark eligible for trademark protection?

To be eligible, your mark must be "distinctive." Certain types of trademarks are too generic to qualify for registration. And it makes sense -- imagine a company selling bananas that wanted to trademark “banana” -- this would cause the English language to not be able to use that word, and would be terrible public policy.

Other types of trademarks are too similar to another mark to qualify. If you trademarked “Google,” you don’t want other internet search companies to be able to name themselves “Gogle” or “Googler.” Consumers would get confused and the knock-off companies would profit off Google’s goodwill. You’ll learn more about this in our trademark search post. 

But in a nutshell, trademark evaluations are heavily based on how likely they are to confuse a consumer. The stronger the trademark, the less likely it is to cause confusion. Strong trademarks are easier to register, easier to protect, and easier to use in commerce. 

For now, let’s dive into what makes a business name eligible for trademark registration. Specifically, the trademark must be “distinctive.” And the US Patent & Trademark Office (USPTO) uses five categories of strength to help you determine if your mark would fit that “distinctive” definition. 

We’ll start with the weakest category and work our way down to the strongest:

Probably Not Eligible for Protection

Generic Names

A generic name cannot be trademarked. A generic name tells the consumer the everyday term for the product. Examples might be:

  • “Clock” for a wristwatch;
  • “Tea” for a warm herbal drink;
  • “Water” for bottled water.

 

Descriptive

A descriptive mark simply gives the consumer some kind of description of the product. These are the second weakest and most likely to be denied for registration. Some examples include:

  • “Easy Bake Pie Crust” for a frozen pie crust;
  • “Instant Dinner” for a microwave meal.

 

Probably Eligible for Protection

Suggestive

A suggestive mark gives the consumer a sense of one of the attributes of a product without simply describing it. They require imagination, thought, or perception to reach a conclusion about the nature of the goods or services.

Compare suggestive to descriptive terms, which immediately tells you something about the goods or services. Some examples include:

  • “Chicken of the Sea” for tuna;
  • “Wite-out” for corrective writing liquid;
  • Legal GPS :)   

Suggestive marks are the closest calls (some descriptive marks might think they’re suggestive and vice versa), so here are some more examples in case your mark falls in this category:

Examples

SPEEDI BAKE for frozen dough was found to fall within the category of suggestive marks because it only vaguely suggests a desirable characteristic of frozen dough, namely, that it quickly and easily may be baked into bread.

NOBURST for liquid antifreeze and rust inhibitor for hot-water-heating systems found to suggest a desired result of using the product rather than immediately informing the purchasing public of a characteristic, feature, function, or attribute.

DRI-FOOT was held suggestive of antiperspirant deodorant for feet in part because, in the singular, it is not the usual or normal manner in which the purpose of an antiperspirant and deodorant for the feet would be described).

 

Arbitrary

Arbitrary marks are the second strongest classification of marks. All arbitrary marks take a word that can be found in the dictionary and apply it to a product that has nothing to do with that word. In other words, they apply the word “arbitrarily.” 

Some examples include:

  • “Apple” for computers; 
  • “Blackberry” for a cell phone;
  • “GAP” for clothing;
  • “Old Crow” for Whiskey.

 

Fanciful

Fanciful words are the most creative and strongest class of trademark available. They are simply made up words that can be applied to any brand because they weren’t in existence before the brand.

  • Microsoft;
  • Google (if you think “Google” actually means the number 10 to 100th power, I’ll save you time; that word was spelled “googol”);
  • Xerox.

Now that you know the spectrum of trademark strength, here are a few other considerations to keep in mind:

  • A strong trademark will not cause any confusion with another brand;
  • A strong trademark cannot cause confusion no matter how it is pronounced or mispronounced;
  • A trademark might be translated into another language in the future.

You can gain Trademark Strength through Actual Use in Business

Trademark strength also can be gained organically through its actual use in business. If you’ve been using your trademark for a long time, have a solid customer base, and the mark is often associated with your brand, you probably already have a strong trademark. Here is one way we’ve seen this come to life for another brand:

  • McDonald’s. McDonald’s may have faced some scrutiny if they’d applied for trademark protection of their name when the company first started. It is just a last name (and a fairly common one at that). Today, the name is so synonymous with the company that it is unquestionably a strong trademark.

Use these factors and considerations to increase the strength of your trademark before you apply to register your trademark. You’ll increase the likelihood of your application being approved and save yourself time and money.

 

Step 4: Determine if you Should Register your Mark

If you have determined that you have something you can trademark then you should continue to learn whether you should register the trademark. If you are using a mark in interstate commerce, this applies to you.

Still, you don’t want to just register any mark. Additionally, registration is not required to use your mark. Registration is expensive, time-consuming, and requires a good deal of work. If your application is denied you won’t get a refund. 

Understanding if you should apply for registration of your trademark is an important business consideration and investment in your brand.

Here are the considerations you need to go through when considering if you should register your trademark:

  • Do I have at least $500 for application?
  • Would it damage my business if someone else used my mark?
  • Do I want the public to recognize my business by this mark?
  • Am I willing to put in the effort needed to see the application through?
  • Do I want to stop others from using my mark in another business?

If you are answering “yes” to these questions then you have a mark that you should apply to register as a trademark with the USPTO.

If you are answering “no” here then ask yourself whether that “no” will be a “yes” in the coming years. Viewing the time and money you put into your trademark as an investment in the future of your brand should help you make the right decision on this issue.

Example

Will operated Salesly, LLC in Jackson Hole, Wyoming. Will did a trademark search when forming and saw he was the only Salesly that existed. Salesly sold a product that automated the automation of sales. They were only selling to customers in Wyoming for their first year.

A year later, Will started advertising using Facebook ads across the country. Shortly after, Will got a letter from an attorney for another Salesly that had recently formed and trademarked the name Salesly instructing Will to cease and desist from advertising across the country because the new Salesly had a federal trademark for that name.

Because Will didn’t register his trademark federally, he would have first priority to the name Salesly in places where he operated first--in this example, in Wyoming. But the federally registered new Salesly had trademark rights to the name in all places Will’s Salesly had not been operating in at the time of the trademark’s approval.

Will could’ve avoided all this by registering his trademark federally with the USPTO.

 

If you have determined that your brand is represented by a mark that you should invest in registering, continue reading to learn how to pursue registration.

 

Step 5: Perform a Trademark Search to Make Sure Your Mark is Available

Whether you want to register your trademark or not, you still need to make sure your business name won’t infringe on someone else’s trademark. 

Sometimes even if someone’s last name (surname) is generic, it still might have been registered as a trademark because it acquired the proper level of distinctiveness. For example, McDonald’s is a registered trademark, despite the fact that thousands of people in the U.S. have that last name. 

Similarly, the name “Schlafly” is a beer brewing company and was sued by another person named Schlafly who argued that the name was made famous by the other person, not the brewing company. The brewing company prevailed.

You have a few options for a trademark search. You can:

  1. Do it yourself; 
  2. Hire a company to do it (prices can range from around $200 to $800 for this);
  3. Hire an attorney to do it and provide a legal opinion (prices can range from $1000 to $5000 for this).

Most people do none of those three simply because they don’t know about it. But, we’ll walk you through some guidance if you choose to DIY (of course, we have to mention that you should always consult an attorney). Before you do the search, you should understand what to search for and -- if you find anything close to your mark -- what might be okay and not be okay.

First, your Mark Can't "Confuse" a Customer

Will a reasonable consumer confuse your mark with one that’s registered? Just imagine that a company in your hometown has a registered trademark. Then you travel somewhere else and see a name that looks or sounds similar. 

If you’re that person, might you think it’s the same brand? Is it possible you could confuse the brand in your hometown for the one you’re seeing at the store? If so, you can’t pick that name for your business.

Having trademark protection is great for everyone. It helps consumers know brands they can trust and avoid being deceived. It helps companies want to establish a good name for themselves. And once they do, it helps them ensure other people can’t profit off of that company’s hard work in building that brand.

 

Performing a Trademark Search

To start, make a quick list of words that could be used to describe your mark. If it is text (e.g. your company’s name), then you will search for that name and names that could sound or look/read similar. If it’s a symbol or logo, your list should include all of its attributes so that your search is more efficient.

Sound Matters. It’s important that the name you’ve chosen is not too similar to existing names that it may cause confusion. 

Example

Salesly, a sales company, could cause a customer to be confused if there was another company named Sailsly, Inc. They are spelled differently but sound the same. The test is, “is there a likelihood that a customer could confuse the new name with the trademarked name.” In the Salesly example, if someone was only hearing about the brand (as opposed to reading about it), they would get confused.

 

Start informally to determine if anyone has a common law trademark

In the interest of time you may want to begin with an “informal” internet search. If the mark can be found quickly and easily by using Google, it makes sense that you start there. Search for the terms on your list in both the regular search and image search. Make a list of companies you find that are using something that appears to be similar to your mark and use these results to search more formally.

Related -- what are common law trademark rights?

Perform a Tess Search on the USPTO Website

You should also search on your state and the federal trademark websites.

The USPTO has a database, known as the Trademark Electronic Search System. You can find it here.

Within TESS, you can search for a basic word or a word and design combination. If you are searching for a design (rather than a word) you need to search the USPTO’s design database within TESS. Start by reading the design code manual. The platform is easy to use and equipped with step by step instructions.

Check out the USPTO resources as well to improve your chances of completing a successful search. They have incredible resources that can give you a lot of guidance, which are linked here. 

Note that when you’re doing a search, you don’t necessarily need to include your corporate or LLC designation (i.e. “LLC” or “Inc.” or “corp”)--unless that’s part of your branding. 

Almost no customer identifies a company by their type of entity. For example, if we were searching for Legal GPS trademarks, we’d search for “legal gps” and "legalgps" (among other things) rather than “Legal GPS, Inc.” We’d also search for GPS, legal, global positioning system, and other variations.

What if you find a Similar Mark?

It depends, but all is not necessarily lost. See below. It’s not exact, but it helps you determine if you would be infringing on someone else’s trademark (or vice versa). 

You can also see a bunch of great examples on the USPTO of confusing similarity with marks.

You can register a mark that is identical to one that already exists if the goods or services you make are almost completely different from those made by the other company and the mark isn’t extraordinarily famous or distinctive (confusing? We try to simplify it). 

You can’t make a shoe company and name it Google or a furniture company named Kleenex. Those companies are either so unique and large that everyone would assume your similarly named company was actually owned by them.

 

If you find a similar that that isn't federally registered with the USPTO, first where where they operate.

If they’re not registered, they still arguably have common law trademark rights. If they operate in a completely different market than yours, it’s probably okay, but consider consulting an attorney.

Sometimes your business might be national, especially if you’re an online-sales business; but if you’re a lawnmowing company in Kansas City, Missouri, and the similarly named company is a lawnmowing company that serves a neighborhood in Austin, Texas, you’re probably not overlapping markets.

But if you’re an arts and crafts company that sells nationally on Etsy, you arguably have the entire country as your market.

 

If you operate in the same geographical market, determine if the goods or services are similar.

If they’re completely different, and the name isn’t distinctive (for example, if it’s a suggestive name), you might be okay. Here are some examples:

  • If you’re selling hats, clothing is part of your industry;
  • If you’re a food truck, restaurants and catering are part of your industry;
  • If you sell technology, food is likely not part of your industry--so you’d be okay unless the company was extremely famous (Apple).

 

If the mark is similar and industry is similar, check to see if the mark is active or "dead."

It will say this when you do a TESS search, which is explained below. If it’s dead, you might be able to use it, but first you’ll want to see if the original owner still uses it. If they do, they’ll still be entitled to common law trademark rights.

If you’ve completed your trademark search and have no confusingly similar names, then you’re ready either to form your company knowing your name is protected and/or register your trademark. You should also consider hiring an attorney to double-check your results.

 

Step 6: Register your Trademark with the USPTO

Acting in a timely manner by putting in your application ahead of potential competitors will help (but not guarantee) that you are the one who ends up owning the trademark. 

Although other people can object to your use of the mark, registration creates a legal presumption that acts as evidence of ownership if your ownership is ever challenged in court. In short, registering sooner rather than later will help you protect your mark

Begin the application process by choosing which application best suits your needs. Your only application filing options in the Trademark Electronic Application System are:

Application Options

Option 1: TEAS Plus

  • Your minimum cost is $250 for this application. 
  • You need to file a complete application the first time (i.e. no extensions) and you must agree to conduct all correspondence electronically. 
  • You also can only choose goods and services identifications that are already in the goods and services ID manual and have been approved for use by the USPTO. 
  • If your good or service is common and easily described, this is probably your best bet.

Option 2: TEAS Standard

  • Your minimum cost is $350 for this application. 
  • You don’t need to file a complete application on the first try but you must agree to conduct all correspondence electronically.
  • You do not need to select an identification of goods and/or services from the Trademark ID Manual or satisfy the other TEAS Plus requirements at the time of filing.
  • If your good or service is not as easy to describe, this might be your best choice (Legal GPS, a SaaS platform, used this option to trademark its name)

Complete the Application

You will need the following information for the sections that are indicated and you should have it ready before you begin filling out the application. You need to read the application carefully and click on the linked explanations within the application to be sure you are filling it out correctly. 

The next sections will break down the various parts of the application, regardless of which application you choose.

Name of the owner of the mark

The owner of the mark is the legal entity that will own the registered mark. The information you put in this section is available to the public. For this reason, you should consider using a business address or a post office box, even if you are filing as an individual.

  • If you have a legal entity, you have to use that entity’s full name in the applicant name section. 
  • If there is no legal business entity established use your individual name. 
  • If there are two people involved and there is no legal entity, use the “Joint Applicants” option and put the information about both individuals. 
  • Always be sure to put in your country of citizenship if there is no legal entity and the state of incorporation if there is a legal entity.

Note: Make sure to check the box that authorizes the USPTO to communicate with you via email (this is found in the box labeled “Internet E-mail Address”) if you are doing a TEAS RF or TEAS Plus. This isn’t required for TEAS Regular, but if you want to communicate via email for efficiency purposes, you should still check the box.

Drawing

This isn’t a literal “drawing,” it is a depiction of the mark. The exact depiction you submit will be displayed on your certificate and will be your official trademark. There are a few different phrases to be familiar with here:

Standard Character Mark
  • This is a plain type font mark that displays your business or brand name alone. You should use this if you want the ability to display the name in any size or any font.
  • You shouldn’t use this if your mark is combined with a symbol,  shape, or something else that is not a number and letter combination written out. 
Special Form Mark
  • This one is a combination of shapes, characters, or other designs. There are two kinds:
    • Stylized Mark. This is where wording appears in a specific font.
    • Design Mark. This is a combination of wording and a design or a design alone.

Special Form Marks have a field for “literal element.” Here, you must fill out all of the words, letters, or numbers that appear in your trademark. Don’t include any numbers, words, or letters that don’t appear in your mark.

Special Form Marks also have a field that calls for a “Description.” This description should be accurate but not unnecessarily specific. Here are some examples:

  • This mark consists of stylized wording “[Words or numbers your mark includes].
  • This mark consists of the wording [Words or numbers your mark includes] and the first three letters are outlined in blue with the first three letters outlined in red.
  • This mark consists of the wording [words or numbers you mark includes] and no colors are claimed. 
Sound Mark
  • This is a trademark that is a sound. 
  • Examples of this include the MGM Roaring Lion, the AOL “You’ve got Mail,” or the “D’OH” sound Homer Simpson makes.

Be aware that every variation of a trademark requires a separate application. If you have a name, a special font for your name, a logo, and you also use the name and logo together sometimes, you probably won’t want to file and pay for four separate trademark applications.

Depending on your business needs, consider filing for the one you will most often use to save time and money. Remember that a Standard Character Mark will allow you to have rights to the name that is trademarked no matter what font, size, or color is used.

Additional Statements

Click the box after you’ve completed the “Drawing Section” to see if any of the additional statements apply to your mark. They are not commonly used and it won’t help your application to include statements that don’t apply. 

You’ll see asterisks here but the statement is only required if it actually applies to your mark. The USPTO warns applicants “if in doubt, leave it out.” If you read through the Additional Statements list and none applied, simply un-check the Additional Statement box and the list will disappear.

Identification of Goods and Services

This is potentially the most important section of the application. Inaccurate information will likely cause your application to be rejected. For this section, you need to identify whether you have goods or services and briefly offer a description of them.

Goods

You have goods if customers purchase something tangible from you. Examples might be:

  • You sell pens that you designed to customers who come into your shop;
  • You are a photographer who sells photos of flowers bearing your watermark to customers who didn’t hire you to take those photos;
  • You make designer chocolates and cakes in your bakery to sell to customers.
Services

You have services if customers pay you to perform a service. Examples might be:

  • You own a company that customers hire to design personalized pens;
  • You are a photographer who is hired to perform photo shoots;
  • You are hired to cater specific desserts for events.

To make this determination ask yourself if the customer is paying you to perform an activity that you would not have performed without that particular customer. If the answer is yes, you are providing a service. If you have a company that offers both goods and services, you need to identify and describe both. 

The USPTO offers an online ID Manual with codes for common descriptions of goods and services. You should check this manual and if you find a code that matches your business, use it in the description section. 

If there is no code, give a general description in your own words in the type box at the bottom of this section. You can use the ID Manual within the form itself or enter the descriptor into the free form text box on the same page. The text box is more likely to lead to a rejection; the ID manual is the safer route. To search the manual;

  • Click the circle next to “Searching IDManual”
  • Click the button below labeled “Add Goods/Services”
  • Type in the goods or services you are searching for
  • Click “Go”
  • Read each description closely
  • Check the boxes that apply
  • Click the “insert checked entries” button at the bottom of the list
  • If one of the entries requires more detail to apply to your business, type the detail into the text box that appears on the next page.

Don’t use too many descriptors. Only use those that specifically apply to your business. If you change your goods or services after you are registered, you will have to submit a new application. More descriptors will cost you more money in fees so be as accurate and concise as possible. 

Filing Basis 

Your filing basis is something you need to understand for Section 1 and Section 44. 

  • Section 1. This section is the most common basis for filing. This covers the use of the mark in interstate commerce, U.S. territorial commerce, or commerce between the U.S. and a foreign country.
  • Section 44. This section is much more rare and usually applies to applicants for foreign applicants who are using another country’s approval of their trademark.

You must be either (1) using the mark in interstate commerce or (2) have a genuine intent to use the mark in interstate commerce. Only include the description of goods or services that meet one or both of these requirements. Do not include descriptions of goods or services that you aren’t using the mark for and don’t intend to use the mark.

If you’re already using the mark in commerce, you need to choose Section 1(a).

  • This section will require you to submit a “specimen” of the mark. 
  • A specimen is an example of how the mark is currently used. Think of a logo on a t-shirt, a label on a bottle, or a watermark on a photograph. 

If you intend to use the mark but you haven’t yet, you need to choose Section 1(b).

  • The USPTO considers “intent to use” to be something you are going to do within the next three to four years.
  • This section requires you to submit a “specimen” of how you plan to use the mark in the future. 
  • This will require additional fees and forms in the future.

1(b), the intent-to-use, is more common and allows you to submit your application before you’ve launched your product or service.

If you are not a U.S. citizen or resident, and you have filed an application for trademark protection in a country who is a member of one of many international trademark treaties with the United States, you should use Section 44(d).

If you are not a U.S. citizen or resident, and you have already received trademark protection in a country who is a member of one of many international trademark treaties with the United States, you should use Section 44(e).

Correspondence

This section is straightforward. Enter your information clearly and accurately. If you are appointing a representative within the U.S. (because you do not live in the U.S.) be sure the check the box that indicates the “domestic representative” box.

Signature

The simplest and fastest way to sign the application is to do it online. At the top of the page, you’ll see a “sign directly” option. Click the circle directly to the left of this option. 

  • Be sure to include a forward slash both before and after your name in the “Signature” box - this indicates an electronic signature to the USPTO. 
    • For example, Jane Doe would type /Jane Doe/ in the “Signature” box and then type Jane Doe in the “Signatory’s Name” box directly below.
  • If you own the mark or the business that owns the mark, type “Owner” in the next box, labeled “Signatory’s Position.” 
  • If you’ve applied as Joint Applicants because there is no business entity and you own the mark with another person, you need to click “Add Signatory” button at the bottom of the page. Then, simply repeat the steps above for the next signature.
  • Click the “Validate” button to continue. 

Validation

Click each of the categories shown to ensure that all of the information you’ve entered is correct. If you aren’t ready to file, simply click the “save form” button so that you can return to your information at a later time. Read the notice, click the box stating that you’ve read the notice, and click “pay/submit.” 

Once you pay your fee, congratulations! You have submitted your application. Within the next three months, an agent will begin the review process.

 

Step 7: Finalize the Application and Protect your Trademark

Respond to all USPTO Communications

After you’ve applied for federal registration of your trademark, check on your application at least once every three months, if not more often. 

You’ll do this by going on the USPTO’s online system known as the Trademark Status and Document Retrieval. You’ll type in your Serial or Reference number in the search bar and check the status of your application. 

If the agent needs further information you will see this on the homepage along with a new deadline. If you fail to keep up to date with your application, the USPTO may deem it abandoned and you’ll have to start the application process from the beginning. 

The USPTO will likely communicate with you through email. This means that you need to keep your email address updated and watch for emails from uspto.gov domains. If you need to change your address, use the Change of Correspondence Address form

When you receive a communication from the USPTO be sure to:

  • Read the entire letter;
  • Wait 48-72 hours to respond;
  • Respond through the TEAS platform with the Response to Office Action form;
  • Respond within the deadline;
  • Address every “office action” the USPTO sends you;
  • Pay close attention to any suggestions the USPTO provides;
  • Contact the USPTO examining attorney if anything is unclear.

 

File your Statement of Use with the USPTO

 This form will require that you provide the following:

  • The date the mark was first used for anything;
  • The date the mark was first used in commerce;
  • A signed declaration;
  • A specimen of the mark’s use;
  • A filing fee.

Specimen

Your submission here will depend on whether you provide goods or services.

Goods 

If you apply for goods you can submit a specimen of the label or logo that is on or attached to the goods. Tags, packaging, and labeling counts here. 

  • If you sell clothing, you can submit the tag or logo you attach to the clothing;
  • If you package your goods and that package includes a logo, you can submit the packaging.
  • If your logo appears on goods you sell, you can also submit a photo of the logo as it is used on your goods.

Services

For services, you can submit many different kinds of materials as long as they show the mark in use with the services you provide. Here are some examples:

  • You can submit a brochure where your mark appears with a pricing list;
  • You can submit a flyer where your mark appears with FAQs about your business;
  • You can submit a screenshot of your website where your mark is used next to descriptions of the services you provide.

Specimens that can be Refused

Some specimens will be refused. Here are some examples:

  • Anything Ornamental. 
    • This is a USPTO technicality. If the specimen you send is really your logo being used as a decoration, it will be refused. 
    • (Think about a shirt that shows a large Gucci label, earrings that are in the shape of the Chanel logo, or an oversized belt buckle in the shape of the Louis Vuitton logo.); 
  • Advertising or marketing materials used as specimens for a company that sells goods;
  • Invoices used as a specimen for a company that sells goods; 
  • Business cards used as a specimen for a company that sells goods; or
  • Mock ups or digital representations of how you might use the mark in the future.

When to File

You must file the Statement of Use within six months. 

If you can’t do it within six months, you must file an extension. The extension will only last six months and there is a fee. You can file an extension up to five times but after the first extension you have an additional requirement of demonstrating that you are making an “ongoing effort” to file the Statement of Use. 

You might want to file an extension if:

  • You haven’t used the mark in commerce yet;
  • You cannot find a specimen that meets the USPTO’s standards; or
  • You don’t have the filing fee yet. 

Without a properly filed Statement of Use, you will not be granted a trademark registration. This is just as important as the initial application.

 

Watch out for Unofficial Solicitations

If you’ve ever taken out a mortgage or a car loan, you’ve probably seen some deceptive solicitations that insist you “ACT NOW” or pretend to be a “final notice” about your loan. If you apply for a trademark, this will likely happen again.

Private companies will reach out to you claiming that you should pay them to keep your application alive. They might be selling a service to appeal your application, for example. This could be long before you need an appeal (if you even need one at all). 

They might sell you a “guarantee” - of which, there is none. They also might sell expedited application services. All of these, and more, are not exactly accurate and many are filled with false representations. 

Solicitations may include your serial number or other seemingly official information about your application. 

Steps to Ensure Correspondence is Official

Here are some steps you should take to be sure that what you are reading is official and actually relevant to your application:

  • Check your email for correspondence from a uspto.gov domain address; 
  • Check the Trademark Status and Document Retrieval and search for your application to see if there are any updates;
  • If you’re unsure if the correspondence is official or not, call the USPTO at 1 (800) 786-9199 and let them know you received some questionable correspondence;
  • Check all letters for return addresses (the official USPTO is in Alexandria, VA), a USPTO government seal, or a contact phone number;
  • Read the fine print on the letters and emails you receive.

You’ll probably receive even more solicitations once the USPTO begins communicating with you during the review process. This is because these communications are public record, available online, and are monitored by private companies.

Be on guard for suspect phone calls, letters, or emails. You don’t want to end up wasting time, money, or energy from a solicitation that doesn’t even apply to your application. 

 

Protect Your Trademark

Once you have a registered trademark, you can indicate that to the general public by using the “Ⓡ” symbol next to your logo. (This is in contrast to the ™ symbol which indicates that the mark is unregistered.) Using your mark often is also important to keeping it active.

In order to make sure you retain protection in your mark, you essentially have to “police” how and where your mark is used. You do this by monitoring your competition and occasionally performing an informal search to see if your mark appears in connection with someone else’s business. 

 

Example

Jude had a company called Templeton’s Donuts, which sold donuts to the residents of Columbia, South Carolina. A year after Jude’s company began, Jude’s best friend, Chris, bought a pig named Templeton and wanted to also open a donut shop named after his porcine.

Jude was fine with it and they both got along great for the first couple years until Chris got in a car accident that damaged his brain and turned him into a nightmare to be around. Jude and Chris had a falling out and Jude was sick of Chris stealing Jude’s goodwill generated from his donut shop so told Chris to cease and desist from operating his donut shop by the name the Templeton.

Chris hired an attorney and argued that Jude had abandoned any common law trademark rights by not enforcing his trademark infringement rights earlier. And that Chris had relied on Jude’s abandonment when establishing his own goodwill under the name “Templeton.” Chris’s attorney was right, and Jude could’ve prevented all of this by enforcing his trademark rights earlier against Chris’s company.

 

Also, keep an eye on the USPTO’s Official Gazette which is published weekly and tells you about new trademark applications. If you find one similar to yours, you have one month to challenge it with the USPTO. There are several private companies that you can pay to do these actions for you if you decide that hiring them would be cost-effective. 

What is trademark infringement?

It’s the unauthorized use of a mark--any mark--in a way that could confuse a buyer. The “mark” here would be whatever your trademark is - it could be a logo, slogan, colors, design or even sound. It’s anything consumers might confuse with your trademark.

Why is this mistake going to harm my business?

Here are the biggest reasons why protecting your trademark from infringement is important:

  • Weakening of the mark

When someone infringes on your TM, meaning they use a similar mark or any mark that causes confusion with your mark, your mark necessarily becomes less and less distinctive. The more the infringing mark gets established with use (when you don’t stop it), the worse the confusion gets and the weaker your TM gets. The weaker your trademark gets, the more likely you are to not be able to enforce its protections.

  • Abandonment

Also, failure to protect you mark or act on infringement may be considered as evidence of abandonment. Remember that TM rights are only protected as long as you use the mark as a trademark. If you are deemed to have abandoned your mark, it means you are considered to have stopped using it. Consequently, the protection over your trademark stops as well.

  • Loss of TM or TM Rights

The weakening of your trademark or abandonment, if you don’t do anything about it, can eventually lead to loss of your trademark rights altogether. What’s worse, the original infringer may end up with better rights than you in the end.

  • Loss of income and/or reputation

TM infringement can affect your bottom line in 2 ways: loss of sales - when buyers get confused and buy the infringer’s product when they intend to buy yours - and loss of patrons when, thinking they got your product, they are disappointed by the quality of the infringer’s product they bought by mistake.

How do I know if someone's infringing on my mark?

Legally speaking, three elements must be met to prove that infringement has occurred.

  1. You have to own the mark - You must have a bonafide trademark: a mark that you use to identify the goods or products you offer to your customers. A trademark can’t just be a decoration; it has to be used on your products so that consumers know they come from your brand. This element is covered extensively in the trademark background materials, so we’ll focus on the last two elements below:
  2. Subsequent use - This element is very specific, and three requirements must be met:
    1. Subsequent use - The use must have occurred after you established your trademark. In other words, the infringer used the mark after you did.
    2. Unauthorized - Simply put, you did not authorize the infringer to use the mark. For instance, you didn’t create any type of agreement or license with the infringer.
    3. “In commerce” - The mark must have been used in commerce, meaning that the unauthorized use was in connection with the sale, advertisement, or distribution of products. If someone has used your trademark but it was not done in reference to the sale, advertisement or distribution of a product, the unauthorized use wouldn’t be considered infringement. One example of a non-authorized but non-infringing use would be a parody in which the use of your trademark involves humor or satire.
  3. The use of the mark must be likely to create confusion for buyers. - This means that the infringer’s use of the mark will cause consumers to be confused between your product and the infringer’s product. In that case, the infringer would likely be benefiting from using a mark that is infringing on your trademark. If there’s no confusion, there’s no trademark infringement.

How can you tell if there is a likelihood of confusion?

Courts that consider this question look at the following factors:

  • Marks

    Here you need to look at two things in relation to each other:

    1. The distinctiveness of your trademark

      If it’s strong and easily distinguishable, there’s a greater likelihood of confusion. If you have a completely arbitrary trademark like “Google” anything that sounds or looks similar will result in confusion. The logic is - you’re the only using that mark so if someone sees it on anything then you must have made it.

      Contrast that with a generic mark, like an element in your mark that is associated with your type of product (regardless of who made it). If your mark is more generic, chances are there will be a lot of companies with similar marks. There’s less of a chance of confusion because the presence of that element in a mark doesn’t tell people about the source of the product: it could have come from any one of a number of companies.

      Think of the word “coffee” or a picture of a bean for coffee shops: if you see it, you think coffee, not one particular coffeeshop. Contrast that with when you see an apple on any gadget, there’s only one company you’d think that gadget came from.

    2. The similarity of the two marks

      The similarity we’re looking for is not simply looking alike; they don’t have to be identical. Similarity could also means the following:

      • Are the dominant parts (what you would remember about the mark) of the marks are the same or similar?
      • Do they mean the same thing? (in terms of connotation, meaning, or translation)
      • If you read them aloud (when applicable), do they sound similar or the same?
      • Do they contain the same words or characters rearranged?

Note: An exception to this includes famous trademarks. They are given more protection. The marks don’t have to be as similar for there to be infringement if the trademark is famous. If the trademark is famous, you won’t necessarily have to prove that the level of similarity causes likelihood of confusion; instead, you can just show that people are making money off of simply associating their products with yours. Good example, Charbucks was found to be infringing on “Starbucks” because the latter was famous. Same with “South Butt” and “North Face.”

  • Relatedness of the products

    Next, consider the products themselves that contain the marks. Are they the same or related, or are they completely disconnected from each other? If they’re related, it’s easier to think that they come from the same company. As an example, consider the Nike trademark. You see this trademark on many products from shoes to bags to clothes. If a competitor were to use a similar mark on socks, it would be easy for consumers to think that those socks were made by Nike. Consider instead that a bag of chips includes the Nike trademark. Most consumers wouldn’t assume the chips are related to Nike since the product is so dissimilar from the products that Nike typically sells.

  • Usual/Target buyers

    The type of buyer also matters. If a buyer is choosy when purchasing the product, they’re not as likely to be confused because they’ve spent considerable time researching the buying process. For instance, many consumers spend a great deal of time researching major purchases like cars or computers. On the other hand, if you’re in a store buying something fairly commoditized, like printer paper, you’re less likely to look at the packaging closely. In that case, there’s a great likelihood of confusion.

  • Actual confusion

    Finally, if you can show that buyers are already confused between your product and another product using your trademark, that’s virtually a slam dunk in proving the likelihood of confusion.

To sum up: Infringement is not just when someone uses the same trademark as you. It includes using a similar mark or any mark as long as the use will cause confusion in relation to your products or the infringer’s products. When you come across a mark that might be infringing your trademark, you can use what we discussed on how to spot infringement to see if you should take action against these marks.

If someone is infringing on your mark, do this

If you find someone else using your mark, you can take these steps:

  • Send that person or business a Cease & Desist Letter;
  • Take photos or screenshots of them using your mark (include the date);
  • Save copies of all letters and photos;

If the use continues, you’ll probably want to hire an attorney to recover money for the infringement. You should talk to your attorney about:

  • How much lost business you can show;
  • Whether the other party can cover the damages;
    • For example, if they are insolvent or have no actual revenue or assets, it might not be worth your time to sue them.
  • How much the lawsuit will cost you (i.e. attorney’s fees);
  • How to calculate any other damages you have.

Maintain Required Documents with USPTO

Finally, you have to maintain the required documents with the USPTO. During the life of your trademark, there are a couple of specific filings the USPTO needs to keep your mark active. You need to: 

  • File a Section 8 Affidavit of Continued Use after five years (but before six years) from the date of registration. 
  • Do this again after the ninth year (but before the tenth). During this time period, you also have to file a Section 9 Request for Renewal
  • This combined Section 8 & 9 filing is due every ten years after the first time you file it. That means, in-between years number 19 & 20, again in between years number 29 & 30, again in between years 39 & 40, and so on. 

 

10 min read

A Complete Guide to Copyrights for Businesses

By Chris Daming, J.D., LL.M. on Feb 23, 2021 12:20:48 PM

This guide helps you better understand copyrights. You'll learn what can be protected, does it make sense to register your work, who owns the work, how to register, and how to protect your copyrights.

The main reason to register your work for copyright protection is to protect the work from others using it. You automatically are granted some protections when you create your work. But, registering a copyright gives you additional recourse if you decide to sue someone infringing on your copyright.

The simplest question is, “Will you sue someone if they infringe on your copyright?” If the answer is no, then registering your work probably doesn’t make sense. And if the answer is yes, it probably does make sense. But you can learn about all that in this guide.

Do you have something that can be copyrighted?

The first thing you need to know about copyrights is whether you have something that is actually copyrightable. This is a three-part question. You need to ask:

  • Is the work original?
  • Is it tangible?
  • Was any level of creativity involved in making it?

If the answer to all three is yes, then your answer is yes, you have something that is copyright-able.

To be even more direct, here is a list of things that you can copyright (if you make them): advertisements, books, essays, manuscripts, screenplays, scripts, directories, photographs, greeting cards, sculptures, jewelry, glassware, videos, film strips, sound recordings, engineered drawings, architectural drawings, drawings, songs, software, codes, designs, catalogs, and compilations of any of these.

What “Can’t” I Copyright?

If you read the list of things you can copyright, you’ll notice that it’s pretty long. This might make you wonder, what can’t I copyright?

You can’t copyright anything that isn’t original or isn’t tangible. Original means no one has made the thing in the way you did before. Tangible means it is something you can hold but keep in mind that electronically stored things count, too (videos, websites, recordings, all count as tangible). If the thing is something that would have been tangible before the internet, and it’s on the internet now, it counts as tangible. If you can give the thing to someone in a way that doesn’t require you to speak it out or act it out, it is probably tangible for copyright purposes.

To really hammer home this point, here are some key examples. You cannot copyright an idea, a method, system, process, fact, logo, slogans, name, dance move, expression, short phrase, articles of clothing, scientific principles or discoveries, or untranscribed speeches.

Determine if You Own the Work (Copyrights)

If you are the author or creator you are also likely the owner. This only becomes more complicated when you hire someone or are hired to create work for someone else.

If you hire someone to create work for you, first ask if they are an employee or an independent contractor. If they are your employee, and the creation of the work was part of their job, then you are considered the author of that work. You own the copyright.

If they are not your employee and they are an independent contractor there is a two-part test to determine who owns the copyright. In legal jargon, you own the copyright if it is a “work made for hire.” A work made for hire is: A work that is specifically ordered or commissioned; and Is being used as a part of a collective work, part of a motion picture, a translation, a supplement, a compilation, an instructional text, a test, answers for a test, or an atlas.

If your work meets these two tests and you have a written agreement that specifies the job is a “work made for hire,” then you own the copyright in the work created by the independent contractor.

Determine if the Work Should Be Registered (Copyrights)

Make a personal and/or business decision about whether you should register for copyright protection. When you think about registering your copyright, you need to think of it in terms of a future lawsuit. To do this, think:

  • How important is this copyrightable thing to my business?
  • How much business would I lose if someone else duplicated the thing?
  • How much money would I need to recoup to recover from that lost business?

The reason you need to think about this is because copyright registration determines how much you can recover in a future lawsuit. In a copyright lawsuit you can recover two types of damages:

Actual and Compensatory

You can recover the money that you lost due to someone else duplicating or using your work. (This person is called the infringer because they’ve infringed on your copyright.) Proving actual damages is tough, requires a detailed legal analysis, and (a lot of times) isn’t even worth the cost of a lawsuit.

Statutory

Statutory damages help where A&C damages can’t. Congress wanted to protect copyright owners in the Copyright Act so they created a special type of damages for infringement suits. These damages are between $750 and $30,000 per infringement.

Even better, an infringement suit doesn’t require that you prove the infringer knew that they were infringing. If you can prove that, you can recover up to $150,000 per infringement plus punitive damages (these are the kind the court awards to punish the defendant for their bad behavior.)

If you sue someone for infringement before you register, you can only recover actual damages. If you someone after you have registered you can recover actual and statutory damages. Except in very limited circumstances, you cannot even bring a lawsuit for infringement until you’ve registered your copyright.

Example

Will wrote a book about the struggles of launching a successful app. He wanted to take advantage of the attention he was been getting for his app and convert that into some extra money from selling his book. He told his frenemy Chet about it, who begged him for a copy of the manuscript so he could offer some pointers.

Will sent it to Chet, who posted it on his website for people to download for free. When Will was about to launch, he asked Chet to take it down to make sure people didn’t just download that free version. Chet declined, so Will had to wait until his copyright registration was finished so he could sue Chet to force him to stop.

Will could have avoided this had he registered his copyright earlier.

 

Apply for Copyright Protection

Copyright protection is time-sensitive. If you do not register it before an infringer duplicates it, you’ll recover much less in a lawsuit. Copyright registration also takes away the defense that the infringement was accidental.

It is good practice to mark your copyrighted works with a ©, followed by your name, and the year the work was completed. This isn’t a legal requirement but it does offer some legal protection. The © notifies any potential infringers that your work is copyrighted. In any future lawsuit this will help you recoup damages and stop the infringer from claiming ignorance.

The © does not mean that your work is registered with the U.S. Copyright Office. If you have works that are copyrightable and works that you should copyright, you need to register them with the U.S. Copyright Office. To register copyrights:

  1. Visit the USCO’s online portal
  2. Complete the online forms;
  3. Enter your payment information; and, 
  4. Upload copies of your work. 

In about a month, the USCO will send you a certificate verifying your copyright registration! 

Protect Your Copyrights

You protect your copyrighted works by watching out for duplicates of your work (there are plenty of online services that will help you do this) and notifying infringers every time you see them. 

If your work appears on a host site like Etsy or Youtube, you’ll send a “Takedown Letter” to Etsy. Etsy can’t be sued for copyright infringement but they are required to remove infringing works from their website once they’re notified they exist. This is the law known as the Digital Millennium Copyright Act. Each of the major host sites will have information about the DCMA and Takedown Letters on their own website.

If your work appears on an independent website you’ll want to send a Cease & Desist Letter to the business. Send your letter through certified mail to be sure that you know when it was received. If you have an email address of the business, you should also send a copy through email.

Regardless of which letter you send, make sure you include:

  1. A description or image of your copyrighted work;
  2. A description or image of the infringing work;
  3. The location where you found the infringing work;
  4. Your contact information; and,
  5. A statement that you are making the request in good faith, under penalty of perjury, the information in the letter is accurate, and that you are the owner of the copyright. 

Keep copies of all correspondence and monitor the website where the infringing work appeared. 

Copyright Mistakes to Avoid

 

Fair Use: Make Sure You Don't Infringe on Other Copyrights

Under Fair Use, you can use other people’s copyrighted material for free if it’s for commentary, critique, reporting, or educational purposes. However, that’s just the first part - and other factors like the kind of work used, what you’re using it for, how much of it is being used, and the effect that your use has on its marketability will be considered in determining if it’s “Fair Use.”

Does this apply to me?

Yes, if you use copyrightable material that you don’t own.

Why is making this mistake going to harm my business?

This can harm your business because once you go beyond fair use in your use of copyrighted material without someone’s permission, you’re infringing on their copyright. This opens you up to liability. You may be sued for copyright infringement which could lead to sizable damages.

You could avoid this by:

The best tip to make reduce the possibility of falling into copyright infringement is to just get the permission of the owner if you plan on making money, directly or indirectly, off of his work. Other than that, you can do 4 things:

  1. Limit the amount of the original you use to just what’s necessary to your purpose;
  2. Make sure you’re not giving away the valuable aspects of the original work;
  3. Transform it as much as you can;
  4. Make sure you’re using it for the purposes allowed under fair use.

Example

Will wrote an e-book about his struggles when he was making his app. He was giving it away for free as this was his way of giving back after the huge success of his app. Will’s goal for the book was to make it easier for other people to launch their own apps. So what he did was to gather the books he read while making his app and essentially condensed the key secrets of each book into his own ebook.

His thought process was that he’d provide the nuts and bolts of each of those books for free so others wouldn’t have to spend money and waste time to learn the lessons he learned. To avoid liability, Will made sure to diligently cite each of his sources in his ebook.

A week after the release Will started getting emails from the publishers of the books he “cited,” demanding that he take down the ebook and that he pays damages for making adaptations that gave away for free what others originally had paid for. Will was being sued for damages on the grounds that people that read his ebook for free would’ve purchased the books cited in the ebook. So those published books lost out on considerable profit.

Will could have avoided this if he simply got in touch with the publishers or the authors of the content he put in his e-book. This would’ve allowed him to either use the content or not, but either way he needed to get their permission. And if he had reached out to them, he could’ve avoided this liability.

 

 

Make Sure You're Protected from Your Website Users Infringing on Other Copyrights

What does this mean?

If you allow anyone to post anything on your website, including in a comments’ section, you open yourself up to copyright infringement issues. In a nutshell, if someone posts someone else’s copyright on your site, you could be liable for that infringement.

And it makes sense - imagine you operated a website called “Freebooks-R-us.com” and you profited from advertising. People visited your site to download free books that other users uploaded onto it. You could claim that you didn’t personally infringe on the copyright -- it was your users -- but clearly you were profiting from the infringing. So, for these kinds of reasons, you could be liable.

Does this apply to me?

If you have a website or provide online services like transmitting or storing works that can potentially be copyrighted, then yes.

Why is making this mistake going to harm my business?

Failing to prevent or take action on infringement by users on your site may cause you to be held liable for copyright infringement by your users. If they store, transmit, make illegal copies of, or do something else involving the copyrighted materials through the services you provide, you might be on the hook yourself. Not only that, but generally, if you know about infringement that is occurring on your site and either don’t do anything about it or make money directly off of the infringement, then you will not qualify for those safe harbors.

You could avoid this by:

You can avoid this by getting a good understanding of the concept of and making sure you qualify for the DMCA safe harbors. At a minimum, you should have systems in place to address copyright infringement by your users in your website like a provision in your Terms of Use saying you can get rid of infringing content they put on your site, and also responding promptly to take-down notices.

Example

Will has a website he uses to promote his app. On his app, each user has their own public profile page where they can post about their experiences or questions they have about the app.

Chet, a user of Will’s product, decided to promote his own product by posting about it on his profile on Will’s website. To attract more link clicks, Chet posted popular ebooks on his page and links to download the PDF of the ebook.

Not long after, the publishers who owned those books demanded Will take down the pages. Will, however, made the mistake of promising to never take down any profiles or comments for transparency purposes. The publishers then sued Will for copyright infringement.

In this case Will would likely be held liable for at least secondary infringement even if he did not even know what Chet posted. He could have avoided this by making sure he had enough control over user actions that would enable him to comply with any future take-down notices.

 

 

 

 

 

 

8 min read

4 Most Common Business Licenses and Permits Every Business Needs

By Chris Daming, J.D., LL.M. on Feb 23, 2021 11:55:20 AM

Most businesses require at least one type of license or permit, whether they know it or not. But, if you “don’t know what you don’t know,” you might not know what applies. 

Here’s an extreme example: if a parent and child are operating a lemonade stand, they could need:

  1. A business license to conduct business in their city;
  2. A local permit to sell lemonade on the sidewalk;
  3. A health permit that ensures they’re operating a healthy food and beverage service; and
  4. A seller’s permit that allows them to collect sales tax.

(That’s a slippery slope because there are a lot more legalities we left out to not bore you, but you get the idea). 

Of course, most likely there’s no government official that would be that big of a monster to enforce the laws in that scenario, but it gives you an idea how a lot of different legalities could apply to your business. And so you don’t get too nervous, most of these licenses and permits won’t apply. But it’s worth learning about them all to be safe.

Let's go through the 4 most common licenses and permits.

Do you need a business license?

A business license is a license that some type of governmental entity requires you to get before you operate your business. Just like how you need a license to drive a vehicle, fly a plane, or sell liquor at a bar, most cities or municipalities require you to get a license to conduct business in their area. Here’s an example from one city: “Any person who engages in any business, occupation, pursuit, profession, calling, avocation, or trade within the City Limits is required to have a business license.”

Business licenses are required by law to protect your company and employees, the general public, and the environment. Obtaining the appropriate business licenses is a crucial step in starting a company, and you should identify required licenses before beginning operations.

One note: we distinguish “business licenses” from specialty licenses and permits (covered next). In a way, it’s an arbitrary distinction. But, in general, business licenses typically apply to virtually every business. Specialty licenses are more industry-specific.

Example

Your corporation, Tick Tock Spirits, Inc, just completed formation documents and are ready to begin producing your new line of whiskey. However, before you can begin production, you must apply for the correct licenses and permits with the Alcohol and Tobacco Tax and Trade Bureau as well as the Alcohol Beverage Control Board at your state and local level. Chances are if you’re selling alcohol, you know that. But many companies like Tick Tock Spirits might overlook the fact that they also need a local business license.

 

Virtually every business will need at the very least a local business license. For example city governments may have language that states, “Any person who engages in any business, occupation, pursuit, profession, calling, a vocation, or trade within the city limits is required to have a business license.” This would apply to both a lemonade stand and a huge retailer.

Local & State Licenses

Here’s the easiest way to find out if local licenses apply: call your city hall(s). Call your license department for the county. Call your city hall for the city or municipality. While some people have expressed frustration with who they’ve dealt with, from my experience the vast majority of time you can get an answer on whether you need specific licenses for what your business is doing or not.

 

Example

Will owned Salesly, LLC and ran the company in a small municipality outside Saint Louis, Missouri. Will operated the company completely online and had no employees. He ran the business from his home.

A local reporter did a story about Salesly and one of the city administrators in Will’s municipality read about it and saw that Will had never registered for his business license. The administrator called Will and told him he could no longer operate his business until he had a business license. This was right when Will was about to make a bunch of sales from the new publicity, so Will had close his website down until he received his business license approval two weeks later, which cost him substantial revenue.

Will could’ve avoided this by calling his city hall and determining if he needed a business license when he started his company.

 

Federal Licenses

There’s a lot of federal licenses you might not think about that could apply to your business. If you don’t get the license or certification you need, it could cause serious problems for your business--regardless if it were an accident or not.

The easiest first step is to Google your type of business or product and “required licenses,” “federal regulations,” and “federal laws.” For example, if you were creating a type of lawn mower, you’ try “lawnmower required licenses,” “lawnmower federal regulations,” and “lawnmower federal laws.”

Also, if you’re in a specific field, chances are you know others in that field. Ask them, especially people that have been in that field for awhile. In could save you a lot of trouble.

Finally, check out this helpful SBA link to see if anything applies.

 

Example

Will had a company that sold a product, Sales 4 Kidz. The product was a game for children that taught them how to be better salespeople. William started by selling the product to friends and family and a few local daycare centers. One of the children from the daycare center who was playing the product started choking on one of the money pieces and his parents sued Will and his LLC for negligent design of the product.

The Consumer Product Safety Commission, a federal agency, found out about all of this and sued WIll as well for failing to comply with the requirements necessary for children’s games. Then WIll’s city and state, Saint Louis and Missouri, found out Will hadn’t collected sales taxes and sued Will for back taxes and punitive fees. All these agencies could do this because Will was selling goods that needed to comply with the CPSC and needed to collect sales taxes when he sold his product.

 

 

Do you Need Any Specialty Licenses or Permits?

Depending on your industry and state, you may be required to obtain a Specialty License. Specialty licenses allow states to heavily regulate certain products and must be in place to protect the safety of consumers. If you sell a product or a service, you need to identify the regulating agency and determine if a special license is required beyond a typical business license.

If your business involves any of the following products or services, you’ll need to determine whether a Specialty License is required:

  • Alcohol
  • Tobacco
  • Gambling and Lottery Tickets
  • Gasoline
  • Firearms, Ammunition, or explosives
  • Food and Beverage
  • Beauty products or services
  • Construction or trades
  • Children’s products
  • Fish and Wildlife
  • Health and Fitness
  • Agriculture
  • Radio and Television
  • Vending Machines
  • Debt Collection

Whether you run a boutique online store selling homemade children’s pillows or multiple restaurants serving a myriad of dishes, you will need to comply with the mandated permits and licenses. 

 

Do you need any Public Safety Permits?

If your business poses a potential safety risk, you may be required to obtain a Safety Permit. Safety risks can range from handling chemicals to serving food.

The most common safety permits are:

  • Health
  • Fire
  • Building
  • Zoning

Not obtaining required Public Safety permits could cost you thousands in fines and penalties and ruin your company. Your business’ reputation and goodwill are directly linked to your protection of your customers. Additionally public safety permits are necessary to protect the general public.

Let’s discuss some examples of Public Safety permits. These permits are required by state and local governments and include:

Health Permit - required if your company serves food.

Anyone serving or even handling food or beverages needs a safety permit. It is the government’s seal of approval that your business isn’t posing a health risk to the general public.

Example

Chet and Will owned a small coworking space in downtown Saint Louis. Things were going great and they decided to expand by selling coffee, lattes, and muffins off a cart near the main entrance. They didn’t think to get a health permit -- they were focused on just creating a great environment. But a health inspector was walking by the coworking space and saw a sign advertising the food and drink being sold. He knew he hadn’t inspected the site because he was the only inspector in the town.

As a result, Chet and Will’s side business had to shut down until they resolved the health permit issue, and it led to terrible press for their coworking space, giving the impression to the public that it was unsanitary.

 

Fire - Required if your company deals in fire hazards.

Determining what counts as a “fire hazard” is not always obvious. These permits are almost always issued at the local (county or municipal) level which makes tracking down the information a little easier.

Contact your local government or local fire department if you deal with fire, explosives, fireworks, gasoline, Christmas trees, or any flammable materials.

You should also look into this if you are holding a carnival, fair, festival, or other event that involves temporary structures (like tents).

Building - Required if your company is building something (Construction, etc.)

Building permits apply when you are improving, modifying, or altering a structure. Some local governments even extend this definition to “maintenance” of a structure. If you are doing construction work of any kind, it is best to look into whether you need a building permit.

Zoning - Required by certain “zoning restrictions” in a region to regulate where certain types of businesses can operate.

Almost every local government has “zoning” laws. This means that no matter where your business is located (yes, even your own house) there is likely a law that says what you can and cannot do in that particular zone. You cannot run a storage facility in an area that is zoned for residential use. Likewise, you can’t have a restaurant in an area that is only zoned for light industrial use.

You need to check your local government’s zoning laws before you start your business in a physical location. Even if you are only running a home-based, online business, if you plan to meet clients or store your product in your house, you need to know the zoning regulations.

Where to Start Your Search

First, check with your State and Local Governments to ensure you meet all requirements for Public Safety Permits. Regions vary, and certain locations can be much more regulated than others, so conduct thorough research.

Research your state government website or state Online Business Portal for Public Safety Permit Requirements. Additionally, contact your County Office and City Hall to inquire about certain permit requirements. Once you have obtained any necessary Public Safety permits, store them with all corporate records.

These can be much more regulated than others, so conduct thorough research.

 

Do you need a seller's permit?

If you sell goods or services, you may need a Seller’s Permit. This is required by law.

Without a seller’s permit, you won’t be able to collect sales taxes in states that require you to do so. But, you’ll still be required to pay the sales tax. This means you’ll be paying from your own pocket and not from the sales tax you could be collecting. Your company could also face additional fines and penalties.

Check out our guide to seller's permits and sales taxes to learn more.

22 min read

LLC vs. S Corp vs. C Corp: Which Is Right for Your Business?

By Chris Daming, J.D., LL.M. on Feb 11, 2021 2:45:00 PM

Should I form an LLC, a C Corp, or an S Corp?

Great question! First, we're guessing that at this point you’ve read dozens of blogs that regurgitate very similar “pros and cons” of LLC, S Corp, and C Corp. You've probably learned about LLCs being passthrough and being more informal; S Corps saving you money on self-employment taxes; and C Corps being dreaded because of “double taxation.”

What a lot of those things don’t say is that in most cases, the choice doesn’t make a big difference initially. Think of it like when you buy a new phone or Smart TV -- you probably don’t use 80% of the features it has because you don’t need them.

This guide takes a much different angle. Hopefully I’ll simplify it enough for you that you should feel pretty good about what makes sense for your business by the end. We’ve broken it done into a 5-step process. And as a spoiler, in most cases:

  1. Some people should be a sole proprietor.
  2. Most people should form an LLC taxed as disregarded entity in their home state.
  3. Some people should form an LLC taxed as S Corp in their home state.
  4. A few people should form a Corporation taxed as C Corp in Delaware.

The rest of this guide will explain all that and help you figure out which choice is best for you. It'll take you about 25 minutes, but many people spend 15+ hours on this issue so it's well worth your time :) 

One note: this guide assumes you already know you want to be a for-profit company. If you're still considering whether a nonprofit makes sense, learn more about nonprofit advantages and disadvantages first. Otherwise, let's go to Step 1.

Step 1: First Understand Your Entity Choices

To really make the right choice, it's important to understand what the "choice" you're making actually is. 

When you choose an entity, you make two choices. What will be what’s called your “state law” entity, and then what will be what’s called your “tax law” entity. Every business in the US has both—a state law entity, and a tax law entity.

State Law Entity

Your state law entity effectively determines how you’ll operate. To form a “state law” entity, you file a document usually called either articles of organization (if an LLC) or articles of incorporation (if a corporation) with one state that you choose.

For almost every business, the state law entity choice is either an LLC or a corporation. Those are the most common for-profit choices. You can also choose to be a nonprofit corporation.

There are several other state-law entity choices depending on your state (e.g. limited liability partnership; limited liability limited partnership; limited partnership; L3C; B Corporation, among others). But in almost all cases, unless you have millions of dollars in assets, you'll almost always form as an LLC or a corporation. 

Tax Law Entity

Your tax law entity determines how you’ll be taxed. This is how the IRS recognizes your business. There are only four types of tax law entities:

  • Disregarded entity;
  • Partnership (not to be confused with a “general partnership” or a “limited partnership”; this partnership just means the type of tax law entity that the IRS recognizes);
  • C corporation;
  • S corporation.

That’s it. Almost every formal company in the United States is either an LLC or a corporation. And literally every for-profit company in the United States is one of those four tax law entities. Almost every large company you’ve ever heard of is a corporation (state law entity) taxed as a C corporation (tax law entity). Most small businesses owned by a single-owner are an LLC (state law entity) taxed as a disregarded entity (tax law entity).

Recap of the Two Choices

So it goes like this (with some exceptions noted below):

First, Choose a State Law Entity:

  • LLC; or
  • Corporation

Next: Choose a Tax Law Entity:

  • Disregarded entity;
  • Partnership;
  • C corporation; or
  • S corporation.

Most publicly traded companies are: corporation (state choice) + C corporation (tax choice).

Most small businesses with one owner are: LLC (state choice) + Disregarded Entity (tax choice). We're intentionally repetitive -- it helps!

Think of the tax law entities as different sections of the IRS tax code. Disregarded entity is “disregarded” from the IRS tax code and included in individual income provisions. Partnership is Subchapter K. C corporation is Subchapter C. And S corporation is Subchapter S.

If you have a company, you must be one of the four tax entities (otherwise, how would the IRS get your money? :) ).

State Law Entity, Meet Tax Law Entity

We said that the two main state law entities are LLC and corporation. If you have a state law entity, you must have a tax law entity (will say this a dozen times for emphasis). Here’s how that works:

If you form an LLC as your state law entity and you have one owner:

  • Default: The IRS automatically says your tax law entity is a disregarded entity. If this is what you want, you don’t have to do anything additional with the IRS to be classified as a disregarded entity. You’ll simply report your business income and expenses on Schedule C to your personal income tax return.
  • Other options: In this scenario, you can “elect” to be taxed as a C corporation or as an S corporation by the IRS.

To elect to be taxed as an S corporation, you simply file an IRS Form 2553 with the IRS after you have formed your LLC.

If you want to be taxed as a C corporation, you simply file an IRS Form 8832 with the IRS after you have formed your LLC. (note: we’ll explain in detail later, but almost no one who forms an LLC chooses to elect to be taxed as a C corporation).

In other words, an LLC with one owner can be taxed as:

  • Disregarded entity (default);
  • S corporation (can elect);
  • C corporation (can elect but almost no one does - we'll cover this later).

What tax law entity is missing? Partnership. If you’re an LLC with one owner, you can’t choose to be taxed as a partnership. That requires at least two people. We’ll hit on that next.

If you form an LLC as your state law entity and you have more than one owner:

  • Default. The IRS automatically says your tax entity is a partnership. If this is what you want, you don’t have to do anything additional with the IRS to be classified as a partnership.
  • Other options. You can also elect to be taxed as either a C corporation or as an S corporation.

In other words, LLC with two or more owners can be taxed as:

  • Partnership (default);
  • S corporation (can elect);
  • C corporation (can elect but almost no one does).

What tax law entity is missing? Disregarded entity. To be taxed as a disregarded entity, you can only have one owner.

And that’s everything for LLC choices. Next is corporations.

If you form a corporation as your state law entity (regardless of how many owners), your tax options are:

  • Default: C corporation.
  • Other Options: S corporation. You can elect to be taxed as an S corporation. (one caveat: you can’t have more than 100 shareholders and still be an S corporation)

That’s it. You have those two options. If you form a corporation, you can’t elect to be taxed as a disregarded entity or a partnership. Why not? No idea. It’s just the law that the IRS enforces.

So, Now You Have a Couple Choices to Make. Your Two Choices Will Be One of These Options:

If a business has one owner, you have five choices:

  • LLC + Disregarded Entity;
  • LLC + C corporation;
  • LLC + S corporation;
  • Corporation + C corporation; and
  • Corporation + S corporation.

And one other choice that we'll cover in Step 2 (sole proprietorship taxed as disregarded entity).

If a business has multiple owners, you also have five choices:

  • LLC + Partnership;
  • LLC + C corporation;
  • LLC + S corporation;
  • Corporation + C corporation; and
  • Corporation + S corporation.

So, you really only have five options. There are lots of other weird entities that exist (limited partnership; limited liability limited partnership; etc.) but almost no one without an extraordinarily unique situation chooses those.

Let's go to the next step.

Step 2: Should you form an entity at all?

Before we dive into which of those choices make the most sense, let's first confirm if you even need to form a "formal entity" at all. If you're the sole owner and you don't form any formal entity, you're automatically considered a sole proprietorship in the eyes of the government.

Note: Skip to Step 3 if you already know you want to form an LLC or corporation and just aren't sure which one.

First ask yourself, does your business have potential liability issues?

One caveat -- entities do NOT provide liability protection when you commit a tort, which means you took or did not take an action that injures someone else. If your employee or other owner committed a tort, then it provides protection for you. But if you personally harm someone, you’re still liable for that harm (this is where insurance is valuable).

So how does "liability protection" help? For single-owner businesses without employees, it usually helps with contracts -- if you sign a contract on behalf of your LLC or corporation and breach it, the other typically can only sue the business, not you.

It's a much bigger help for multiple-owner businesses or businesses that have employees. In those situations, if the other owner or an owner does something that causes them to get sued, then the person suing can't try to sue you personally -- which helps you preserve your personal assets.

Next, how much does your state charge for forming/running an LLC or corporation?

Depending on your state’s fees, sometimes remaining that way can save you money. For states like Missouri, for example, it only costs $50 one time to setup an LLC, so it rarely makes sense to remain a sole proprietorship because the alternative is so cheap.

Example

Let’s say you moonlight as an artist and sell occasional paintings on Etsy. You generate approximately $2,000 in revenue each year. And you’re the only owner and you have no employees. If your state charges you $500 to form an LLC or a corporation, and you have to pay another $500 each year as an annual fee, then setting up an entity probably doesn’t make as much sense. 

 

But for other states that charge a high fee like $500 and an annual recurring fee, sole proprietorships could make more sense if the business has low risk, no employees, and other factors.

There are other factors and if you're still on the fence, check out sole proprietorship vs. llc for a deeper dive.

 

Step 3: Determine if Your Company is More Like a "Business" or a "Scalable Startup."

In most cases, your type of business likely dictates (1) what state law entity is best; (2) what tax law entity is best; and (3) what state is best for you to form your entity in.

We know that the word "startup" is often applied to every type of business (many people use it to mean every new type of business). But for purposes of helping you pick the right entity, we're only using it to apply to very small amount of businesses.

What we need is for you to identify whether your business fits more closely our guide's definition of "Business" or "Scalable Startup." And to give you a hint -- probably 99% of businesses should identify as a "Business" here.

If you're wondering why this matters -- the reason is that in a very few select cases, it makes more sense for a Scalable Startup to form a Corporation taxed as a C Corp in Delaware. For Businesses, rarely does either of those choices make sense. So, let's figure out which option best suits your scenario.

Option A: Scalable Startup

We define scalable startup as a scalable business that typically seeks venture capital and pays equity compensation (meaning you’ll pay people, in part, by providing a portion of ownership of your company) to at least it's initial founders and employees. While there are 30+ million small businesses in the U.S., there are less than 100,000 startups.

Scalable means -- generally speaking, it can grow exponentially without needing a lot of extra staff. 

Option B: Business

You should identify as a business for purposes of Steps 4 & 5 in this guide if it’s any other type of business, like freelancers, restaurants, home-based businesses, or service-based businesses that aren’t scalable.

For additional guidance, Small Business is most likely your category if any of these apply: (1) you don’t plan on hiring employees (and even if you do, Small Business still probably applies, but see the next factors); (2) you don’t intend to seek investment or venture capital; (3) you don’t plan to issue equity compensation to pay your team - tech startups will hire employees and as part of the compensation package, they offer them partial ownership of the company, but this is rare for most businesses; (4) your business is service-based; or (5) you’re a freelancer.

If in Doubt, Choose "Option B: Business"

For some business owners, you might not be sure what’s the right category because maybe you’re closer to a Business now but eventually will turn into a startup. The best tip is to think about what your current company plans are. If things change dramatically in the future, chances are that you’ll just start a new company and form a new entity or convert your existing one. 

Example

For example, let’s say you’re a graphic design freelancer now and have a tech idea to do something like automate the animation of logos. And for that company you might seek investment and pay equity compensation. Odds are you’ll start your freelance business first (the “Small Business”) and then form a separate entity for your Startup idea.

 

This is exactly what our company did -- we started as an LLC in our home state. And when we grew and began seeking investment and paying equity compensation to new employees, we converted our LLC in a Delaware C Corporation. This way, we initially were able to take advantage of losses against other income with the LLC. But were able to be more prepared for investors and be able to pay equity compensation in a much simpler way by converting to the corporation.

Step 3 Recap

If you know your company is a Business, continue to the next step. If you're one of the 1 percent of companies that fit the "Startup" definition, check out Best State and Tax Entities for Startups.

Step 4: Pick your State & Tax Entity for your Business

Okay, we're getting close! Now that you've indicated you're company is closer to a "Business" than a "Startup" (as we define them). Let's analyze what state law and tax entity might be best for you in this two-part process.

One note: this analysis is catered toward single-owner businesses. While it mostly applies to all Businesses, multiple-owner businesses sometimes have nuances that require a much more in-depth analysis and should likely hire an attorney (reason explained here).

So, heregoes:

Part 1: Choose a State Law Entity

While your state-law entity choices for a single-owner Business are LLC or corporation, more businesses in this category choose LLC.

But first a full disclosure: for most single-owner businesses in the " Business" category (which is most businesses in general), it doesn't make much of a difference. If you have a LOT of money and are putting a LOT of money into your business initially, then consider hiring a CPA and tax attorney to weigh all the pros/cons. 

But -- thinking about the 80/20 rule -- only about 20% of the differences between LLCs and corporation matter for 80% of businesses. And those differences are relatively simple. (For a deeper dive, learn more about LLCs v Corporations).

So then why do LLCs have a slight edge?

LLCs are easier to form and operate.

They’re easier and faster to form and require less ongoing corporate formalities that are required by corporations. With corporations, you’re supposed to hold annual shareholder meetings, elect a board of directors, have regular board meetings, elect corporate officers, and pass resolutions, among other things.

If you’re a corporation, you have to file additional tax paperwork. (We’re assuming that no one in this small business category will be a C corporation, so we’ll only cover S corporation here.)

If you’re an S corporation, among other things, for taxes you have to file:

  • Form 1120S - S corporation tax return. This is for informational purposes for the IRS, not how you pay tax, since being an S corporation makes you a pass-through entity.
  • Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, Etc. S corporations use this schedule to report to each person who was a shareholder at any time during the S corporation's tax year (and to the IRS).
  • But also, even if you’re the only owner, the IRS will consider you to be an employee of your company, so you’ll have to file the employer forms (even if you’re the only “employee” and owner). You’ll also have to pay State Taxes, even if you don’t have any other employees.

LLCs often can have the same or better liability protection

Limited liability companies do have a couple of true advantages when it comes to limitation of liability. They make it easier to "preserve the corporate veil" (this is a fancy way of saying, "If I preserve the corporate veil and I get sued, the suing party can't go after my personal assets). because you don't have to do "corporate formalities" like you do with corporations. And they also have charging order protection.

One important caveat

But, before you make your decision, it’s worth balancing the slight advantage LLCs have versus whether they could cost you any extra fees. For many states, LLCs are the same or less in fees than corporations and are less of a hassle. But for some states, the fees are substantially higher for LLCs (California in particular) and so if you’re a hobby business, LLCs might not make sense.

If you see that an LLC makes sense, then you need to figure out if you should elect S corporation as your tax choice of entity or retain the default classification, disregarded entity. We'll cover this in the next part.

Part 2: Choose a Tax Law Entity

The two most common entity choices for single-owner Businesses are:

  • LLC + Disregarded Entity;
  • LLC + S Corporation.

You could also choose "LLC + C Corporation" but that almost never happens. So we'll focus on the other two choices.

Most Common Approach

Here’s the most common tax entity approach for single-owner Businesses: they start out as an LLC taxed as a disregarded entity, then when they reach a point where they can pay themselves what the IRS would consider a reasonable salary and still have profits left over, they remain but an LLC but elect S corporation tax status.

A lot to unpack, but it will all make sense. Here’s some steps to walk you through the process.

First, determine your reasonable salary
Before you can determine what tax entity makes more sense between S corporation and disregarded entity, you’ll want to know what you would say the IRS would deem to be your reasonable salary.

The IRS gives you a lot of factors to consider, but in general, your reasonable pay is the “amount that a similar business would pay for the same or similar services.” In other words, determine what services you’re offering that, if you offered them to another employer, you would be paid $X for them. For example, if you run a digital marketing agency, what would another company pay you annually to be their "digital marketing associate?"

That’s your reasonable pay.

Second, depending on salary, consider being taxed as disregarded entity
Running your company taxed as an S corporation is more complex. Once you’re an S corporation, your taxes get more complex, and you have to treat yourself as an employee. Many LLCs taxed as disregarded entities can handle their own taxes.

So, it makes sense for most businesses to initially be taxed as a disregarded entity, then when it makes financial sense, convert to an S Corp.

Why? It’s all a balancing act. There’s a lot more work with S corps and the tax advantages don’t kick in for almost any business until the business is profitable. Why is that? Self-employment taxes. Here's a couple examples that will simplify this.

Example 1

Templeton creates and sells art on Etsy. He makes $55,000 his first year. He calculates that his reasonable salary would be $35,000/year, and his expenses are about $20,000 a year. Because Templeton would not be profitable, he wouldn't benefit from S Corp's self-employment tax relief benefits.

Example 2

Templetina sells ID wrist bands to hospitals. Templetina makes $100,000 her first year. She calculates that her reasonable salary would be $50,000/year and her expenses are $25,000 a year. This means she turns a profit of $25,000/year. If she elected S Corp tax status, she could save approximately 15% in taxes on that $25,000 profit, or about $3,825.

 

The tax savings come from the fact that the S Corp only has to pay self-employment taxes on the reasonable salary the owner pays themselves. If there are profits after all expenses and a reasonable salary has been paid, then the S Corp only pays the ordinary income tax on those profits, not the additional self-employment taxes.

If you’re not profitable (i.e., if your business’s revenue isn’t greater than your expenses, which include your reasonable salary paid), then if you elect to be an S corporation, you’ll incur more fees, probably have to hire a CPA to prepare your corporate income tax return, have to run payroll, and other tasks that wouldn’t necessarily be required if you were simply a disregarded entity.

Also if you’re not profitable, you have more opportunities to take a “loss” to offset other income from your business if you’re a disregarded entity v. being an S corp.

But if you are profitable, then S corps start to make more sense. Some CPAs estimate that if you’re self-employed and your business generates $100,000 in revenue, then S Corp election makes sense. Otherwise, remaining as the default (disregarded entity) is often wiser.

Third, an important takeaway

Lastly, you should know that you can always convert your LLC taxed as a disregarded entity into an LLC taxed as an S corporation later. Many businesses starting off just want to get things running, aren’t sure how profitable they’ll be, and want to do whatever is simplest to start.

Then, after a year or two (if ever), if they become profitable, they’ll elect to be taxed as an S corporation for the following tax year. You can elect to begin being taxed as an S corporation in any year after you start your business, although there are deadlines for when you have to make the election in order for it to be effective in any given year.

Step 5: Choose One State to Form your LLC or Corporation.

You have to pick one state initially to file your LLC or corporation formation documents in. This is your organizing state. We'll walk you through step-by-step to help you determine which state is best.

First determine if your home state is the right choice. For most, it is.

If your business is physically located in one state, your home state, and conducts business mostly in that state, it likely makes sense to file in that state. If you don’t do that, you could end up having to pay two sets of fees rather than just one. 

Example

Imagine your business is located in California but you’ve heard that you should file your LLC in Delaware, what you’d do is file the certificate of formation in Delaware, hire a registered agent in Delaware, and pay the fees required to do both. But because you’re doing business in California, you’d still need to file for a foreign registration to “do business” in California. By “foreign,” we mean a different state, not a different country.

 

Worse, often the fees to register your business as a “foreign entity” in your home state are the same or higher than registering your LLC in your home state.

For example, if you live and work in Georgia and decided to form an LLC in Delaware, you would need to pay $90 in fees to organize in Delaware, pay annual fees in Delaware, pay for a registered agent in Delaware, and pay $225 to Georgia to register as a foreign LLC.

Compare this to if you registered in Georgia (no Delaware registration), where you would pay $100 to register your LLC plus your annual fee ($50, for both domestic and foreign LLCs).

Or, if you live and work in Missouri and decided to form an LLC in Delaware, you’ll have the same fees in Delaware, and then have to pay $105 to file a foreign registration in Missouri. Compare this to if you registered in only Missouri, where you would pay $50 once, not have to pay Delaware fees initially, and not have to pay ongoing fees because Missouri doesn’t require annual reporting for LLCs.

Identify your home state by asking the following questions:

  • Where do you physically live?
  • Where do your employees physically live?
  • Does your business have real estate in any particular state?
  • Where is most of your business transacted?
  • Where do the other owners/members of the LLC physically live?

The state you’ve identified here for some or most of these questions is probably your home state.

Next, See if the “privacy” and “asset protection” exceptions apply.

The two biggest exceptions are if you need absolute privacy (i.e., you don’t want anyone to know you own the LLC) or if you want to take extraordinary measures for asset protection and you’re a single-member LLC. This is very rare, so unless this sounds immediately pertinent to your scenario, it usually doesn’t make sense.

But in the event that one of the issues applies, you should consider forming your LLC in Delaware, Nevada, or Wyoming. These states give you the ability to be completely anonymous with your ownership of the LLC. And they have additional asset protection laws (without getting into the weeds, they ensure something called a “charging order” is available for single-member LLCs).

Ask yourself: Will you be doing business in many states or have plans to scale nationally?

If you’re a business with plans to scale nationally, or seek investors, first you should consider whether an LLC is the right choice. If it still is the choice, then Delaware, Nevada, and Wyoming might be good choices.

If one of these exceptions apply, then it’s smart to consult with an attorney to get fact-specific advice.

Lastly, Don’t fall for the “tax trap”—you won’t save on income taxes by forming in other states.

A common misconception is that if you set up a Delaware LLC or corporation (or Nevada or Wyoming LLC), you won’t have to pay corporate income taxes. While LLCs generally don’t have to pay anything related to corporate tax, even if they did, their taxes are determined by where they’re doing business, not the state they formed their LLC in. In other words, it's your home state that most likely determines what your taxes will be.

Here are some more examples:

Example 1

A boutique shop that mainly sells in one state would probably want to register in that state. They’ll avoid the additional fees and paperwork that go along with the foreign state registration.

Example 2

A startup that plans to operate both in their home state and a handful (or more) of other states may want to consider registering in a state other than their home state. See our choice of entity category. You should almost always be a Delaware corporation (as opposed to an LLC).

Example 3

Internet-based businesses (that don’t want to raise venture capital, have investors, or sell shares) are generally best served by filing in their home state. The reason for this is simply that a smaller, internet-based business is similar to a boutique shop when it comes to LLC registration.

 

Besides these examples, factor in the other points raised (e.g. privacy issues) and determine the best state to file your LLC.

For further guidance, or to understand specific state requirements, see your state’s Secretary of State website or conduct a search for “[Name of State] LLC requirements.”

Do You Need a Lawyer For This?

If you get to this point and ask, "What next?" The biggest question is, "Do you need a lawyer to help you with all of this?" Sometimes, yes. But more than not, you don't need a lawyer to start your business. Read our post to find out what best applies to your scenario. 

Topics: Formation
7 min read

A Complete Guide to Nondisclosure Agreement (NDA)

By Chris Daming, J.D., LL.M. on Feb 11, 2021 1:15:00 PM

Not sure of the extent that an NDA, also known as a confidentiality agreement (two different terms--same contract), could affect your business? Think of it this way -- without NDAs or confidentiality, almost nothing would get done.

Businesses couldn’t trust each other. Everyone would have access to everyone’s customer lists and sales processes. Employers would constantly fear employees would sell secrets to competitors.

But here’s the good news. Your business can easily protect its secrets, and writing an NDA is almost always simpler than lawyers make it out to be. In 9 out of 10 cases, you can just change a few words and be good to go. We want to help you do that in this post.

First, we’ll do a little bit of background, but if you already understand NDAs and just want to write one, skip ahead to How to Write an NDA.

 

What’s an NDA?

An NDA, or “nondisclosure agreement,” is a legal contract between two or more parties that tells you what info you or the other party must keep secret. NDAs are used by startups and businesses to cover their ass in case employees, prospective business partners, etc. try to disclose the business’s confidential info. They help protect your company’s trade secrets and other info -- like your business strategy or client contact list -- from being released to the public or competitors.

 

What Type of NDA Should You Use?

There’s a couple main types of NDAs—unilateral and bilateral. Unilateral means one party is obligated to keep certain info of another party confidential. Bilateral agreements mean that each party will each other’s information confidential. Here are some examples:

Unilateral NDA Examples

  • Hiring an employee. In most cases, you’ll share confidential information with your employee but they’re not sharing confidential information with you (if they are, make sure they’re not in breach of any other company’s NDA and confidentiality provisions).
  • Hiring for help on a project or hiring a consultant.


Bilateral NDA Examples

  • Mergers. This is the most obvious example. If you’re thinking about merging with another company, you’ll both want to know information about each other to see if it makes sense.
  • Selling your company. If you’re selling your company, you’ll likely want to know details about the buyer, can they pay, will they maintain your vision, etc.
  • Collaborating with someone or a company in which you both are desirous of each other’s confidential information.
  • Two companies working together on a project.


How to Write an NDA

First, make sure you have our template. We’ll cover specifically a “unilateral NDA” since those are the most common. Below we'll go through step-by-step each provision in the template. 

[Download Free NDA Template]

 

Definition of Confidential Information

For your NDA, you have to define what information you’re declaring as “confidential.” The reason is simple -- imagine an employer saying, “Everything I tell you in the next 2 years is confidential.” A year later you’re about to quit and your employer tells you he thinks it’s going to rain tomorrow. Your employer finds out that later that night, you told your mutual friend that it’s going to rain tomorrow. Did you disclose confidential information? Of course not!

A court would never uphold that broad of a confidential clause. But at the same time, if you make the definition too narrow, then you could accidentally disclose confidential information that the receiving party (the party “receiving the information”) would then be able to share with anyone.

Most businesses use a standard definition like the one in the template, but if you’re not sure, check out our more in-depth post about defining confidential information in your NDA.

Have you already disclosed any information?

If you’ve already disclosed confidential information to the other party, no problem! We’ll take care of you. You’ll want to tweak the template in a couple spots. Check out “what happens if I’ve already disclosed confidential information” to learn exactly how to do this. Otherwise, let’s move onto the description of purpose.

 

NDA Purpose

You’ll notice on the template -- and on all NDAs -- that you need to describe the “purpose” of the NDA. You might say something like, “to manufacture a prototype product for the disclosing party,” or “to evaluate the potential business relationship between the two parties.” The purpose is important because it indicates for what reason the recipient of the confidential info can use the information.

For example, let’s say you want to hire a developer to help you build your website. You share with him your business plans so he has a better idea of the type of website to build. You’d want to narrow the purpose in that scenario to be in connection with the “development of. . .” and then describe the specific parts of the website the developer will be developing.

Without the restriction of that purpose, the developer might use the confidential information to create a separate, similar company and profit off of the business’s confidential info.

In most cases, however, the language in the template (“evaluating the parties’ capabilities of pursuing one or more business opportunities”) is fine.

 

Limited Access to Confidential Information

You’re giving your information to the “Recipient,” but what happens if the Recipient is actually a company? Or what happens if the recipient needs to run some information by his lawyer? These types of issues are addressed in the “Limited Access” section of your NDA.

In most cases, the language in the template is fine. But in general, think about who needs to know the information, and limit the use of the information to those people. Whoever the recipient discloses the information to, the recipient should make sure that person also signs an NDA agreeing to the same terms.

 

Exclusions in the NDA

The next NDA section is “exclusions.” You need these exclusions to increase the likelihood of your NDA being upheld by a court (if it came to that). The only one to consider removing is 4(a)(1) -- and only if you’ve already disclosed confidential information to the recipient. Otherwise, these exclusions as written should work in most cases.

 

Term of NDA Agreement

The NDA could simply cover one transaction that lasts a few days, or you might want it to last indefinitely. Whichever time period covers the anticipated relationship, that is how long the agreement lasts. Often an NDA lasts longer than the particular transaction or relationship itself, specifically, for as long as the trade secret remains secret.

You probably want to include a provision that specifically states that the trade secret must remain protected even after a business relationship or other contractual agreement has ended. If you have no clue what to put here, know that the average time period is between one to five years. And remember that the time period needs to last as long as you need the information to remain confidential.

 

Return of Confidential Information

This provision is great because it ensures you’ll get your information back once the NDA term is complete. It made a lot more sense before when everything was in paper form; but you can use this provision to tell the recipient to delete any confidential information you disclosed once the term ends.

 

Governing Law

This section of the NDA indicates what state’s contract law will apply to your NDA. In almost every case, people use their home state here. Similarly for “jurisdiction,” that just means what court will be responsible for handling the case if there is a dispute over the NDA. Most people choose their home state for that as well.

 

Signing an NDA

When you’re signing the NDA, make sure you are signing as the right party. Long story short, if you’re signing on a company’s behalf, you’ll have the company listed as the signatory, your name under the signature line, and “By: “ to the left of the signature line. If you’re not sure, learn more about how to sign a contract.

 

Other NDA Considerations

 

Make sure your NDA has consideration

For your NDA to be a valid contract, it has to have consideration. If you’re hiring someone new or giving someone information for the purpose of determining if you guys could merge companies, then there’s consideration.

In the employee example, you’re offering employment in consideration for the employee to keep the info confidential. For the merger example, you’re offering info to determine if you can do a merger in consideration for the other party to keep the info confidential.

However, if you’ve already given someone confidential info, like an employee or a contractor, and don’t plan on providing them any additional confidential information, then technically, they might not stand to gain anything from signing the NDA. In this case, you’ll want to offer “consideration.”

One easy trick is to just pay the person $5 in exchange for their agreement to keep the information confidential.

 

Someone breached my NDA

If someone breaches your NDA, you have a breach of contract lawsuit against them. This means that you can sue them for any damages you incurred because of their breach. Sometimes all you want to do is get them to stop using or giving out the info. In that case, you’ll file for injunctive relief to restrain them from continuing to breach the contract. These are larger issues that I’ll cover in a blog down the road.

Topics: nda
6 min read

Trade Secrets Protection Guide

By Chris Daming, J.D., LL.M. on Feb 10, 2021 2:53:11 PM

If your company has valuable information that you wouldn’t want a competitor to possess, chances are it could be considered a trade secret. To understand how your company can protect those valuable trade secrets, first it’s important to understand what qualifies.

What is a Trade Secret?

Trade secrets consist of information that can include a formula, pattern, compilation, program, device, method, technique or process. To meet the most common definition of a trade secret, it must be used in business, and give an opportunity to obtain an economic advantage over competitors who do not know the information or use it.

So we’ve covered the basics of what information is considered a trade secret. Beyond that, the information has to meet three requirements to be considered a trade secret by the courts. “By the courts” is important because in order to enforce your rights over the trade secret, you’ll need to go to court. 

 

Three Requirements to be a Trade Secret

 

1) The Information has “Economic Value”


Your information has to give you an economic advantage because of the fact that you’re the only one who knows it.

To test this, imagine if everyone had that information, would you be able to keep your advantage or no? If you would - then its value is not in being secret. A good example is a secret ingredient or a secret recipe. It gives you an advantage because you’re the only one who can make it. If everyone knew how to make the secret dish exactly like you do it - then you lose your economic advantage.

The recipe for Coke (the soda sold by Coca-Cola) is a trade secret. Companies try to reverse-engineer it and produce generic versions, but only a few people in the world know the entire recipe. If everyone knew the recipe, Coke sales would plummet.

2) The Information isn’t Readily Known by Others

 

It should not be readily known or “knowable” by others: the information shouldn’t be readily available. If some people know about it or can find it relatively easily, then it’s “readily known” or “knowable” so won’t constitute a trade secret. (this ties into the last element -- if the information was readily known, chances are it wouldn’t have economic value anyway).

3) You take the Proper Steps to Maintain Confidentiality of the Information


Finally, you have to take steps to protect your trade secret. You need to protect it from people finding it out easily--both physically and legally (by “legally” - we mean, using NDAs and only sharing on “need-to-know basis”).

 

Trade Secrets v. Patents

If you've discovered that your information is eligible for trade secret protection, the next step is to do the trade secret v. patent analysis. Oversimplified, you want to ask yourself:

  • How long does the advantage of your information being secret last? 
  • How easily can your information or product be reverse engineered?
  • Could you afford a patent attorney if you wanted one?

If your advantage of having the info confidential lasts a long-time, is almost impossible to reverse engineer, and/or you have a very limited budget, trade secrets might make more sense. If otherwise, sometimes patents are the right call.

Assuming trade secrets make more sense, you'll next want to ensure you take proper steps to maintain the information's confidentiality.

 

How to Protect Your Trade Secret

 

Step 1: Physically Protect the Information

The first thing to do is to make sure your info is physically protected. For example, if you’re in a shared office (where not everyone around you is bound by confidentiality), you can’t leave it out on your desk. It needs to be locked up.

Is your info on a computer? That computer should be locked up—both with a password and physically. If you left your laptop at a coffee shop and someone stole the trade secret from it, a judge might say you didn’t protect the information adequately, so it won’t get the trade secret protection. (if you had a password on your laptop, it’d be surprising if that weren’t enough precautionary measures, though).

This being said, if you have it locked up and someone breaks into your home, I would be shocked if someone said you weren’t protecting it enough physically. Obviously there are limitations to what you need to do—it’s not like you have to build a nuclear-bomb-protected vault to protect it. But it should be under some type of “lock and key.”

 

Step 2: Require Anyone Accessing the Information to Sign an NDA

You also should also share the information with people bound by confidentiality through an NDA.

You might be wondering--how do I show this information to people like my employees or to investors? That’s when non-disclosure agreements, or NDAs, make sense. An NDA is just a contract between two parties that says that someone is giving another person some info, and the person receiving the info can’t share it with others.

These are extremely important and must be used if you want to keep your trade secret status. Use them anytime you’re telling someone the secret info. This being said, there’s one big caveat to keep in mind. Investors typically won’t sign NDAs just to find out some background about your company. If you asked them to sign one in your first meeting with them, it could make you look bad.

One easy way to think about what you can say to investors or others is to just imagine what are some basic details about your product. That stuff’s not confidential. If everything about your product, including your pitch, is confidential, you’re probably overdoing the whole confidentiality thing.

Of course, if the investor becomes more interested and you have to give them important info as part of due diligence, that’s probably the time to get the NDA signed. Do some background research on the investor and find out what their policy is for NDAs and when they’ll usually agree to them.

 

Step 3: Share the Information on a “Need-to-Know Basis”

In terms of how to handle giving out information, you should do it on a “need to know” basis. First, if you have to give someone access to certain information, only give them access to the information they need. Coca Cola is an extreme example of a company that does this. Their recipe for coke is supposedly only known by two employees at a time.

You can do similar things with your company. Figure out what’s the minimum amount of information you have to disclose, and disclose that and no more.

For example, if you have a tech company with trade secrets surrounding your software code, chances are that your sales force won’t need to know the details of that code. Just as your developers don’t necessarily need to know the sales group’s customer lists.

Limit Personnel with Access to Info

Besides limiting the actual info you give out, you should also limit the number of people you give that info to. In other words, who on your team needs to know confidential information. Don’t go out of your way to give out the info just because the person is an employee.

Here’s a good practice--once you’ve established who needs to know confidential info and have had those people sign NDAs, create a “need to know” spreadsheet. The sheet would say who the people are that you gave the info to. And it’d also say the date the people signed an NDA, the terms of the NDA, and whether they returned all property once the NDA term was over. This is great to show investors because it indicates you’re serious about protecting your IP.

 

Step 4: Properly Mark the Information as Confidential

You should also mark your trade secret documents as confidential. And you can include info that says the documents are part of a trade secret.

Make sure to specifically identify only the documents that are actually the confidential ones—you can’t just label every document you have as “confidential.” Doing that makes it easier for others to argue that you disclosed part of your trade secret and shouldn’t get trade secret protection. Like, for example, if you stamped “confidential” on a weather report, that’s almost never something that’s confidential.

As a refresher, to understand what’s important and should be confidential, figure out what information gives your business a competitive advantage.  Some examples of information that qualifies as giving your business a competitive advantage are:

  • Customer lists;
  • Blueprints;
  • Computer code;
  • Recipes or formulas;
  • Manufacturing process;

If it gives your company a competitive advantage, indicate that it’s confidential--either by marking as such, keeping it locked up, putting it in a folder (digital or physical) marked as confidential, or any other way so that both you and, more importantly, anyone else who has access to the information knows what is and isn’t confidential.

Why it's a problem to Overmark Documents as Confidential

Here's a good example why that's a problem:

Will was developing the program for his sales automation system with his team. Wanting to protect the system as a trade secret before the program was launched, he had everyone in the company sign non-disclosure agreements. He wasn’t sure how to define the confidential information, so he decided to say everything on the company’s computers was confidential.

A month later Chet left the company to start his own. Chet had signed the NDA and also was privy to everything in the company. Chet set up an identical company. And Will sued Chet for stealing Will’s trade secret.

Unfortunately, Will had a hard time proving what information in the company was and wasn’t confidential. Chet’s lawyer brought the digital records of Will’s computer to court and asked Will if his weather report for his city was confidential? And if the webpages of espn.com were also confidential.

Because WIll never indicated what information was confidential, Chet prevailed in court. Will could’ve prevented all this by indicating what information was and wasn’t confidential.

 

Summary

Trade secrets aren't a common "lingo" for businesses but ironically, they apply to most owners. If you take these steps and use NDAs when you want to share information, you'll be in great shape!

Topics: Trade Secrets nda
10 min read

Why Using Google for Legal Problems Will Kill Your Business

By Sample HubSpot User on Dec 27, 2017 6:54:43 AM

Imagine yourself a half mile off the coast of Southern California. You want to go snorkeling, and you’re about to jump off a boat into the Pacific Ocean. You were visiting this area and did some quick research on best places to snorkel and found this lovely location as a top choice.


You can see crystal clear water and bright blue, green, and red coral beneath you. And you’re pumped to have your mind blown swimming with sea lions, sea turtles, and tropical fish you read about.


Before you jump in, let me ask you this.


What if you knew ahead of time there was an electrical short-circuit at a nearby oil rig that happened the day before? And that if you jumped in, you’d be electrocuted and eventually drown?


Of course you’d change your mind. But that’s kind of silly because how could you possibly know there was a short-circuit nearby?


You wouldn’t. Here’s why. No one would think to research something like that before going snorkeling. If you’re looking for snorkeling, you’re simply searching for a place with pleasant scenery.


You’re not going to think to look for information to confirm whether there are dangerous things in the area that could harm you.


You might see if there are sharks in the area because everyone knows about the dangers of sharks. But, there will always be other possible dangers--like jellyfish or other harmful sea creatures, oil spills, etc.--that you won’t research about ahead of time. And the reason is simple:


You’ll never look up what you don’t know you don’t know--what you never knew to search for.


This is why Google can kill your business.


But first, one major caveat: Google is really an INCREDIBLE resource. That’s Captain Obvious stuff, right there. Without Google, you wouldn’t have known where to go for the best snorkeling site in California!


And not only that -- Google is a great LEGAL resource. If you know what you’re looking for, Google can save you a ton of money vs. hiring an attorney or paying $$$ for an online contract template you could find for free with a Google search.


But putting aside the joys of Google, there are three problems Google doesn’t solve that will kill your business.

The 3 Problems That Cause Google to Kill Your Business


The problems are that:

  1. You have to know about “it.”
  2. You have to know the “why.”
  3. You have to know the pain of not following the “why.”

Google doesn’t address any of those problems. Instead, it creates a false sense of security that consistently destroys thousands of businesses each year that make avoidable legal mistakes.


Let’s start with the first problem.


1. You have to know about “it.”

The “it” is the problem itself. You have to know about the problem.


If you’re going to know you shouldn’t jump in the ocean, you first need to know there’s a problem--there’s an electrical current nearby.


In our example, you didn’t know there’s an electrical current nearby because you “didn’t know what you didn’t know.” You didn’t know you should’ve researched that issue ahead of time.


Of course, if you knew to check whether there were electrical currents in the area, Google would’ve been great! You would’ve gotten the information you needed and avoided that deadly snorkeling trip without a doubt.


But how does that apply to the legal world?


Here’s how. Let’s say you wanted to start a business in California. You might Google “starting a business in California” or something similar.

You’d do this because you need to get some information about starting a business, and you already know there are some legal formalities required.


If you did that search, here’s the top article you’d get:

 

From this, you’d know that you need to select a business structure, file for your tax IDs, and look into filing for licenses and permits.


If you continued to read other articles, chances are you’d find advice about hiring employees and contractors.


And if you were aware of other legal issues you needed to check out, then great. But most early stage companies don’t. It’s because if you “don’t know what you don’t know,” you wouldn’t have even thought to research these issues. If you never had encountered a problem before, chances are you wouldn’t know to look it up.


And no matter how much time you have to search, there’s always going to be lots of common legal problems or issues that new companies have that won’t show up in a general search for “starting a business in California.”


It’s like in our ocean example. You knew to search for the best snorkeling locations. And you might’ve known to look up “shark attacks” because everyone knows about that problem.


But, “electrical currents?” No way. Literally the only person that might look that up is someone who’d been electrocuted in a similar scenario. That’s it.


So what happens for the legal problems you don’t know to research when starting your business? Here’s a fraction of some of those issues:

  1. Failure to assign your IP to your company;
  2. Failure to require an NDA when sharing confidential information or otherwise protect it in sufficient ways to preserve the information’s trade secret status;
  3. Failure to do a trademark search when picking your business name;
  4. Failure to get the right terms of use and privacy policy on your website;
  5. Failure to require a written contract for contractors; and
  6. Failure to have the right type of operating agreement or bylaws

And that’s just for starters. We put together a list of over 125 other common mistakes that entrepreneurs made, and there are many more than that.


So, this is the first problem. And it’s a major one. Most entrepreneurs just simply don’t know about “it” -- “it” being the dozens of legal problems or legal issues they need to take care of.


This is especially awful because it’s preventable. For almost all those problems (more than 80%), it’s stuff you can DIY. As long as you know you need to do it and have a little guidance.


But, knowing the “it” is only part of the equation for avoiding the problems Google presents.

2. You have to know the “why”--“why it’s a problem”


The “why” is just as important. Let’s say you knew there was an electrical current near your snorkeling location from an article you read. You didn’t think anything of it, though, because it’s not like you’re going to touch the oil rig! You’re over 50 feet away from the rig.


That’s where the “why” comes in. Even if you knew there was an electrical current, without knowing why the electrical current is a problem, you wouldn’t know that it’s a problem that electricity in nearby water could harm you.


The “why” is that water, especially salt water, conducts electricity.


It’s similar to someone telling you that you need to have a written agreement with contractors. You might think that’s only necessary when you don’t really know the person.


Like, let’s say you’re having a friend design your website and logo. But, he’s your friend, and written agreements aren’t needed when you guys agree on a price and agree that you’ll both be fair.


But if you knew the “why” behind needing a written contract, it’d change things. One reason: your friend will own the design of your website and logo under copyright law unless you have a written agreement indicating otherwise.


Also, what happens if your friend thought he was just designing the home page? Not the blog, the FAQ, contact page, or anything else? You just said “website,” after all. What if that causes a disagreement about how much work he signed up to do.

Not having your agreement in writing just causes a lot of headaches for you because you haven’t spelled out the terms of the expected deliverables.


If you knew the “why” as to what you should do, or “why” something is a problem, you’d be a lot more likely to do it.

 

3. You have to know the “pain caused by not following the why.”


It’s the “pain of not following the why” that usually resonates best with entrepreneurs.


Back to the ocean -- and this example is a little more ridiculous, but, bear with me...


So, you know that the electrical current is in the water. You also know that the electricity could sting.


But, you don’t know the extent of the pain.


In fact, all you remember is touching an electric fence when you were a kid to test if it worked (true story from the author). And that it was a sting but no big deal.


So, you look it up on Google and you see that “yeah, if you’re within a certain amount of feet of the electrical current, it could be bad,” but after your research you decide you’re far enough away. So you touch the water just to test, and it doesn’t really sting.


So it’s a “once in lifetime thing,” you think -- you’re only out in this area once, and may as well just suck up a small, temporary sting (if any) to see all the beautiful wildlife in the sea beneath you.


What you didn’t know was that electricity could cause you to drown. It’s not necessarily going to “electrocute” you in the way everyone sees in the movies. Instead, the electrical current paralyzes your muscles, causing you to be incapable of swimming, which causes drowning.


You knew the “it” - electrical current.


You know the “why” - electrical current in water could cause electricity.


But you didn’t know the “true pain” - that it’s not from electricity, which you just tested, but from drowning.


That’s what happens in the legal world.


Like in our last example about having a written agreement with contractors. You now know that if you don’t have a written agreement, then your friend could own the design of your website and company logo. And you know that you need to specify the deliverables you’re expecting from him.


But you also need to know the pain.


What if your company takes off right when your logo is getting a lot of recognition. So you try to register your trademark before it’s too late but find out a competitor has purchased the rights to your logo from your friend.


You’d still be able to use it wherever you were doing business, but that’s it. If you wanted your business to expand, you’d have to switch logos and lose any goodwill that came with it.


Losing goodwill is a real pain.


You’ll lose customers. Your reputation could be tainted if the competitor develops a bad reputation (people will equate his mistakes to your company). Your advertising dollars won’t yield the return it used to because you’re essentially splitting the profits with your competitor.


Same thing with the design of your website--he can sell the rights to that. Then suddenly your website doesn’t have the same unique feel it used to have.


And this is just a fraction of the problems you might experience with a contractor. And contractor problems are just a fraction of the dozens, and sometimes hundreds of avoidable legal mistakes companies are making right now.


Now, bringing this all together...


So why does Google kill businesses?

It’s because people rely almost solely on a resource that can’t possibly know to provide search results for a search that never existed.


People rely on Google, which prevents them from knowing

  1. it (the problem),
  2. why (why it’s a problem), and
  3. the pain they’d incur from not understanding “why” the problem could hurt their business…


It’s because you can’t know what you never searched for.


But Google is better than nothing, right?


Sometimes, except when it’s not. If the choice is “nothing,” (that is, “no Google”) you at least still know you might be overlooking something. You might have a lingering anxiety thinking you probably should consult some professional to confirm you’re doing everything right.


This was like the pre-Google era. Then, business owners used to seek out one-on-one advice from attorneys, small business centers, mentors, etc. who were able to catch those “don’t know you don’t know” issues.


Now, at least sometimes, a Google search can make you think you things figured out. Google has helped allay some of the anxiety people have about knowing they were probably overlooking something critical. And this could create a false sense of security.


But truly the worst part of relying on Google to solve legal problems is this: you now don’t usually research something until you know it’s a problem that needs to be solved.

 

With most other issues in a business, that’s OKAY! You might miss out on some early revenue, but waiting to be reactive to a problem usually won’t destroy the business.


That’s not the case with legal issues, though. You have to know about the possible problem before it happens. Because once it happens, especially with early stage companies that can be ruined by any minor setback, it’s too late.


So, Google is a plus for businesses in many ways. Now, entrepreneurs feel more confident about solving their own legal problems--and that’s GREAT! Because it opens the door for many more entrepreneurs to pursue starting businesses in a way that wasn’t possible before.


Just make sure you know what you’re doing before you jump in the water.

(NOTE: Learn about 62 other common avoidable mistakes you could be making so you can solve them on your own with your free Complete Legal Guide to Running Your Company).

Topics: Avoidable Mistakes
4 min read

Terms of Use: Why Every Business with a Website (Even a Lemonade Stand) Needs One

By Sample HubSpot User on Dec 27, 2017 5:51:09 AM

What is a TOU and what is it for?

A long time ago, before you could just click on a button and watch whatever you wanted on TV, if you wanted to rent a movie, one of your options would be to go to Blockbuster. To rent from there, you’d sign up for a membership, choose a movie, pay, and leave. The card that came with your membership would describe rules related to renting a movie. In a nutshell, you couldn’t rent to other people, couldn’t make a copy of the DVD, and if you break it, you buy it. In short, rules to be followed. Now, these same kinds of rules are found on just about every website--usually right beside the “about us” and “privacy policy” links in the obscure, finely printed, and hardly-ever-viewed sections of the website.

However, the basic premise remains the same now as it does before with Blockbuster. Terms of Use – also called Terms and Conditions or Terms of Service – are legally enforceable agreements made between the owner of a website service or app and the user. Terms of Use can vary greatly depending on the service provided, but generally include basic ground rules about the type of conduct that is permitted when using the website or app, who is permitted to use the website or app, and limitations on liability and damages.

Do I really need all that, you might be thinking, I only run a small website providing custom donuts?

It would be easy to brush off including Terms of Use on your website or app, particularly if you run a small business since there is no legal requirement to adopt them. However, without a clear Terms of Use, you may open yourself up to litigation or other costly issues. Let’s take a look at these in detail, and how Terms of Use can prevent a worst case scenario:

1. Limitation of liability

Terms of Use are crucial in limiting a business’s liability. Without clearly stated limits on what users can or cannot seek damages for, a business leaves itself open to very costly litigation.

In our custom donut shop example, let’s imagine that the owner has neglected to include a Terms of Use on his donut business website, Donut Forget Me. A customer, Ann, places a larger order for donuts and pays the bill online. A few days later, Ann realizes that the computer she used to order the donuts now has a virus that can be traced back to the Donut Forget Me website. None of Ann’s work can be recovered, her computer is useless, and she loses her job. Ann sue Donut Forget Me for lost wages and damages.

This scenario can easily be avoided with the inclusion of a clear Terms of Use. Terms of Use generally state that the business cannot be held liable for direct, special, or indirect damages, such as Ann’s loss of salary or the infection of her computer. A Terms of Use would prevent Ann’s case from going forward, whereas, without a Terms of Use, Donut Forget Me may be held liable for Ann’s damages.

2. Choice of Law

Another important aspect of Terms of Use is that they can determine which laws will apply in case a dispute arises. For any business owner, deciding which jurisdiction a dispute must be brought in is a huge advantage and could save the business owner thousands of dollars.

Let’s take a look at our previous example again. Donut Forget Me is a business incorporated in Massachusetts, with a brick-and-mortar bakery in Boston. Our litigious customer Ann lives in North Carolina but has an intense craving for donuts from Donut Forget Me. She fills out an order online, and as the donuts are perishable, Donut Forget Me ships them overnight through FedEx. However, the smell of the donuts is so irresistible that the FedEx driver eats half the donuts before they arrive. Ann files a lawsuit against Donut Forget Me in North Carolina.

In this case, Donut Forget Me would be expected to travel to North Carolina on a regular basis for depositions, hearings, and ultimately, a trial. This would incur costs for airline tickets as well as accommodations and meals. If Donut Forget Me is a one-man shop, the owner would also face additional labor costs in hiring and training someone to run the business while he is in North Carolina. However, if Donut Forget Me had included a choice of law clause in its Terms of Use that limited any dispute to be brought in Massachusetts under Massachusetts law, litigation would proceed in Massachusetts and ultimately be less costly for the company. In addition to these cost savings, a business owner may choose a particular jurisdiction due to its favorable attitude or laws towards that business. For example, if Massachusetts had a history of ruling leniently on donut shop owners, but North Carolina did not, it would be wise for Donut Forget Me to include Massachusetts as its choice of jurisdiction in its Terms of Use.

3. Control

Lastly, Terms of Use also set out particular rules, allowing a business owner more complete control over his website. Terms of Use can articulate what type of conduct is not permitted on the site, such as leaving inappropriate comments or advice on how to commit a crime, scraping the website for commercial purposes, or reproducing content published by the business owner. Without such rules in place, a user cannot be held liable for inappropriate conduct.

For example, let’s say that Donut Forget Me allows users to leave reviews of each donut it sells. Donut Forget Me receives approximately 20 reviews per week, and the majority are very positive. One day, Donut Forget Me realizes that it has received 40 new reviews in 24 hours; when the owner of Donut Forget Me investigates this issue, he discovers that a user named Mr. Clown has been posting obscene, pornographic, and inappropriate comments on his website. Mr. Clown has even gone so far as to provide advice on how to kidnap children with Donut Forget Me mini-donuts. Donut Forget Me’s owner immediately deletes the comments, but they keep appearing. He is at a loss as to what to do.

Clearly, the comments by Mr. Clown are undesirable, and possibly open Donut Forget Me up to criminal liability. In this case, Donut Forget Me would have been wise to include Terms of Use that stated that users cannot leave comments that are pornographic, obscene, or criminal in nature and that Donut Forget Me cannot be held liable for any comments left by users. This would allow Donut Forget Me to block Mr. Clown from making further comments and would ensure that other users are presented with a professional website.

Including Terms of Use on a website or app has significant legal advantages that business owners should take note of. A well-written Terms of Use lays out the ground rules for users, crucially limits a business’s liability, and allows a business owner to determine which law will govern any disputes that arise. As shown above, even a small, one-man donut shop can benefit from having Terms of Use clearly stated on its website.

It is important to note, however, that Terms of Use can be written very differently depending on the business involved. Boilerplate Terms of Use that are available over the Internet may not cover your particular business needs. Although the main points outlined here are applicable to most businesses, it is often prudent to consult a lawyer to draft Terms of Use that are a particular fit for your website or app.

Topics: Website
2 min read

5 Things You Need to Know about Registered Agents

By Chris Daming, J.D., LL.M. on Dec 27, 2017 1:06:22 AM

Have you ever heard the term “registered agent” and nodded along, even though you have no idea what it means?

You’re not alone. For lots of new business owners and entrepreneurs, this is unfamiliar territory.

In this post, we’re going to cover 5 common questions that new startups have about registered agents. With these answers, you’ll have a solid understanding of what these “registered agent” things are all about.

1. What exactly is a registered agent?

Registered agents do two main things: (1) receive important docs on behalf of the business that include mail sent by the state and other official government notifications; and (2) accept service of process on behalf of your business if it is being sued. All states require that businesses have registered agents. This way, there’s an official contact on file for your company, and the state and public know where to send important legal notices regarding your business.

2. Who, or what, can be a registered agent?

A registered agent can be an individual or a business, but it must be located in the same state where your business is registered or any state where you file an application for authority to do business.

3. When do you need to designate a registered agent?

You have to provide a registered agent when you register your business with the state and when you file an application for authority to do business in another state.

4. Does a registered agent need to play an active role in the operation of the business?

Nope. Being a registered agent doesn’t entitle the registered agent to any ownership or right to participate in the company. A registered agent’s job is solely to collect legal and tax docs and accept service of process if your company is sued.

5. Can a business owner be the registered agent for the business?

Yes, many business owners choose to be the registered agent for their own business. But there are some drawbacks here:

  • Always available. You have to be available to accept service of process during business hours. Otherwise, you won’t be able to leave the office early or go on vacation without worrying about missing notice of a lawsuit. With a hired registered agent, you can be out of the office and still accept this paperwork.
  • Address changes. If your business moves and you used the same address for the registered agent, a formal state filing is required in order to keep state records updated. This usually means paying a fee. If you hire a registered agent, you could move as much as you want without worrying about having to update your registered agent’s information.
  • Privacy concerns. The registered agent’s address will be publicly available. This means marketers and spammers could have easy access to your address—so you could be subject to receiving unsolicited junk mail. If it’s important for you to keep your address private, hire a third party registered agent.

If you’re looking to hire a registered agent, there are plenty of options you can find by Googling “registered agent services.” Keep in mind that some registered agent companies serve all 50 states and the DC area, while others specialize in serving only one state.

. . .

Now that you’ve got a better sense of what registered agents are and why they matter, you should feel more confident in designating one for your new business.

4 min read

Four Steps for Moonlighting Startups to Protect Their Intellectual Property

By Chris Daming, J.D., LL.M. on Dec 27, 2017 1:03:16 AM

You just finished a hard day’s work at the office.

After commuting home and eating a quick dinner, nothing sounds better than some quality binge watching on Netflix. But you resist the urge, open up your laptop, and get to work on that side job.

Sound familiar?

For a lot of new startups, this is a typical weekday. Welcome to the world of moonlighting.

Moonlighting, or working multiple jobs, has become more and more common these days. People moonlight for lots of reasons: to supplement income, to gain skills, or to start a new business.

So why’s moonlighting important?

These days, many successful companies (like Instagram) owe their existence to moonlighting. But moonlighting is hard work, and it can be risky. Intellectual property (IP) is often one of the most valuable assets of a startup. And if you’re moonlighting, you risk losing ownership of your IP. Here are four steps to moonlight like a pro.

Step 1: Understand how intellectual property laws affect moonlighting.

Moonlighting brings up major IP concerns. So what is IP?

IP essentially covers everything that your startup creates. When most people hear IP, they think patents and inventions. This is true, but IP also covers smaller things like a company logo you designed or a special procedure you developed to work through a problem. For example, if you’re a tech startup, developer code is definitely IP.

All of this matters because moonlighting can have awful consequences. It can cost you your job if an unapproving boss finds out. Plus, investors are reluctant to get involved in a startup if they sense any IP concerns.

Perhaps worst of all, if you create things for your startup on your employer’s time or equipment, you risk losing your rights to that IP. Something as small as using a work computer to test an algorithm for your startup could wind you up in a situation like this:

 

 

(Video credit: HBO's Silicon Valley

That’s right, if you create IP while working at your day job, your old boss might own that IP. What if you use part of your employer’s IP to help create your own stuff? Same result: your boss might own it, and he could have other claims against you for improperly using “his” IP.

Ever heard of “work made for hire”?

It has a very technical legal definition, but it boils down to this: if you're an employee, any work you do for the company is “work made for hire.” And all that work is owned by the company. Nothing has to be in writing for this to take effect. (But note that if there's a written agreement, be sure to understand the scope of that agreement.)

If nothing's in writing, this issue can be tricky. The general rule here is that the work is “work made for hire”—and your boss owns the IP—if (1) it’s the kind of work you were employed to perform, (2) it happens within work hours, or (3) it’s done with the intent to serve your employer.

Something else to keep in mind here is a document called an “assignment agreement.”

Depending on the language in these agreements, your boss might own rights to all IP you create for work, regardless of if you created it during work hours or using work equipment. Some states, like California and Washington, have laws limiting the scope of assignment agreements. But remember, if IP was created on the job, employers might not even need an assignment agreement in order to own that IP. So don’t assume you’re in the clear if you never signed an assignment agreement.

Whether you’re moonlighting or not, there are serious IP concerns that every startup needs to keep in mind.

Step 2: Check for moonlighting policies at your day job.

Chances are you won’t find something nicely labeled, “Moonlighting Policy,” so it’s important to review all the employment documents you’ve signed for any language that limits your ability to moonlight. Be on the lookout for policies referencing “outside activities” or “outside employment.”  Pay particular attention to these documents:

  • offer letters and employment agreements
  • confidentiality agreements
  • intellectual property assignment agreements
  • non-compete or non-solicitation agreements
  • stock option agreements
  • non-disclosure agreements
  • employee handbooks

When you look through these documents, note any terms suggesting that IP is shared with or owned by the employer. Are there any outright bans on working a second job or starting your own business? Does your employer require you to tell them about your side hustle? Be sure to get a good handle on this paperwork.

Step 3: Moonlight Properly.

One of the first decisions you will have to make is whether to be upfront with your boss about your new startup. If there is a policy or contract that requires you to disclose your side gig, then there’s your answer. Otherwise, use your best judgment given the situation.

Next, set clear boundaries to keep your startup activities separate from your full-time job. Keep in mind the following:

  • Never work on your startup during work hours or at your work office. 
  • Don’t use your employer’s materials or equipment. That means stick to a separate  phone number and email address for your startup work. 
  • Don’t use any work IP as inspiration for your startup. If you’re with a tech company and you think your startup would benefit from borrowing some lines of code, don’t do it.

Step 4: When ready, make a clean break.

The key to moonlighting is to secure ownership of the IP you create. As early as possible, form your startup and assign all the IP to the startup.

Also, when you’re ready to part ways with your full-time job, make sure you have all work equipment and files ready to return ASAP.

We want to hear from you!

Are you in the midst of moonlighting? How’s it going? Or, if you’re a business owner, what’s your take on workers doing businesses on the side? Leave a comment below.

Topics: Intellectual Property