3 Legal Questions Every New Business Needs to Ask

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3 Legal Questions Every New Business Needs to Ask

If you’ve started to research how to start a business, you may have been overwhelmed by all the potential issues facing a new startup, from contracts to copyrights, forming an LLC to signing an NDA. Obviously you could spend infinite time and money on legal solutions--and that would get you nowhere. But there are a few most important questions that every entrepreneur needs to answer, whether you are a solo business owner, or whether you are a founder of a venture-capital funded up-and-coming next-big-thing.

1.    Will you do your own legal work or hire an attorney?

If you are a one person business, you may be able to do your own legal work in the beginning, using templates, guidebooks, and other Do-It-Yourself resources. It will take a fair amount of your own time and some research, but it is a way to save money, when you are solo.

Are you bringing on investors, business partners, employees or contractors, or forming a joint venture? As soon as you add other humans to your business, you add complexity as the dynamics of those relationships change, and risk to you personally, and to the business overall. One way to manage that risk is to hire an attorney to help you draft agreements and formalize those relationships.

For example, in a business with two or more owners, the default is that the business is a general partnership. A general partnership is highly risky, because each partner is personally liable for the actions and decisions of the other partners. You may not be aware of these risks until it is too late, but an attorney will help you avoid this accidental risk.

How to pick a lawyer? Quick tip: Beyond their qualifications and expertise, find someone you like as a person so that you feel entirely comfortable telling them everything going on in your business (including mistakes and bad decisions!). 

2.    What legal entity will you form?

There are many options available, including sole proprietorships (if you have one owner), partnerships (with two owners), LLCs, and corporations (S-corporations, and C-corporations), depending upon your needs and requirements. No one choice is the “right” answer.

If you are a one-person dynamo with no employees, no investors, co-owners or joint ventures, you don’t need tax savings, and you have minimal risks that are inherent to your line of business, then a sole proprietorship, which offers minimal paperwork and government filings may actually work for you. It is important to understand the risks, however:

     You’re personally liable for for business debts.
     You could get personally sued for business obligations.
     You will pay self-employment tax on all profits.
     Your business may not look as legitimate as those with an LLC or corporation in the name.

Another common choice for many startup companies is a Limited Liability Company, or LLC. You can form an LLC as a one person business or a multiple owner business, and you don’t even need to be located in the United States (or be a U.S. citizen). Here are a few highlights:

Like a corporation, an LLC is a legal entity that is separate from the owners, and can take on its own debts, have its own checking account, and sign contracts on its own behalf. In this way, the LLC can keep the risks of the business—getting sued or going bankrupt—separate from the owner’s personal assets. Your LLC might not protect you but there are 7 ways to fix it.

Like a partnership, an LLC is very flexible and has minimum government requirements once you file the initial papers to form the entity.
LLCs are only formed when the founders file a one or two page form with their state government, usually called Articles of Organization or Certificate of Formation. 

3.    Do you have intellectual property that needs protection?
Almost all companies have some kind of intellectual property that form the part of the value of the business, whether it is the foundation of their company, like the code that forms their software, or whether it is more subtle, such as the marketing materials used to promote the services of the founder of a professional firm. Some of your Intellectual Property can be protected simply by enforcing your rights (such as under copyright law), while others will require you hiring an attorney to create the rights (such as filing a patent application). 

Here’s an overview of each of the five main types of Intellectual Property, so you can review how they may apply in your business:

Copyrights are creative works that have been fixed in a tangible form. Examples: writings,
photos, recordings, paintings. In the U.S., you automatically have copyrights over what you
create, but you need to register your work with the U.S. Copyright Office if you want to sue someone in court, or if you want to have access to statutory damages at a later time.

Patents are grants from the government that give you exclusive rights over your invention for a specific amount of time, in exchange for full disclosure. Examples: software, machines, methods of doing business. In the United States, you apply for the patent with the U.S. Patent and Trademark Office (USPTO), and the process takes quite some time—sometimes years. The moment the patent expires (twenty years from filing), anyone else can make generic versions of your work.

Trademarks are words, symbols, colors, sounds, or smells that someone is using in conjunction with a product or service. Examples include the name Pepsi, the Just Do It tag line, the Apple logo, or the shape of a Coca Cola bottle. IIn the U.S. you get some local state law rights when you use your trademark in commerce, but you don’t get rights over your trademark over the entire U.S. until you register your trademark with the Patent and Trademark Office. While this system is simpler than a patent application, it does require the art of figuring out exactly what to trademark and which class (category) to select.

Trade secrets are secret information used by a business that derives its value from being secret, and where the business is invested in protecting that secrecy. Two commonly cited examples include the recipes for Coca Cola and for the KFC “original recipe”. Other types of trade secrets include client lists, sales methods, and business plans. There’s no registration system -- you obtain and protect them through your efforts in keeping them secret, such as via non-disclosure agreements (NDAs).

Right of publicity is defined as your right to control how your name, likeness, and persona are used by others. An example is that I have the right to prevent my name and photo from being used to promote someone else’s service, unless they obtain my permission. This issue typically comes up when handling endorsements, sponsorships, and testimonials. 

About the author:

Elizabeth Potts Weinstein, founder and lead attorney of EPW Small Business Law PC in San Jose, California, helps entrepreneurs, small business owners, artists, coaches, and consultants get the legal complexities out of their way so they can get back to helping their clients and changing the world. Elizabeth has been featured in The Wall Street Journal, Inc.com, Entrepreneur.com, as well as many radio shows and podcasts. She’s licensed to practice law in California and before the U.S. Patent & Trademark Office, and she graduated from University of San Diego School of Law. Elizabeth is also a mom, homeschooler, hiker, driver of empty roads, and people-loving Introvert.


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