Dorchester Bay
and
The Economic Justice Project
Present
THE BUSINESS LEGAL WORKSHOP
Speakers:
Laurie Hauber, The Economic Justice Project
Kari Harris and Melissa Bender, Ropes & Gray
September 18, 2002
© 2001 The Economic Justice Project
Overview
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Choice of Entity
Real Estate
Intellectual Property
Employment
Contracts
Choice of Legal Entity
• Considerations:
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Liability
Taxation
Formal requirements and fees
Management and control of business
Continuation of business
Choice of Legal Entity
• Practical Tip:
– Considerations relating to liability
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Risk of exposure to lawsuits
Type of contracts business will be entering into
Whether company will borrow money
Whether company will hire employees
Whether customers will be coming to business
establishment
Types of Legal Entities
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Sole Proprietorship
General Partnership
Corporation
S Corporation
Limited Liability Company
Sole Proprietorship
• Business owned by only one person
• Little legal separation from the owner
• Drawback: unlimited liability
– owner is personally liable for all debts and lawsuits
related to the business
– owner may be liable for acts of agents and/or
employees
– liability not extinguished if business terminated or sold
– insurance may protect against certain risks
– filing for homestead exemption will protect your
primary residence
Sole Proprietorship (con’t)
• Benefit: taxed at ordinary income rate
– gains and losses reported directly on personal
tax return
– business losses can offset other gains
• Ends when owner dies
• Business tax kit- call IRS at 1-800-taxforms
Sole Proprietorship (con’t)
• Benefit: few formal requirements or fees
– register business name with local city hall
– pay self-employment tax on own income
– obtain Federal employer identification number
(can use social security # if no employees but
not recommended)
Sole Proprietorship (con’t)
• Practical Tips:
– This entity is fine for most starting companies,
particularly non-retail businesses (e.g., consulting
businesses, home-based businesses, home-based
businesses or other off-site businesses)
– Adequate insurance is critical
– Homestead exemption if you own a home
– Include disclaimers/limits on ability to sue in contracts
General Partnership
• A business conducted by at least two people
as co-owners
• Includes a business conducted by husband
and wife
• Drawback: may be formed through oral
agreement or actions
General Partnership (con’t)
• Drawback: each partner has unlimited
liability for debts and obligations of the
business
– partners are liable for acts and obligations of
other partners
General Partnership (con’t)
• Benefit: favorable tax treatment
– each individual partner files personal income
tax return
– losses from partnership operations may offset
other gains
General Partnership (con’t)
• Partnership ends when
– one partner dies or leaves the business
– disagreements can destroy the business
• Difficult to transfer ownership interests to
new people
General Partnership (con’t)
• Partnership Agreement important
– can provide more flexibility and minimize risk
of serious disputes
– without it, Massachusetts partnership laws
apply
General Partnership (con’t)
• Benefit: few formal requirements or fees
– register business name with local city hall
– obtain Federal employer identification number
– should have a partnership agreement
General Partnership (con’t)
• Practical Tips:
– Written partnership agreement (prepared with
assistance of counsel) is imperative
– All parties should understand legal
ramifications of partnership and their rights
under partnership agreement
– Once disagreement arises, joint representation
is difficult (mediation may work)
C Corporation
• An independent entity, separate from the
identity of its owners
• Owned by stockholders
C Corporation (con’t)
• Managed by a Board of Directors (can be
just one) and officers
• MA law requires a President, Treasurer and
a clerk (can be held by 1 person)
• Benefit: liability limited to the assets of the
corporation, not the individual owners
C Corporation (con’t)
• Drawback: 2 levels of tax
– corporation taxed based upon its net income
– stockholders taxed on the amount of profits
distributed
• However, can deduct more as business
expenses
C Corporation (con’t)
• Must also qualify in other states where it
does business
• Unlimited duration - easy to change
ownership
• www.corp.sec.state.ma.us or
www.state.ma.us
C Corporation (con’t)
• Drawback: ongoing filing requirements and fees
– file articles of organization with Secretary of
Commonwealth
– $200 minimum filing fee
– $85 annual report filing fee
– $456 minimum corporate excise tax due each year
– obtain Federal Employer identification number
• Carry worker’s compensation insurance, even if
you are the only employee
C Corporation (con’t)
• Drawback: formalities to create and
maintain to ensure limited liability
– must pay required fees and make required
filings with Secretary of Commonwealth
C Corporation
(Formalities con’t)
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sign agreements as the corporation’s name
maintain separate financial records and books
pay yourself and other owners a salary
maintain corporate minutes
C Corporations (con’t)
ABC Corporation
By:
“
President
“
C Corporation
• Practical Tips:
– Corporation is appropriate for a business that
will have employees or on-site customers
– Examples: food business, manufacturing,
temporary staffing agency, transport company
– Lower risk of liability (but requirement of
personal guarantees often eliminate this benefit)
– Easier to raise capital
– Easier to continue business if one person leaves
S Corporation
• Similar to C Corporations Except:
• Benefit: corporation does not pay federal
income tax
– owners (stockholders) pay personal income tax
on the profits when earned
S Corporation -- limitations
• Drawback: Stockholders limited to US
citizens or permanent residents (subject to
US taxes)
• All stockholders must be individuals
• Drawback: ongoing filing requirements and
fees same as a C Corporation
– must file Form 2553 with IRS for favorable tax
status
S Corporation
• Similar to C Corporations Except:
• Benefit: corporation does not pay federal
income tax
– owners (stockholders) pay personal income tax
on the profits when earned
S Corporation
• Practical Tip:
– Double taxation may not be likely in first few
years of business where there are no
distributions to stockholders
– If the net revenues are less than $40k, a C corp
is likely to be a better alternative due to the
lower tax rate
Limited Liability Company
• Combines attributes of corporation and
partnership
• Owned by the members
– requires two or more members
Limited Liability Company
(con’t)
• Benefit: taxed like a partnership -- owners
file personal income returns
• Benefit: no personal liability (like a
corporation)
Limited Liability Company
(con’t)
• Benefit: Organizational structure less
complicated than a corporation
• Benefit: flexibility in dividing profits and
losses
• Benefit: no limitations on types of
stockholders unlike S corporations
Limited Liability Company
(con’t)
• Drawback: Important to have an operating
agreement
• Drawback: tax filings more complicated
• Limited duration -- requires stated term
Limited Liability Company
(con’t)
• Drawback: ongoing filing requirements
and fees
– file certificate of organization with Secretary of
Commonwealth
– $500 initial filing fee
– $500 annual report filing fee
– obtain Federal tax identification number
Choosing a Name
• Reserve name with Secretary of
Commonwealth
• Cannot use a name that is:
– same as or similar to another name already on
file in MA
Intellectual Property
• Trademark: word, name, symbol or design
(or any combination) that is used to identify
the source of products and to distinguish
them from the products of others
• Copyright: work of authorship
• Patent: inventions
Trademark
• Trademarks are the distinctive marks that
distinguish the product or services of a particular
manufacturer from those of another
• May consist of non-generic words, names or
symbols
• Examples:
– “Exxon”, “Kodak”, “Apple Computers”, Nike logo
– “Restaurant” or similar is not protectable
• Product must be commercially available
Trademark (con’t)
First Step--Avoiding Infringement on Other’s
Marks:
• Do not duplicate the trademarks of other
businesses
• In deciding on a name, search the US Patent
Office web site (www.uspto.gov), the internet and
the local telephone book to determine if there are
other existing trademarks in that name
• Letters from other businesses claiming
infringement on an existing trademark must be
taken seriously
Trademark (con’t)
Protecting Your Trademark:
• Practical Tips
– Evaluate importance and value of the trademark
to business over time to determine if and when
state or federal registration becomes
appropriate
– Be vigilant about preventing others from using
your marks
Trademark (con’t)
Protecting Your Trademark:
• Non-registration
– You can use a trademark without registering it
– Some common law protections are established
through proven continuous use
– Less expensive initially but higher risk of loss
– May use TM/SM symbol to designate
trademark
Trademark (con’t)
Protecting Your Trademark:
• Mass trademarks
– $50 fee (plus additional ongoing fees)
– 10 year duration with continued use
– Check with the Secretary of the Commonwealth before
applying
– May be an alternative to federal registration for local
business
– May use TM/SM symbol
Trademark (con’t)
Protecting Your Trademark:
• Federal trademarks
– Unlimited duration with continued use
– Must defend against infringement by others
– A full search and registration of a trademark is
expensive (also requires additional ongoing
fees)
– Must register federally and have mark issued to
use ® symbol
Copyright
• Right of an author to control the use, distribution,
adaptation, display and performance of an author’s work.
• Protects the author’s manner of expressing ideas but not
the idea itself
Examples:
– books, computer programs, recordings, photographs
Distinguish:
– Information in phone book (no copyright)/Presentation of
information in phone book (copyright)
– Recipe and directions (no copyright)/Presentation in cookbook
(copyright)
Copyright (con’t)
• Copyright is created automatically upon creation of work
• Formalities:
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less involved than trademark protection
copyright notice, e.g., © 1999 Jane Smith
registering with US Copyright Office may be advisable
$30 filing fee
registration allows you to clearly document the date of creation
unlike a trademark, ongoing use need not be shown
be aware that registration requires you to disclose idea
Copyright (con’t)
Practical Tips:
• Avoid infringing on the rights of others:
– Generate your own pictures and other images for
websites and other marketing materials (Note:
copyrighted materials will not necessarily have a ©
symbol associated with them)
– Do not copy software
• If you contract with someone to prepare marketing
materials for your business, be sure that they
assign all of their interests in the materials they
create to you
Patent
• A patent give you the right to exclude others from
making, using or selling an invention
• Two principal types:
– Design patent: what the product looks like
• Must be new original and ornamental
– Use patent: how the product works
• Invention must accomplish one of its intended
purposes
• Purpose must have a beneficial use
Patent (con’t)
Filing with USPTO (www.uspto.gov):
• Limited duration
– 14 years for design patents (from the date of patent grant)
– 20 years for use patents (from the date of the filing of the
application)
– once patent expires, public may use it
• Filing and maintenance fees
– Depending on the complexity of the patent, the process can be very
lengthy and expensive
– Design patents are generally much less expensive to register than
use patents
Patent (con’t)
Practical Tips:
• If you think you have a patentable design or
invention, only disclose it to counsel
• There is a one year filing deadline after you
make your design or product available to
the public
• Avoid the companies advertised on TV
Trade Secrets - Protecting Your Ideas
• A trade secret is information that has
independent economic value because it is
not generally known to other people
Examples:
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secret recipe at a restaurant
customer lists
business information
Trade Secrets - Protecting Your Ideas
(con’t)
• Non-Disclosure/Assignment of Inventions
Agreements
– have all employees, independent contractors and others
who have access to confidential information sign
– include a confidentiality clause in employee or
independent contractor agreement
– should also include provisions that employee or
consultant must assign anything he/she develops to the
Trade Secrets - Protecting Your Ideas
(con’t)
• Practical Tip:
– Although an agreement may provide legal
protection, enforcement is costly.
– The best form of protection is to know your
employees and limit who has access to sensitive
information.
Websites
• Practical Tips:
• Have a written contract with website designer/web
host
– If possible, ensure business has rights in design and
designer cannot make same design for another person
– Obtain guarantee that host will license design and
provide transitional services if operations cease
– Be sure to understand vendor commitments concerning
number of search terms to be provided and guaranteed
“up-time”
– Understand your liability for licensing violations of the
web host or designer
Websites
• Consult counsel where you are marketing to
children or are obtaining credit card or other
private information from website users
• If you are designing your own website:
– Do not use pictures or material that you have found on
other websites without consent
– Determine if the software you are using can be used for
commercial purposes
• Domain names should correspond to trademarks
Websites
• Give instructions as to how website content
may be used to avoid misuse
• Disclaimer on site content may be advisable
but may also be subject to legal limitations
• For an interactive site a use policy is also
advisable, but you should be prepared to
follow it
Other Intellectual Property Issues
• Practical Tips:
• If you are seeking a loan, the bank may
want a pledge of intellectual property
• Document and keep copies of everything
related to your ownership and use of
intellectual property
Real Estate
• Zoning
• Leasing
• Buying
Zoning
• Home-based businesses
• Permitted uses
• Seek variances or special permit if do not
comply with local zoning laws
• other permits and licenses
Leasing Property
• Economic factors
• Flexibility for business fluctuations
Leases -- Economics
• Space
– confirm sq. footage
– delivery date
• Security deposit
Leases -- Economics (con’t)
• Rent
– base rent ($/sq. foot)
– additional rent
• what else are you paying (e.g., utilities, real estate
taxes, insurance)?
• Look out for vague language -- “costs of managing
and operating the building . . .”
– annual increases in multi-year leases
Leases -- Economics (con’t)
• Insurance often required
– General liability
– Casualty to protect personal property
Leases -- Economics (con’t)
• Improvements
– Often requires LL approval
– Who pays?
– Removable fixtures
Leases--Economics (con’t)
• Maintenance
• Right to offset
Leases -- Flexibility
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Change in use
Assignment -- right to sell business
Sublease
Extend term
– agree on rent or formula to calculate rent for
extended terms
• Expand space
Leases -- Flexibility (con’t)
• Right to refuse to lease other space
– important for destination businesses
• Termination
• Events of Default
Leases -- Flexibility (con’t)
• Subordination (to mortgage or other lien)
• Personal Guaranty
• Purchase option
Employment
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Hiring process
Employee v. independent contractor
Employer obligations
Terminations
Employment -- Hiring
• Immigration requirements
– Employer must file I-9 for all employees
– fines and possibly criminal penalties if fail to
comply
– www.ins.usdog.gov for Form I-9
Employment -- Hiring (con’t)
• Anti-discrimination laws
– Federal: most only apply if have 15 or more
employees
– Mass: applies if have six or more employees
Employment -- Hiring (con’t)
• Hiring minors -- must comply with Federal
and Mass child labor laws
• Agreements to protect business’ confidential
information and work product
Employee v. Indep Contractor
• Right to control: Does the employer have
the right to control and direct the
individual’s work?
Employee v. Indep Contractor
(con’t)
• Financial control
Employee v. Indep Contractor
(con’t)
• Type of relationship
Employee v. Indep Contractor
(con’t)
• Could incur serious fines by IRS, DOR or
under MA law if categorize incorrectly
• Far fewer obligations with independent
contractors
Employment -- Obligations
• Must pay minimum wage -- $6.75 in Mass
• Overtime -- 1.5 times regular pay rate after
40 hours during a workweek
Employment -- Obligations
(con’t)
• Payroll withholding
– Fed and Mass income tax (employer withholds
from employee income)
– Fed social security and medicare (employer
withholds from employee income)
– Fed and Mass unemployment tax (employer
pays)
– Child support (under MA law must deduct from
pay)
Employment -- Obligations
(con’t)
• . . . Payroll withholding
– www.irs.ustreas.gov for federal guidelines
– www.dor.state.ma.us for Mass guidelines
Employment -- Obligations
(con’t)
• Workers’ compensation
– Must compensate employees injured on the job
– Must have workers’ compensation insurance for
all employees
• except: sole proprietorships and partnerships must
carry worker’s compensation for employees but not
themselves
Employment -- Obligations
(con’t)
– Must post notice of insurance at work
– Issued STOP WORK ORDER and serious fines
if fail to comply
Employment – Obligations
(Independent Contractors)
• Report amount paid on 1099 if more than
$600 within a year
• Report all newly hired independent
contractors to the MA DOR within 14 days
of hire
• Require all contractors complete W-9
Employment -- Obligations
(con’t)
• Must comply with Occupational Safety and
Health Act (OSHA)
• Sales/Use tax
Employment -- Terminations
• “At will” relationship: can fire anyone for
any reason as long as it is not an illegal
reason
Contracts
• May be oral or written
• Some types of agreements must be written
to be enforceable
• Advisable to put agreements in writing
• need not be a formal agreement
Contracts
• Contracts should describe the nature of the
transaction
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Who is getting what? Doing what?
Payment and costs
Delivery terms and conditions
warranties
Ownership of intellectual property
Term
• Consider what happens when things go wrong
• Handling contract disputes
Contract disputes
• One party fails to do what was promised
under the contract
• remedies if other party breaches
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encourage other party to cure their breach
stop performance
mediation or arbitration
small claims court or lawsuit
• Limit damages to minimize $ owed in the
event of a breach