There are several ways that aspiring entrepreneurs can structure their new business. The most well known are the limited liability company (LLC), and the corporation. The basic corporation is what’s known as a C corporation, but there are also S corporations, named for Subchapter S of the Internal Revenue Code. A corporation takes on the S designation when it elects to pass income through the corporation and onto its shareholders; the corporation itself does not pay taxes on its income, but its shareholders do.
Why is this a desirable arrangement?
It can help startups by reducing tax liabilities at a crucial time for the business’s development. In addition to income, losses also pass through to shareholders (in many cases, startup employees); these losses can be offset against income received from the business (and other types of income) in calculating the amount of income tax owed. In addition, as a corporation the S structure allows shareholders to receive dividends, which are then taxed at the more favorable capital gains rate.
While these are definite benefits to having S status, there are other caveats that should be considered when deciding whether to make the S election. Because of the corporate form, S corporations need to adhere to stricter legal formalities than an LLC (such as paying state report fees, creating corporate bylaws, issuing stock, and more detailed record keeping). S corporations also have limitations on issuing stock that their C counterparts don’t; there may only be 100 shareholders per S corporation, and only one class of stock can be issued. This can complicate the process of dividing stock options between investors, since there is no way to allocate different types of dividends or distribution rights that different investors might want. In addition, the IRS watches S corporations more closely, since shareholders can receive both dividends and a salary; the IRS will need to ensure that payments made to shareholders are accurately represented.
However, whether a business should make the S election depends on the needs of the business and its members. Other benefits available to S corporations include transferability of shares (which can’t be done in an LLC), and the corporate structure (compared to the more partnership- like LLC); these should all be considered in deciding what sort of organization will suit your business best.
Should You Register Your Trademark Yourself?
Many startup founders don’t see the point of hiring a lawyer to trademark their name or logo. After all, the trademark application seems relatively simple, if you follow the instructions and file everything correctly.
But, as with so many things, the trademark process can be deceptively complicated. Your application can be rejected for any number of reasons, even if you do everything by the book.
One example is having a mark that isn’t sufficiently distinctive. This can prevent registration for even the most conscientious and diligent business owner.
What makes a trademark “sufficiently distinctive?” It’s a good question – and one that eludes a simple answer. Basically, your trademark can’t merely describe what your product does; it has to be distinctive enough that consumers could hear the name and think of your product.
Good examples of distinctive trademarks are Hulu and Kodak. These brand names don’t describe what the product does (TV streaming and film/photography, respectively); rather, they are made up words that have no meaning in and of themselves. Perhaps counter-intuitively, distinctive names like these are actually easier to register than names that describe what the product does (this might partially explain why TVStreamer and FilmCompany aren’t famous brand names, although those names are also pretty boring).
Another factor in the trademark approval process is making sure that the mark attempting to be registered is not similar to any other marks that are already registered, to prevent what’s called “likelihood of confusion.” Some factors in determining the likelihood of confusion are how similar the marks are, how similar the products or services are, and how well-known the originally-existing mark is, among others.
These are just a few examples of things that can snag an otherwise properly-filed trademark application. A lack of investment up front can end up costing businesses time and money down the line – time and money that could have been spent acquiring new customers and growing their business.
What’s the Difference?
Common provisions of a Terms and Conditions include:
Your billing policies.
How a customer may (or may not) use your service.
Your copyright policy and how customers can report copyright violations.
When and how you might modify your service.
Any warranties that you place on your service.
What happens in the event of a dispute, including whether it will be decided in arbitration or in court, and where the case will be heard.
The types of “personally identifiable information” that you collect from customers. This includes things like names, addresses, email addresses, or anything else that could allow you to pinpoint an individual’s identity. IP addresses may also be classified as personally identifiable information.
The types of “non-personally identifiable information” that you collect. This is anything that can’t be used to identify an individual. Examples include the browser they’re using, the pages they visited on your site, or the zip code in which they are located.
LLC vs. S-corp vs. C-corp
Lots of startups wonder about the advantages of an LLC vs. an S-corp vs. a C-corp. There’s no doubt that it’s an important question, but the answer depends in large part on what you’re looking to accomplish. If you’re looking to take funding, chances are you’ll want to go with a C-corp as that’s what a lot of investors prefer. If you don’t want to deal with the red tape inherent in a corporate structure, an LLC makes sense.
The difference between an S-corp and a C-corp is that a C-corp is taxed as a corporation while an S-corp is a “pass through entity,” meaning that the taxes are passed through to the shareholders. An LLC is also a pass-through entity; members of an LLC are essentially taxed as a sole proprietor (if only one member), or a partnership (if more than one member).
Of course, the decision of what corporate structure to choose for your startup is extremely important and one that shouldn’t be made on the fly. Be sure to speak with an experienced startup or small business lawyer who can help you navigate the decision of whether to form an LLC, an S-corp, or a C-corp.
Using a Bad Contract Template
Most startups are short on both money and time. As a result, they tend not to spend a lot of time proofreading and refining the contracts that they send to clients. While this seems logical in the short term, the reality is that using a bad contract can come back to haunt you in a big way. This is especially true for small businesses that use the same contract template for all their clients – which, in my experience, is quite common.
Shockingly, I have spoken to a few entrepreneurs who don’t have their clients sign contracts at all. I don’t have to tell you that this is a bad idea, so I’ll let him do it.
If you ever have a client who refuses to pay you or says you agreed to do extra work, you’ll have a hard time proving your case without a signed written agreement.
So, having a contract is a good first step. But a much more common mistake – and one that’s almost as bad – is having a poorly drafted or incomplete contract.
There are so many things that go into a well-drafted contract. And what is required depends largely upon the particulars of the agreement: who the client is, what you’re promising them, and what they’re agreeing to in return.
What goes into a good contract?
Here are just a few clauses that you may want to consider putting into your contracts:
Intellectual property: This one is crucially important, especially if you’re sharing intellectual property with the other party. For example, let’s say you allow the other party to feature your company logo in a catalog. You’ll want to clearly spell out who owns the rights to the logo, and what type of license you’re granting to the other party in permitting them to use it. This will prevent them from saying that you gave them permission to use it indefinitely into the future.
Forum selection: A forum selection clause governs where any case brought against you will be heard. If your business is in Manhattan, for example, you may want to specify that any case will be heard in New York County, so that you won’t have to travel across the country (resulting in lots of lost time and money) if you get sued.
Severability: A severability clause says that if a court ever finds one part of your contract unenforceable, the rest of the contract will still be valid and in effect. Without a severability clause, you run the risk that your entire contract will be thrown out because one portion was poorly drafted.
These are just a few of the many clauses that you should consider putting into your contract. Again, each contract is different and will require different things to be optimally drafted. Unfortunately for small business owners, there is no “one-size-fits-all” strategy when it comes to contract drafting.
Reviewing contracts you sign
Of course, it’s also important to thoroughly review the contracts you sign. If you aren’t sure about the meaning or the implications of a clause in a contract, it’s imperative that you talk to your lawyer about it before you sign. Signing a contract that you don’t fully read or understand is a recipe for disaster.
What Documents Should My Team Sign?
As your business begins to grow, you’ll have independent contractors working on projects. Eventually, you may bring on an employee or two. Before you know it, you’ll have a bustling team working for you. Congratulations! You’re now officially the owner of a growing business.
Now the bad news: there’s a certain amount of red tape that comes with bringing on new team members. Full-time employees create the most work on your end, since you’ll need to worry about taxes, health insurance, and any number of other issues. But even with interns and independent contractors, you’ll need to protect yourself and your company by having them sign certain documents.
Which documents should I have my team sign?
There’s no blanket answer to this question: it depends in large part on the circumstances and who is sitting on the other end of the table (for example, employee, independent contractor, intern, or partner/collaborator). That said, here are just a few documents that you may want your team member to sign:
Nondisclosure agreement (NDA): An NDA sets forth specific information that you plan to share with the other party, and requires that they keep the information confidential. NDAs are very common, and as a best practice, it’s wise to have anyone that will view any internal company information sign one before getting a seat at the table. Regardless of whether the other party is an independent contractor, employee, or potential collaborator, if you don’t want them to steal your information, it’s a good idea to have them sign an NDA.
Covenant not to compete: This is a promise by the other party that they won’t open a business that competes with yours, or, in some cases, go work for one of your competitors. Covenants not to compete can be tricky to enforce, as courts don’t like to validate agreements that last for an especially long period of time, or cover a large geographical area. For that reason, it’s important to draft your covenant not to compete so that it’s sufficiently narrowly- tailored to protect your business while still being enforceable.
Independent contractor agreement: An independent contractor agreement sets forth the terms for any work you give to an independent contractor, including the duties for which they’ll be responsible, their hourly rate, liability and indemnification, how either party can end the relationship, and any warranties given by you or the independent contractor, among many other things. The agreement also explicitly states that the contractor is not an employee, and therefore isn’t entitled to health insurance, tax withholding, or any of the other benefits that come with an employer-employee relationship. The agreement also states that the contractor won’t have the authority to act as an agent for your company. Depending on the situation, all, some, or none of the above documents may be appropriate. By the same token, there are many other contracts and agreements that you may want your team members to sign. It depends on the type of work you’re doing and who you are working with. Check with your attorney to see how to best protect yourself and your company when bringing new people on board.
What Does CAN-SPAM Require?
You’ve probably heard of CAN-SPAM, but do you know if you’re in compliance? If you’re sending any commercial email, whether in bulk or individually, you’re required to comply with CAN-SPAM.
What does CAN-SPAM require?
The four main requirements of CAN-SPAM, stated broadly, are:
No false or misleading information: A commercial email can’t include any information that’s false or misleading, whether in the body of the email, the subject line, or anywhere else.
An indication that the message is commercial: CAN-SPAM requires that a commercial email include a clear indication that the message is an advertisement or solicitation.
Valid contact information for the sender: CAN-SPAM requires that a commercial email include a physical address where you can be reached.
A CAN-SPAM compliant opt-out mechanism: Anyone who receives an email from your company must be able to easily opt-out of future emails. CAN-SPAM sets out very specific methods by which a user must be able to unsubscribe. Importantly, CAN-SPAM compliance doesn’t end after you send an email. Any opt-out requests have to become effective within 10 days after being made, and you can’t ever send commercial emails to people who have opted out unless they explicitly opt back in. You also can’t sell, trade, or transfer email addresses of customers who have opted out unless you’re doing so for the sole purpose of ensuring your own compliance with CAN-SPAM.
What happens if I don’t comply with CAN-SPAM?
The costs of violating CAN-SPAM can be astronomical: the law provides for a fine of up to $16,000 for each email that violates the law, and more than one person or entity can be found liable for a violation. Certain violations could also result in prison time.
Other marketing laws and regulations
CAN-SPAM is just one of many number of marketing laws that you may need to be aware of, depending on the nature of your business and what kind of advertising you do. It’s important to do your homework before embarking on any marketing campaign, given the potentially serious penalties for violating marketing laws.
For more information on the requirements of CAN-SPAM, penalties for noncompliance, and helpful information on how to stay in line with the law, visit the Federal Trade Commission’s CAN-SPAM Compliance Guide for Business, available at http://www.ftc.gov/tips-advice/business-center/can-spam-act-compliance-guide-business.
The Uber Employee vs. Independent Contractor Dilemma
By now, you’ve probably heard the brouhaha around Uber’s classification of its drivers as “independent contractors.” The story stemmed from a 2014 complaint filed with the California Labor Commissioner by a California Uber driver. The driver wanted Uber to reimburse her for business expenses, including gas and tolls. In arguing that it shouldn’t have to pay, Uber said that the driver was an independent contractor and therefore not entitled to expense reimbursement.
The Commissioner disagreed with Uber, analyzing an 11-step test used in California to determine whether a worker is an employee or an independent contractor. (The list shares some similarities with the IRS’s (PDF) list at the federal level.) Ultimately, the California Employment Development Department (EDD), an administrative law judge, and the California Unemployment Insurance Appeals Board all agreed that an Uber driver was an employee and therefore entitled to benefits not available to independent contractors.
The case is interesting on its face, but it doubles as a cautionary tale for anyone involved in running a business. These days, many businesses (especially startups) are misclassifying employees as independent contractors in order to avoid the responsibilities that come with having people on the payroll (carrying workers’ compensation insurance, complying with withholding and payroll requirements, providing benefits, etc.).
While classifying workers as independent contractors may seem like a smart idea in the short term, it can lead to disastrous consequences. Employers who misclassify their workers are exposing themselves to severe financial penalties, and in recent years the IRS has been cracking down on employers who misclassify employees. And, of course, even the threat of financial ruin can bring a company down; home-cleaning marketplace HomeJoy shuttered last July, citing lawsuits from allegedly misclassified workers as one of the causes. Perhaps because of the heightened exposure the issue has received in recent years, many startups – especially service-focused startups similar to Uber – have begun voluntarily reclassifying their workers as employees. Whether this trend continues is anyone’s guess, but it shows that companies and investors alike are paying attention.