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 Choice of Entity Real Estate Intellectual Property Employment Contracts

Choice of Legal Entity Considerations: –Liability –Taxation –Formal requirements and fees –Management and control of business –Continuation of business

Choice of Legal Entity Practical Tip: –Considerations relating to liability 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 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 tax- forms

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 or

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) –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 ( the internet and the local telephone book to determine if there are other existing trademarks in that namewww.uspto.gov 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: –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 ( 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:-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 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 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 – 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 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 – for federal guidelines – 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 –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 –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