Legal Matters Every Entrepreneur Should Consider

A common question among entrepreneurs starting a business is whether they should incorporate.

Incorporation means that your company is a separate legal and financial entity from yourself.

Legally, a corporation is treated as a citizen. It even has its own social security number for tax purposes, called a “Federal Tax ID.”

Most people incorporate to limit their personal liability in order to shield their personal assets. For instance, if your incorporated business were sued and found liable for damages, it is much less likely that the winner could take your personal car or home.

Incorporating creates a more professional image, and it helps with your taxes.

If you plan to receive outside investments to grow your business, corporation is the way to go. Incorporation protects you in many regards, but it does not protect you from any criminal charges by you or the corporation. You can’t hide behind your corporation to commit illegal acts and expect to be free from liability.

By investing cash or other property in your corporation, you become an owner of an interest. In exchange for your personal investment, you are issued stock in the corporation. A person with that ownership interest is called a “stockholder” or a “shareholder.” Once you become a shareholder, your liability is normally limited to the value of the cash or other property you have contributed to the corporation in exchange for stock.

As a rule, the shareholder’s assets that are not invested in the corporation are safe from the corporation’s creditors. A shareholder might become personally liable for corporate debts if the corporation is not formed in compliance with, or if it operates in violation of applicable statutes, or if the corporation is functioning as a mere front for its shareholders rather than for corporate purposes. In other words, if you are simply creating a corporation to avoid liability, you might become personally liable.

Under certain circumstances, corporate officers might be held personally liable for the corporation’s failure to pay state and federal income tax withholdings. Additionally, a shareholder might be required to personally guarantee a loan issued to the corporation in order to satisfy a lender. If a shareholder does so, his liability is no longer limited to the value of his investment in the corporation.

The board of directors and officers manage the business affairs of a corporation. The shareholders elect the board of directors. For this reason, while shareholders have the ultimate control of a corporation because of their stock ownership, the everyday management lies with the board of directors through its officers. In small corporations the shareholders, directors and officers are often the same persons.

Taxes and Corporations

Corporations enjoy certain tax advantages.  To enjoy these advantages, first you have to become a corporation.

Due to the complexities involved, you should consult an experienced CPA or tax attorney for details. The corporation can adopt a pension or profit-sharing plan for the benefit of its employees. If certain requirements are met, contributions of cash or other property by a corporation through such a plan would be deductible by the corporation for federal income tax purposes.

The corporation pays income tax on the profits that were not distributed to the shareholders as a salary or in some other form that is deductible by the corporation for federal income tax purposes. The shareholders are required to pay a tax on their own personal dividends.

Trademark Issues

A trademark is a word, phrase, symbol or design, or a combination of words, phrases, symbols or designs that identify and distinguish the source of particular goods. By and large, a mark for goods appears on the product or its packaging. A “TM” on a product indicates unregistered trademark rights, and an “®” indicates a registered trademark. It is unlawful to place an “®” on a mark that does not have national registration.

As your domain name can become a highly valuable business asset, you should think in terms of trademark registration. It is fairly simple and inexpensive to register your trademark. It is not a bad investment early on in the life of your business.

One of the most important facts to consider is to avoid using a name that has been trademarked by another business. If you build your brand, even if you have done it unknowingly, around a trademarked name, you could be sued and held liable. Before you register a domain name, go to www.uspto.gov and run a trademark search for the names you’re considering. Because the database you are searching is about 12 months behind, it is not guaranteed that someone else has not already protected your desired trademark. Doing your own research is not a full proof solution, but it lowers your risk of violating trademark laws. It is key to document your research to show that you have done your due diligence.

When trying to determine the ideal trademark for your business, keep in mind that the purpose of trademark law is to prevent consumer confusion about the source of goods or services. Ask yourself if a consumer would confuse your name with that of another product, service or company.

Copyright Issues

Short Copyright Facts

The owner of a copyright has the exclusive right to:

  • Copy the work
  • Modify the work
  • Distribute the work
  • Perform the work publicly
  • Display the work publicly

Copyright is important when you obtain content for your site, and in the protection of your content. Copyrightable works are usually in the form of text, image, music, etc. Facts, titles, recipes, form designs, alphabetical lists and other items do not have the required “originality” to merit copyright protection. One of the misconceptions about copyright protection is that you have to register your work to gain legal protection. If you do protect your original works, you are more likely to win attorneys’ fees and, sometimes, higher damages. Filing for copyright protection doesn’t mean that the government will go after any potential violators. As you file for protection, you are simply putting your intent in writing. It is still up to you to take legal action against any violators.

The term “Public Domain” does not mean that everything in public or on the Internet is free from copyright protection. It refers to items that either do not qualify for copyright protection, or for which the protection has expired. The default you should assume for other people’s works is that they are copyrighted and should not be copied unless you know otherwise.

The correct form for a notice on your website [dates] by [author/owner].” You can use C in a circle © instead of “Copyright,” but “(C)” has never been given legal force. The phrase “All Rights Reserved” used to be required in some nations but is now not a legal requirement in most jurisdictions.

Even if you don’t charge anyone for a product that contains copyrighted materials, you are still violating the law. An example of such an unlawful act would be the instance when Napster enabled widescale download of copyrighted music.

One exception would be fair use. Copyright law does not block your freedom to express your own works. For example, you might be reviewing an article from a newspaper’s web site that requires you to reproduce some of the work on your site. This is not the same as simply copying the work to your site, so you don’t have to create your own work. Of course, that does not mean that you can start posting articles from other web sites and pretend you are reviewing them when you are simply stealing content to cut corners. One of the keys to the fair use doctrine is that you cannot diminish the value of the original work. Copying just 300 words from Gerald Ford’s 200,000-word memoir for a magazine article was ruled as not fair use, in spite of it being very newsworthy, because it was the most important 300 words—why he pardoned Nixon.

Protecting Your Domain Name

Once you register your domain name, protect it, because it might become one of your most valuable business assets. As you grow your business, many of your customers will know your business through your registered domain name. Think of your domain name as a revenue-generating part of your organization. Losing it would mean losing one of your most valuable assets.

Practical Example

Let’s say you have registered your domain name for a new product your company will bring to market in the near future. The domain you have registered is yourcoolnewproduct.com. Fast forward five years, and now you have a successful business web site built around the new product hosted on the yourcoolnewproduct.com. One of you competitors might have registered the same domain name with the .net top-level domain. Now, your competitor owns yourcoolnewproduct.net. You could potentially lose revenue. To reduce this risk and to protect the value of your domain name, consider registering the domain name in all three main top-level domains. Registering the domain name in all three main top-level domains is a small investment to pay to protect your company.

For a small investment, you can register common misspellings of your domain name. It will help reduce the risk that someone will misspell the domain name and be directed to another business’s web site. Some of the most commonly misspelled searches online are Wallmart (Wal-Mart), Geneology (Genealogy), and Wikepedia (Wikipedia).

In case your registered domain name serves to identify the source of your products or services, it might be possible to register your domain name as a trademark with the United States Patent and Trademark Office. It is true that federal law protects both registered and unregistered trademarks, but registered trademarks offer somewhat more protection than unregistered marks.

Privacy and Security

The right to privacy is a serious concern for most consumers. No formal law exists within cyberspace, and Internet users can find recourse only through the applicable laws of their own governments. It is your responsibility to ensure the privacy of your web site visitors. You have to create a transactional or interactive environment that protects the privacy of your customers.

Many people refuse to become online consumers because they fear their personal information could be misused or compromised. Identity theft, credit card fraud, and breach of personal information are among the most common consumer concerns. According to Marc Rotenberg, Executive Director of the Electronic Privacy Information Center in Washington, DC, “The absence of consumer privacy protection might in fact be the number one obstacle to the growth of e-commerce.”

Privacy is one of the leading issues facing the future success of e-commerce. One of your most important tasks as a business is to establish trusting relationships with your site visitors. It is your responsibility to prominently display a privacy policy on your site that details how customer information is collected, used, and protected.

Learn from the pros, if you are unsure about what your privacy statement should look like. You can learn from many highly successful online businesses. Don’t copy their privacy statements, but use them as learning tools. Study the websites of the leaders of your industry. There is nothing wrong with a little bit of competitive intelligence. As you study privacy policies, look for common trends. Take notes, and make an outline. Ask questions as you are writing your outline. What does their privacy statement include? Where is the privacy statement located? Is it easy to find? Using the intelligence you have gathered during your research process, write your own privacy statement.

The body of your privacy policy should include several key components, such as how the collected user information is protected, the security measures you take to protect the information, and if you will share that information with a third party. Also, include privacy information specific to your field. For example, if you’re collecting customer email addresses, be specific about how you plan to use them.

Always include the company contact information in your privacy policy so customers can contact you in case they have any questions. Make sure that a link to your privacy policy is clearly visible on your web site. At the very least, have a link to the privacy policy from your home page, but it doesn’t hurt to have a link to it from all of your web pages.

Sales Taxes

Any business that sells online must be aware of Internet sales tax rules. If an online business has a physical location in a certain state, such as a store, business office or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales in that state. This rule originated from a 1992 Supreme Court decision that declared that mail order merchants did not need to collect sales taxes for sales in states where they did not have a physical presence.

Online shoppers who live in a state that collects sales tax are officially required to pay the tax to the state even when an Internet retailer does not collect it. When shoppers are required to pay tax directly to the state, it is referred to as “use” tax instead of sales tax. The revenue collection agencies in most states now have some kind of formal position on ecommerce sales. Most states treat offline sales in the same way they treat mail order sales; however, contact your state tax agency and ask for help and information with regard to your particular business to be sure.

State governments and brick-and-mortar retailers are in the hunt for legislation to overturn the 1992 Supreme Court ruling. Missing out on tax revenue from online purchases is maddening for state governments, so expect changes.

Practical Example

Suzie, who lives in California, found the perfect birthday present for her husband but can’t find it in California, so she orders the gift online from a gift shop with headquarters in Texas. The supplier has all of its facilities in Texas and collects payment in Texas. Suzie does not have to pay California sales tax (or Texas sales tax) on the gift.

A few months later, the online business opens a warehouse in California to handle its online orders for the entire country. Suzie continues to order gifts from the same company in Texas but she must now pay California sales tax.

Domain Name Disputes

Disputes over domain names can be part of any business. When a dispute over a domain name occurs, you can always turn to the courts. Although courts have the authority to award control over domain names, don’t expect a quick resolution, as usually courts act slowly. Therefore, many businesses avoid the courts and turn to the name registrars for help.
Companies that do bring a court action must be prepared to spend a significant amount of money on legal fees. Your company is going to have to prove in court why a domain name needs to be transferred to another business.

In reaction to strong lobbying from trademark owners and famous individuals, Congress passed the Anticybersquatting Consumer Protection Act in November of 1999. This act made it easier for individuals and companies to take over domain names that are confusingly similar to their names or valid trademarks. To do so, however, they must establish that the domain name holder acted in bad faith.

Website Terms of Use

From a legal standpoint, it is important to have a “Terms of Use” page on every business web site that describes the terms and conditions that govern the relationship between the visitor of the site and its publisher. Properly written, “Terms of Use” can be an invaluable tool in protecting your businesses from misunderstandings, frivolous lawsuits, and crippling legal exposure. Terms of Use pages contain similar content, but there is no “one size fits all” solution. Each business has a unique relationship with its customers that must be considered in its “Terms of Use.”

Common Elements Of Terms Of Use

Choice of Forum – Choice of Forum provisions permit the parties to a contract to choose, with some limitations, the jurisdiction in which any disputes pertaining to their relationship are resolved. In many cases, a web site’s Terms of Use purports to require any legal action pertaining to the web site to be brought in the jurisdiction in which the business is located that might be very inconvenient for a distant customer.

Choice of Law – Choice of Law provisions permit the parties to a contract to select, with some limitations, which particular jurisdiction’s laws will be applicable to their relationship. Usually, a web site’s Terms of Use will apply the law of: (1) the jurisdiction whose laws are most favorable to the publisher; (2) the jurisdiction in which the publisher is physically located; or (3) the jurisdiction whose laws are most familiar to the attorney who drafted the contract.

Limitation of Liability – These provisions allow one or both parties to place certain limitations on their liability for breaching the agreement of the parties. Properly drafted, Limitation of Liability provisions can cap a party’s legal liability for certain conduct.

Indemnification – Indemnification provisions permit a party to shift the burden associated with a projected loss to the other party. In many cases, a website’s Terms of Use requires the visitor of a website to indemnify the site’s publisher toward any losses associated with the use of the site’s content.

Attorneys’ Fees and Costs – In general, a party is required to pay his own legal fees and expenses—win or lose. Nevertheless, parties to a contract might, with some limitations, require that a party who loses in a legal action brought pursuant to the agreement pay the attorneys’ fees and costs sustained by the prevailing party.

Your Terms of Use is one of the most important pieces of content created for your web site; therefore, it is advisable to have an attorney look it over before posting. A well-drafted Terms of Use contract can reduce your legal exposure, while a poorly written one can increase your liability.

Important: Always consult an attorney with legal matters.

 

 

photo credit: SunGod

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George Meszaros is the editor and co-founder of Success Harbor where entrepreneurs learn about building successful companies. Success Harbor is dedicated to document the entrepreneurial journey through interviews, original research, and unique content. George Meszaros is also co-founder of Webene, a web design and digital marketing agency.
2017-09-15T19:03:03+00:00 July 7th, 2016|Articles, How To Start A Business|0 Comments