Thinking of Starting a Business? Select the Entity that Makes Most Sense

Whether you want to take that hobby and turn it into a full-time job or have a brilliant idea that you’re developing that’s going to change the world, one of the first things you need to think about is what form of business entity makes the most sense for your short and long-term goals.

Why is that so important? Every business owner should be concerned about minimizing his/her exposure to risk and liability as an individual for debts and obligations of his/her business.  If you create a separate business entity, you can separate your personal assets from the assets of the business and therefore shield yourself from most claims made against the business.

In order for you to achieve this liability protection, you will need to file the appropriate paperwork with the state where your principal place of business is located and one that has laws you’d like the business to be governed by. The two most common entity forms that provide you with liability protection include a limited liability company (LLC) and a corporation. And, depending on what your short and long term goals are, you will likely select the one which offers the desired structure and management of your business as well as the tax treatment you prefer. 

In terms of structure and management, you’ll need to think about whether you want a more flexible or traditional format. Limited liability companies provide great flexibility because you can set up your company to be managed by all of its members (or owners) or by one or more managers. You can even have the company managed by a non-owner so specific individuals with certain expertise perform the management responsibilities.

The structure and management of an LLC is governed by the company’s operating agreement and the applicable state LLC rules. The operating agreement sets forth how the company will be run and managed and is a critical document that should be put in writing. Even if you’re a solopreneur, it’s important to be clear on the company’s protocol for day-to-day operations, membership interest, and what occurs in the event the member or owner becomes disabled or dies. These are all important considerations that should be addressed in writing, among others.

The LLC provides for flow through taxation, meaning that taxable income earned by the company is passed through to individual members and therefore the company is subject to one level of taxation.

For a corporate structure, you’ll typically see a more traditional format. Typically, the corporation’s shareholders elect a Board of Directors, and the Board appoints the officers of the corporation who handle the corporation’s daily operations. You can elect to be a C-corporation or an S-corporation. There are a variety of similarities and differences between the two. They both offer limited liability protection, are considered separate entities, require paperwork to be filed with the state, and share the same structure and corporate formalities. However, they are different with respect to taxes and as to corporate ownership.

C corporations are subject to double taxation, and S corporations are pass through entities and therefore are subject to one level of taxation. With respect to ownership, C corporations have no restrictions but S corporations do.  Some restrictions for an S corporation include being limited to 100 shareholders who must be US citizens/residents, not being allowed to be owned by a C corporation, another S corporation, an LLC, partnership or certain types of trusts, and only having one class of stock. 

For companies that are seeking outside investors, the corporate structure is often very attractive because the structure and corporate management is predictable. In the alternative, the limited liability’s structure and management is attractive because it often allows for more efficiency and less rigidity with respect to corporate formalities.

As a business strategy, selecting the best entity form for your business requires consideration of various factors. For more information on choosing the appropriate entity for your business, please contact us at 703.319.7868 or via email at grace@graceleelaw.com.

Avoid These 5 Costly Intellectual Property Mistakes

1.     Mistake: Not doing your research on the competition.

      One of the biggest mistakes that a start up can make is failing to do their homework and researching whether there are other competitors with similar inventions, patents, trademarks, copyrights and other intellectual property already in existence and/or in the marketplace. Conducting this research before launching your business can determine how you will move forward with your idea and whether your invention, idea or product is unique enough to qualify for intellectual property protection. If you fail to do a proper and extensive search, you could unknowingly infringe upon someone else’s protected intellectual property. Remember, ignorance of the law is not a defense. If a court were to find that you are infringing, you could be subject to punitive and even triple damages. Plus, if you’ve ever seen an episode of Shark Tank, you already know that a non-patented invention or idea oftentimes prevents you from securing the necessary funding to get your business off the ground. A comprehensive intellectual property search done by an attorney or reputable company will usually run about $500-$1,000 but is well worth the expense to reduce your risk of being sued for infringing on an idea you didn’t realize already had legal protection.

2.     Mistake: Not timely protecting your intangible assets.

       There are plenty of ideas that are patentable yet not marketable in the real world. After you’ve done your research about the competition and determined that your idea is commercially viable, filing a patent might be a good next step. But, as they say, timing is everything. And, while you don’t want to be overly enthusiastic and file too soon, you also need to be careful not to wait too long. Most business owners don’t know that a patent application must be filed within one (1) year of the first disclosure, printed publication, or offer to sell the product. If you don’t file within that one-year period, you’ve lost your opportunity to file for patent protection. The US Patent and Trademark Office now has a “first to file” rule, meaning that whoever files first will win the patent race despite not having actually invented first. If you don’t have the funds for a regular patent application or are still in beta stage, you could buy yourself a little time by filing a provisional patent. This gives you another year before you have to file for your regular patent. And, although the provisional patent is not as formal as a regular patent application, you should be as detailed as possible. Another consideration for your intellection property is whether your idea would be best kept as a trade secret rather than being filed as a public patent. This may be the case if your intellectual property cannot be easily reverse-engineered. There are various factors that should be weighed prior to making that determination.

3.     Mistake: Not signing the proper agreements with employees, vendors and others with whom you work. 

       Startups are usually built from passion and as a result, there tends to be a more informal and relaxed atmosphere in the business environment. Although this type of environment is enjoyable to work in, there are legal considerations that you should address early on. If you’re hiring vendors to help you develop the idea, make sure it’s clear who owns the intellectual property and anything else that is created out of the work for hire. Have employees and vendors sign a non-disclosure and confidentiality agreement. Address who will bear the legal cost in the event of an intellectual property infringement situation. You may also want to consider having employees sign a non-compete and non-solicitation agreement so they can’t leave and take ideas, trade secrets and other employees with them without serious consequences.       

4.     Mistake:  Going the DIY route with professional services.  

       With so many online resources available these days, it’s easy to be tempted to use a DIY website for legal, tax and other business documents – even easier if your company is cash-strapped and finding it difficult to allocate financial resources for professional advice. While these DIY habits may be tough to break, it can be extremely expensive to fix improperly prepared DIY documents. What you don’t get with these online resources is a live attorney who understands the intricacies of your specific business situation and can thus prepare the most appropriate legal documents to support what you’re trying to accomplish in both the short term and long run. All too often, entrepreneurs attempt to put together their own core corporate documents using online DIY resources and then plan to hire a professional at a later date when there is sufficient funding. By then, it could be too late. Just like a house, when you’re starting a business, it’s important to have a solid legal foundation.

5.     Mistake: Using proprietary and/or other valuable information from a previous employer.  

      Sometimes the information that you obtain from a former employer may carry over into your new business. This may include trade secrets, customer lists, client contacts, information technology, business strategies, and the like. While you may not think having this information and using it for your own purposes is a problem, your former employer may have a very different opinion. Nowadays, it’s very common for employers to require employees to sign a non-compete agreement. Oftentimes, the employee doesn’t even recognize the significance of such an agreement and what obligations they are being bound by. This lack of knowledge can be fatal to your new business in the event you use information obtained while working for a former employer. In many instances, the former employer enforces the non-compete agreement, which can subject the business owner to unanticipated legal fees, monetary damages and even criminal liability. It’s important to evaluate the breadth and scope of any restrictive covenant you have agreed to be obligated to before starting your new venture. 

For more information on ways to avoid intellectual property mistakes and protect your intangible assets, schedule an introductory strategy session online at graceleelaw.com or call us at (703) 319-7868. 

5 Surefire Ways to Run Your Business Into the Ground

1.     Not forming the proper entity to limit your risks and liabilities. As a business owner, you should think about forming a business entity to minimize your individual liability for debts and obligations of your business. A separate business entity will allow you to separate your personal assets from the assets of the business and therefore protect your personal assets from most claims against your business. The two common business entities that provide liability protection are the limited liability company (LLC) and the corporation. Deciding which one to choose will depend on the ownership structure, management and governance of the business, the tax treatment you’d like, the strategy planned for seeking outside investors, and the compensation for employees and staff. Choosing the best entity for your business involves many considerations and is best done in conjunction with the help of a legal professional.

2.     Not having properly prepared legal documents and contracts. It’s incredibly important to have your business entity documents in order so owners and management understand and are clear on how the business will be governed and managed and how profits and losses will be shared, among other considerations. An LLC is governed by an operating agreement, and a corporation is governed by its bylaws. These business documents can help resolve internal issues and disputes by providing clarification on how certain matters are to be addressed.  Equally important is having written contracts when you’re doing business with clients and customers. You're going to want agreements to protect your business, maximize your ability to get paid, and specify what will occur if and when your clients and customers breach their obligations under those agreements. Formalizing your business documents and having strong contracts in place will help clarify the parties’ obligations and, more importantly, reduce costly and time-consuming disputes.

3.     Not having policies and procedures in place. By stating what your company policies are, you have provided a roadmap of your company’s vision and how its day-to-day operations will be handled. The ultimate goal of the procedures is to offer the person reading them a clear understanding of how the company will carry out or implement its policies. These policies and procedures provide employees with information that allows them freedom to carry out their job and make decisions within defined boundaries, thus reducing a manager’s need to micro-manage. Policies and procedures provide clarity to the reader when dealing with accountability issues or activities that are of critical importance to the company, such as health & safety, legal liabilities, regulatory requirements, or other issues that have serious consequences. By writing clear policies and procedures that even an outsider would understand, you increase your legal protection in the event they were challenged in court.

4.     Not knowing whether to hire an employee versus an independent contractor. Hiring an assistant can free you up to do more important things. When you hire someone, you need to know whether you should hire the individual as an employee or independent contractor – they are not the same. Each has different implications on your business depending on the type of entity selection you’ve made. Your first hiring decision will impact your labor costs, liability, flexibility to hire and fire, exposure to lawsuits, and taxes. Misclassification of an individual working for you can also have costly legal consequences such as back taxes and penalties for taxes, insurance and benefits, to name a few. A careful assessment of your business needs and the classification of hired individuals is critical to avoid these traps.

5.     Not knowing when to hire because you’re too busy working “in” the business. If you think that working “in” the business will ensure that everything’s done right, you’ll spread yourself too thin and set yourself up for failure. When that happens, you end up spending way too much time on every part of the business, which can be draining. Running yourself ragged can cause you to not pay attention to details resulting in missed deadlines, overpromising and under delivering and then you won’t be able to focus on protecting your business. Don’t expose yourself to liability by trying to do it all. Being sued for breach of contract or negligence isn’t fun and can be extremely expensive. Delegate work to others by hiring an assistant, a tax professional, a business attorney, and a bookkeeper to free up your valuable time – working “on” the business instead of in it will enable you to maximize your company’s productivity, profits and protection.

For more information on ways to protect your business, schedule an introductory strategy session online at graceleelaw.com or call us at (703) 319-7868.

10 Tips for Government Contractors: To Team or Not to Team?

That is the question. When you’re a government contractor, it’s highly likely that you’ll need to team with another government contractor that may offer different or other specialized services to win a contract. The problem that occurs with teaming arrangements is that essential terms are often overlooked or worse, not even contemplated. Why, you might ask? Well, oftentimes, small businesses think the teaming agreement provided by the prospective prime contractor is a standard form agreement that merely memorializes that both parties will be pursuing government contracts together.

And, while that’s somewhat correct, this presumption is not only costly but can be a big mistake for a number of reasons. The teaming agreement really is the first opportunity to formally begin negotiations since many terms will also be stated in the subsequent subcontract. As a result, it’s really important to understand what should be discussed in the early stages and why. 

If you’re not as familiar with team agreements, here are some areas that you should focus on and give serious consideration to:

1) Mutual confidentiality and nondisclosure obligations: Since the prime contractor and subcontractor will be sharing proprietary information and knowledge, data, technology, rates and other information, these clauses are essential. You’ll also want to make sure this clause survives the expiration or termination of the agreement to maximize the protection.

2) Representations regarding exclusivity or nonexclusivity: It’s important that the parties understand and define whether the parties are allowed to subcontract or are only able to work with the partners cited in the subcontract to avoid confusion and problems down the road. 

3) Duties: The specifics of each party’s duties that will be performed should be defined such as scope of responsibility, rates, and/or other relevant criteria.  Clarity is key.

4) Mutual indemnification: This holds a party harmless from any direct, incidental or consequential damages and/or costs arising from the other’s actions. This clause allows you to seek reimbursement for money you are forced to pay to a third party as a result of an injury caused by the party from whom you seek the reimbursement as a result of their negligence and/or poor performance. 

5) Ownership of Work: There must be a clear understanding and agreement of who owns the intellectual property that may be created through the performance of the prime contract. There are often disputes regarding this point, so negotiating this early is important.

6) Disclaimer of Joint Venture: If this is not a joint venture, you should expressly state so. Joint ventures are different from teaming arrangements and present different obligations, responsibilities and liabilities.

7) Assignability: There should be a provision with clear limitations on the assignability of the obligations under the teaming agreement. You may not want a third party stepping into the shoes of one of the parties to the contract as that party could be a competitor or may not have been properly vetted through due diligence.

8) Non-solicitation of Employees: This prevents the parties from raiding each other’s workforce for a certain period of time, helping curb the loss of intellectual property, know-how, trade secrets, and possibly more.

9) Termination: The agreement should be clear as to when the relationship between the parties begins, and ends, as well as rules and specifics on any violations of the contract or if the team fails to win a contract award, and the like.

10) Terms of the Subcontract: The teaming agreement should state that a subcontract will be entered into if a government contract is awarded to the prime contractor and that the responsibilities will be at least as inclusive as the teaming agreement so that you get what you bargained for.

Are Non-Compete Agreements Enforceable in Virginia?

The short answer is yes! And, as much as restrictions on trade are disfavored, courts in Virginia are much more willing to enforce non-compete agreements these days. Under Virginia law, the court will review each non-compete agreement on a case-by-case basis in order to determine 1) whether the agreement is drafted narrowly to protect the employer’s legitimate business interest; 2) whether the agreement is overly broad and/or vague; and 3) whether enforcing the agreement would violate public policy.

Traditionally, clauses that prohibit competition or restrict an employee from pursuing his or her chosen profession are deemed invalid. Court rulings are not always consistent, and unfortunately, there is no bright line litmus test to determine whether your agreement will be deemed valid or reasonable. However, we do have some factors that help us evaluate a non-compete agreement’s enforceability. The court reviews the duration, geographic area and scope of restriction as factors in determining whether or not the agreement is really necessary to serve an employer’s legitimate business interest. In enforcing a non-compete agreement, the court balances an employee’s right to secure gainful employment against his former employer’s legitimate business interests.

Since the employer is enforcing the provisions of the non-compete agreement, it has the burden of proving 1) whether the agreement is valid; 2) whether the provisions of the agreement are reasonable; 3) whether there was a breach of the agreement by the employee ; and 4) whether the employer suffered any damages. 

To speak with an attorney about your non-compete agreement, please contact our firm at  (703) 319-7868 or info@graceleelaw.com.