Making It Legal:

Here’s the lowdown on taxes when it comes to home-based businesses. If you earn money on it, no matter how little, plan on paying taxes. Doesn’t matter that it’s for a little “walking around” pocket change, for the baby’s diaper fund or to help Grandma get her heart medications.

Q.: I was thinking about doing something from home–gift baskets or cookies–because I am a stay-at-home mom. I was wondering if I would have to pay taxes if I made these items and sold them to make a little extra money. Also how would I go about checking to see if the business name I want has been taken? Is there a specific website for that? And can I advertise on one of those free websites?

A.: Let’s leave aside for now the morass of food licensing issues that arise if you use your home kitchen for a food-based business. The IRS takes the position that whatever income you generate through a business activity, no matter how small and no matter whether it’s a home-based business or otherwise, is taxable . . . so yes, you’d generally have to pay taxes on what you earned. An exception is if your legitimate business expenses outweigh your income but, in that case, you’d be losing money on your products (which brings up other headaches).

In terms of checking the business name, if you plan to form a corporation or LLC, your state’s secretary of state may have a website where you can check business names. Or if you just plan to file a fictitious name (or DBA), you’ll want to go to the offices of your local county clerk (usually you have to go there in person; not that many have business name records online).

From there, however you want to advertise your products is up to you. However, I’d strongly recommend that you put together some form of business plan so you can be crystal clear about your product expenses, advertising budget and competition for your target market. I’ve encountered a lot of people who have run headlong into business ideas that they thought would make them easy money, then ran out of cash before they could really get them off the ground. I’d hate for that to provide an extra strain on your family. Consult with your local Small Business Development Center. You can find a list of centers near you at http://www.sba.gov/aboutsba/sbaprograms/sbdc/sbdclocator/SBDC_LOCATOR.html.  They should be able to give you all of the basic information you need to get started and have many programs available for free. 

Well, friends, I almost fell for it–and I want to prevent you from doing the same.

I received an e-mail from (what seemed to be) PayPal, saying that my account had been placed on hold because of a “reason to beleive that your account was accessed by a third party.” See the clever language, below. It looks like PayPal, seems to show the company’s concern for me (thanks, PayPal!) and ties right into a concern people have about online transactions–that somehow, my account was hacked and will be misused.

Guess what–IT’S NOT FROM PAYPAL!

Somehow, I had the presence of mind to call PayPal instead of clicking through the links . . . only to learn that, yes, the e-mail was a spoof. Had it been a real e-mail, it would have been personalized and addressed specifically to me (and not just through my e-mail address).

In any event, save yourself the trouble–should you receive e-mails that ask for account verification, always call the company or institution to find out if it’s legit and, if so, how best to handle it.

As a lawyer, I’m always dealing with companies’ confidential information. So keeping secrets is a core part of my business. You may be surprised to find that it’s part of yours, too.  They may be buried in various places–or dug up by your employees or independent contractors.  And if exposed without permission, you can find yourself in hot water.

Consider including confidentiality provisions in the following kinds of scenarios:

• You use an independent graphic artist to help design a client’s annual report and provider her with sensitive client information.

• You don’t want an employee tweeting about a client product launch before its time.

• You want to avoid employee blogging about a company takeover.

• You’re sharing crucial market research with a strategic partner, but don’t want it to use the information for any purpose outside your partnership.

• You’ve hired a broker or finder for a business opportunity and don’t want your company information shared for an unauthorized purpose.

• You’ve taken on a business partner and don’t want her to misuse company information after she retires (or resigns).

And, of course, get it in writing.

Yes, it comes from a competitor, but money is money, right?

Forbes, in conjunction with The Venture Alliance, is launching a survey of America’s Most Promising Companies.  It’s an opportunity for small business owners to evaluate their chances of getting investment capital funding.  They’ll look not just at growth in sales, but a whole range of other intangible factors, too, like the strength of the management team, the commitment of the owners and the intellectual property they’ve developed.  Don’t hold me to it, but I’m told there’s a money prize for the winner . . .  and publicity for the finalists (and you know investors will be checking out that list, too).  Enter today to get on their radar!

Entrepreneurs occasionally ask me about the value of forming a nonprofit (”not-for-profit corporation” (NFP) in legalese). I suppose they say, “Hmmm . . . nonprofit . . . that means I don’t have to pay taxes!”

And to a certain extent, they’re right. Nonprofits are exempt from paying federal and state income taxes, provided you have organized them properly. They’re not a way for individuals to get rich (let’s leave aside the United Way scandals and the like). Other than a reasonable salary that staff can earn, all of the profits need to go toward the project, community or purpose of the NFP. But people still come up with clever approaches, to see if there’s a loophole in there, somewhere.

Q.: Can a nonprofit use any of its proceeds to help fund or start up a new venture in an LLC?

A.: Generally, nonprofits do not use their proceeds to fund for-profit ventures, for two important reasons. First, the profits or funds generated by a nonprofit need to be put toward the people or programs the nonprofit was set up to help. If it starts a for-profit LLC, the profits would need to be channeled back to the nonprofit organization. Second, there are complicated tax rules concerning certain kinds of not-for-profit structures. If too much of the funds generated for the nonprofit come from for-profit sources (like business ventures or selling products), it can harm the organization’s ability to keep its nonprofit tax status. I’d highly recommend that you speak to an accountant familiar with the tax rules for not-for-profits so that you can get a handle on the scope of what will be acceptable . . . and decide whether that fits within your goals. 

Wille Faler writes, “There are two qualities that are necessary for an entrepreneur if he is to rely on anything but blind luck: being able to be brutally honest with himself and others, and being able to judiciously manage risk.”

I liked that because I find that entrepreneurs like to talk about the risks they are taking, and not so much about the risks they are managing.

What kind of chances are you taking with your company? Are you protecting yourself? Is doing business with Wal-Mart** (see my note, below) really worth it when it can hold up paying your invoice for 90, 120, 180 days? What will that do to your cash flow? Can you afford to stay in business?  After all, as Faler notes,

Given the riskiness and high stakes of new ventures, living to fight another day and give it another try may in fact be a more valuable asset than hitting any one individual milestone.

Let me know if you agree.

***  Author’s note (6-16-09):  It’s come to my attention that I may have raised the blood pressure of some businesses who actually deal with Wal-Mart by mentioning the company and a long payment cycle within the same sentence.  Mea culpa.  I don’t have the inside track on whether Wal-Mart is paying promptly, nor did I mean to insinuate that they aren’t.  I should have said (more artfully and accurately) to beware of being lulled into a false sense of security that you’ll be paid promptly simply because you’re doing business with a large corporation . . . as they can become late-payers, too.  The larger the order, the harder the hit to your cash flow, if delinquent.  

Wells Fargo just released the latest in its series of webcasts for small business owners.  Titled “Cost Saving Real Estate Strategies for Your Business,” it features moi, in a scintillating, not-to-be-missed discussion of how tenants can reduce their lease expenses.  I’m joined by co-panelists Brad Blackwell and Jagdeep Dayal of Wells Fargo, Emily Fu of ReMax of Greater Atlanta, and moderator Rich Sloan, chief startupologist at Startup Nation.

OK, so maybe my age is showing (it hasn’t been that many years since college, has it?), but I thought that drinking games were idiot party tricks made up on the spot by frat boys sitting around a keg of watered-down beer trying to get into the panties of the coeds. Apparently, it’s now a lucrative business opportunity. . . ?

Q.: I want to make and sell a drinking game. What are the legal issues involved in selling them online? I have spoken with a patent lawyer–I don’t have the money for a patent right now but am keeping all my documents showing my initial designs and such.

A.: You have a number of issues you’ll be facing–some legal, some financial, and many of which depend on where you’re located because state laws can vary. The most important question, though, is whether you have put together a business plan. You mentioned that you didn’t have the money for a patent . . . but starting a business takes money. Have you thought about how you will attract customers? What you will charge for the game (and why would people pay for the game when they can find drinking games on the internet for free)? What will it cost to manufacture the game (if it’s a tangible product) . . . or create the website (if online)? When you can expect to earn money from it? What will your profit margins be? How will you sell/distribute it? You’ll want to give these issues a lot of thought; otherwise, you could be throwing hard-earned cash out the window without seeing a return. As to your legal issues, you’ll want to consider:

• Forming a proper business entity so that your personal assets are protected
• Consulting with legal counsel that specializes in liquor issues to address whether there are any special licenses or disclaimers you should include in the game
• Confidentiality and non-disclosure agreements with the game manufacturers or anyone creating the intellectual property for you
• Trademark or copyright protection for your intellectual property (you already know that patents may be involved)
• Sales terms (and return policies) for customers

I would strongly suggest that you consult with your local Small Business Development Center.You can find a list of centers near you at http://www.sba.gov/aboutsba/sbaprograms/sbdc/sbdclocator/SBDC_LOCATOR.html. It should be able to give you all of the basic information you need to get started and will have many programs available for free. The most important part of your plan is working through the financial projections to make sure that you know: 1. How much the venture will cost you to get started, 2. When you can expect to make a profit (and take money out of the business) and 3. How long you can afford to keep pursuing the business (in other words, when it’s time to close up shop and work for someone else).

I was asked recently in my Forbes.com Ask An Expert column whether you could copyright something you didn’t write.  The short answer is “no,” unless you’ve carved out a “work for hire” exception.  This is particularly relevant for entrepreneurs who outsource to freelancers for their projects.

When you hire a freelancer to do work for your company, the freelancer–not you–is the owner of the copyright.  In order for your company to become the owner of the rights, you need one of two things (preferably, both):

• A written agreement that states that the work being performed is done on your company’s behalf as a work for hire; and

• A written agreement transferring any rights that the freelancer may have to your company.

The second is important because your contract may come under scrutiny and not have the right language for a “work for hire” (it can happen, especially if you download contracts from the internet).  The first is important because, without the “work for hire” provisions, your freelancer can sell the work to someone else, make changes to it or use it in other ways . . . all of which you don’t want.  For more examples of how the lack of “work for hire” language in your written contracts can cause problems, read my article, Why Guns for Hire Should Scrutinize Work for Hire Provisions, available on my GreatBusinessLawTips.com site.

Q: What would be the first step for an invention? How can the idea be protected when others will need to be involved in the process of getting the idea to market?

A: It’s very difficult to protect an idea, unless you have found some way to “capture” it in a kind of tangible form–such as a writing, drawing/schematics, etc. The way people have tried to work around this when building prototypes is to use confidentiality and non-disclosure agreements, which aim to prevent your manufacturers, designers, etc. from disclosing to others the information they learn from you, or from using it themselves. How you structure the agreements can depend on the nature of your invention and the work you’re having people do for you.

Your best next step is to consult with a local patent attorney (with an invention, you’d want to have one on board anyway). If you don’t know of one, most counties have a bar association that will have an intellectual property committee . . . make sure you find someone who is admitted to the U.S. Patent Bar (not all IP attorneys work with patents). The attorney should be able to discuss with you: 1. the full process involved in protecting an invention, 2. the costs and fees associated with the various forms of protection and 3. strategies for handling that “in between” stage of developing the prototype.

I hear a lot of complaints from business owners about not getting paid . . . cash flow is an issue . . . and they’re concerned about meeting their own obligations. But when we start to explore how they can protect themselves from slow payers, I find that they’ve often left themselves exposed. Here are just a few areas where a little protection can go a long way:

• Charging interest. If a customer pays you late, you’re losing not just the fee (or the price), but also the time value of having the money in your pocket. Charging interest or late fees on late invoices can supplement that lost time value.

• Attorney fees.  One of the big impediments to bringing a lawsuit is the cost of hiring an attorney to handle the matter. If the other side had to pay your attorney fees (assuming you were in the right, of course), you’d then have a huge bargaining chip to resolve the matter sooner.

• Venue. If you do business with out-of-state clients, the last thing you want is to have to schlep across the country to bring a lawsuit against them. You can agree in advance to bring disputes in the courts to your home turf. That can also add valuable leverage.

These are just a smattering of the terms you can put in your arrangements.  But you need to have them in writing–which is why written contracts are so important. You often see them in sections of contracts called “boilerplate” or “general” or “miscellaneous.”  In fact, why do contracts have to be so long? How does all this “fine print” help–or hurt–you?  To learn more, I’ve created a handy booklet, Guide to Fine Print: How Contract Boilerplate Can Benefit–Or Bite–You, available through my GreatBusinessLawResources.com site.

Today’s query has to do with celebrities. Dabnabbit!–why don’t they return my calls?

Q.: I sent two celebrities a business idea for a website. I never heard a response from them or their companies. Should I continue to write them or find other interested parties?

A.: Without knowing the business idea or which celebrities you contacted, I can think of several reasons they didn’t respond:

• They didn’t like your idea.
• They didn’t like how you proposed they be involved in the project.
• They began implementing the idea you suggested well before you contacted them.
• They’re too busy to be bothered

Under various state laws, celebrities have the right to control how their image and likeness are used. It’s called the “right of publicity.” One can assume you didn’t pick these particular celebrities because they were your closest friends since childhood. No–you wanted to trade off their publicity machine, their influence and their “power of attraction.” So they may not be interested. After all, you’re probably not the first person to approach them with a business opportunity.

People have no obligation to respond to an unsolicited offer, proposal or manuscript. But they may not want to take the risk of acknowledging your idea, in case it’s close to something they already have in the works . . . and the last thing they need is a lawsuit claiming they infringed your intellectual property rights, no matter how specious the lawsuit is.

Unless you have a way to get past the “gatekeeper” (such as through a personal connection to the celebrity’s business manager, accountant, attorney or sister), continually sending letters probably won’t get you far. Either find a way to be a closer “”degree of separation,” or try someone else.