Making It Legal:

When you’re in business by yourself, the math is easy.  But when you have multiple owners, how should you share the spoils?  That’s the nature of this week’s basic training post.

Q: How should I divide profits in an LLC?

A: Especially in an LLC, you have many options for how to divide your profits. There’s no hard-and-fast rule. The formula you choose can depend on a number of factors, including:

• The number of people actively involved in the day-to-day operations of the business
• Whether there are any passive investors who have contributed capital
• The extent to which the active owners are actively involved (e.g., are some full-time with the company, whereas others are only part-time?)
• The non-cash contributions the owners have contributed to the company (e.g., inventions, client lists or other intellectual property) and the value placed on that contribution
• The time commitment each owner is prepared to make to the business (are some in it for the long haul, whereas others want a quick ROI and to move on?)

It’s not something you want to take lightly, because it will guide the amount you’re required to pay someone to buy him or her out, should the time come. Best to speak to an attorney and an accountant in your area who can specifically guide you to the result that’s right for your company.

Non-disclosure agreements (NDAs) have many uses. You may have a fabulous idea and want to protect it as you share it with potential investors. Or you may be on the receiving end of one, as this article, “How to Speed Read an NDA,” anticipates.  Written by my colleague, IP attorney Terence Church, Esq., the article gives you a brief rundown of the top six issues you’ll want to see in any NDA you sign. 

Of course, this leaves aside the issue of whether you really should be doing business with someone who shoves an NDA under your nose 2 minutes before you’re about to begin a meeting with him or her and expects you to sign it without the benefit of discussing it with your legal counsel. If he or she won’t give you the time to review it carefully (assuming you’re an entrepreneur who takes her contract obligations seriously), you may want to take your business elsewhere. If you’re in a line–or at a stage–of business where NDAs are common, speak to your attorney to get guidance in advance about how best to handle these kinds of situations if they arise.

This is a perennial favorite:  “I have no money, but have an idea that’s going to be great.  How can I take steps to launch it on a shoestring?”

Q: I have a great diaper idea for the ”on the go mom” that I think is unique. I don’t have money for any startup to manufacture this product, but I have started creating a presentation explaining how the product works. If this product goes to market, I’m sure it would be profitable for myself and others involved. In addition, there would be a possible partnership with diaper manufacturers such as Luvs, Pampers and Huggies. If possible, would you be able to point me in the right direction on how to get started with getting a patent or trademark, potential investors and anything else I would need to possibly get this product to market?

A: One of the dangers of getting started on a shoestring with great ideas alone is that ideas are very easy to steal. In fact, unless you have been able to translate them into some form of intellectual property (like a patent, trademark or copyright), it’s very hard to protect ideas themselves.  You could try to have your potential manufacturers, corporate partners and investors sign confidentiality and nondisclosure agreements, but often, major corporations won’t do that, as they may simultaneously be working on their own prototype in their R&D department and will not want to jeopardize their own efforts. 

The Patent and Trademark Office has a lot of educational information on its website (http://www.uspto.gov/). That said, actually filing for a patent (or provisional patent) is not something you should attempt without the benefit of legal counsel. Doing it improperly or inaccurately could create long-term problems for protecting your prototype, which would make the product less attractive to investors. Where you may want to start is by consulting with an intellectual property attorney who knows this area and getting some ballpark figures on the costs for getting started on the right foot legally. You’ll also want to do some market research to get a clear handle on the potential market and costs for product manufacture to put into a business plan. Then you can make a more educated determination of whether you really do have the finances (or access to credit) to give your idea the solid footing it will need to move it forward.

Oh, it should be so easy.  Let’s face it, if securing and protecting trademarks were simple, any fifth-grader would be able to do it.

You’ve had sleepless nights coming up with that oh-so-fabulous brand that will rock the world (or at least your market niche). You sweated out the search process, making sure that no one else is using the same or similar mark in the same (or a similar) way. You drummed your fingers incessantly, waiting months for the Trademark Office to respond to your application. You tore your hair (or bit your fingernails) over the seemingly picayune alterations they wanted you to make to the application in order to get it through (not to mention the possibility of paying more in filing fees). You held your breath during the publication phase of the process, closing your eyes and praying to any deity that would listen that no one would object to your application. Finally, you got what you thought was the Holy Grail of trademark protection: the “R-circle” (®).

Can you breathe now? 

Yes and no.

In her post, “My Trademark Was Granted–I’m Done . . . Right?” my colleague, e-business lawyer Deena Burgess, Esq., tells you what’s up ahead, and what you need to anticipate.

I was intrigued with what Robert Tuchman had to say about his experience with business partners–check out Chapter 5 (”The Partner Principle”) of Young Guns: The Fearless Entrepreneur’s Guide to Chasing Your Dreams and Breaking Out on Your Own. Especially as his is a success story. How rare is that? So I invited him back for a second interview to learn more. [For the first interview with Robert Tuchman, click here]

Listen in as Robert and I talk about how he chose his business partner, what traits he was looking for, how he tested the waters, and what made the relationship work. For more information about Robert and his book, visit YoungBusinessExecutives.com.

Like cheating on taxes, playing fast and loose with Fair Labor Standards Act employee classifications can land you in a world of hot water. Do you know the distinction/difference between “exempt” and “non-exempt” employees as it relates to their duties and the paying of overtime?

Q: I want to lessen my payroll by finding ways to lower the amount of overtime I pay people. The question has come up about converting someone from an hourly employee to a yearly salaried one. It’s my understanding that there are strict limits on who can be a salaried/exempt employee vs. someone who works on an hourly basis. I’d prefer to pay someone more via a salary, but less than it would cost me to pay overtime. 

A: The exempt/non-exempt distinction is not one you want to play around with.  Violations of wage and hour laws are one of the top reasons employers get sued–and the penalties can be stiff. 

The issue is not whether the employee will be paid a salary (instead of hourly) for work done–it’s the nature of the work the employee is doing that affects the pay structure. The U.S. Department of Labor specifically designates certain classes of workers as exempt, including executives, administrative personnel, outside salespeople, highly skilled computer-related employees and licensed professionals, such as doctors, lawyers, architects, engineers and certified public accountants, among others. In addition, managers who hire and fire employees and who spend less than half their time performing the same duties as their employees are typically also exempt employees. In general, the more responsibility and independence or discretion an employee has, the more likely the employee is to be considered exempt.

If the concern is slashing payroll/overtime costs, you may be better served by looking into outsourcing certain functions (e.g., for janitorial services) by hiring a separate company, rather than trying to reclassify an employee and run the risk of violating the Fair Labor Standards Act.

I spoke at the Brooklyn Creative League earlier today, and the question, “Isn’t it true that there’s no regulation of the internet?” came up.  So once again, I had to debunk that myth.

In addition to the Communications Decency Act and the Digital Millenium Copyright Act, there are a host of federal and state laws concerning false advertising, trade, trademarks, copyrights and contract terms that DO apply to your online business activities.

So how can you create an e-commerce website that doesn’t become a breeding ground for lawsuits? For starters, have a look at “Careless With Your Business Website?  Don’t Get Sued.” written by my colleague, technology lawyer Mark Grossman, Esq.  Also check out my article on Website Terms and Conditions at GreatBusinessLawTips.com.

I was recently contacted by a business owner who felt that he was being cheated by his business partner.  He had nothing specific to go on . . . just a gut feeling . . . and there was no paperwork.  What could he do to protect his investment?

Whether or not he was actually being cheated, there are important steps that business owners can take to monitor what’s going on in their company.

1. Have an open conversation:  It may be tough to do if you’re already concerned about being lied to.  Depending on the size of your investment and your commitment to the company, you may want to bring in a mediator or someone experienced with coaching people through partnership issues.
2. Watch your numbers – -regularly:  Engage a qualified accountant to review the financial books and records–the P&L, income statements and cash-flow journals (as well as bank statements, canceled checks, credit card statements, etc.)  These should give you an idea of how money is actually being spent in the business.  As a business owner, you should be familiar with these financial documents (especially the reports) and review them regularly as a matter of good business “hygiene.”
3. Get copies of documents:  Obtain a copy of the formation documents for the company that were filed with the secretary of state of your state.  Realize, though, that some states don’t require the identities of the owners to be listed on them . . . so don’t get upset if you don’t see your name there.
4. Hire counsel to patch up the gaping holes: Engage an attorney who has experience with business owner relations to review the “paperwork” you’re supposed to be provided and to create the shareholder’s (or operating) agreement for the company.
5. Consider whether to stay the course.  Suspicion breeds mistrust . . . which leads to a contentious and fractured business relationship.  If you can’t trust, why would you want to stay in business with this person?  If there’s no paperwork yet, and before enmeshing yourself further with an untrustworthy partner, you may want to pull out of the venture altogether, recoup what you can of the investment and take your money elsewhere.  This is a thorny area, so let your attorney help you do so as cleanly as possible.

Your employees can become your next competitors if you don’t handle the relationship carefully . . . and by “carefully,” I mean having non-solicitation agreements and other understandings (in writing!) with your employees.

But some folks are “old-school,” or don’t want to spend the money.  As a result, their employees are considered working “at-will” and free to leave at any time.  From the perspective of the soon-to-be entrepreneur, can you take your employer’s clients?

Q:  We’ve been working for a company for more than a decade and have finally reached the point where we want to set up our own shop in the same industry. Most of the client relationships are with us, as the owner is very hands-off and many people don’t like him. We have no employment contracts. One of our concerns was transferring clients, specifically when is the earliest we could advisably do that? We’ve been moving forward with our plans, but we’ve realized that it would be far more practical for ourselves and for the clients, who otherwise could feel at sea, to be able to speak with them in advance.  How can we do so?

A:  While I appreciate your concerns about leaving clients “at sea,” employees do have a duty of loyalty to their employers in that you should not solicit clients, take files, etc., while still on the job (you can take your contact database), nor should you use “company property” (company phones, computers or make the announcement at a client  meeting or during your workday).

Best (safest) way to handle it is to get your ducks in a row, leave Friday afternoon, and contact everyone after you’ve left.  Do not use your work e-mail for these kinds of conversations. The longer the time delay between leaving your job and contacting the clients, the stronger your defense to a lawsuit that you took clients on company time.

Another way would be to contact clients on your own time (again, from your homes and not during workdays or hours) to let clients know you’re leaving and that you’ll be back in touch in a week or so to let them know where you’ve landed.  Two problems with that approach:  1. The client may want more information than it’s appropriate to give at that time . . . so if you’re concerned about their being “at sea,” that could leave them even more worried about how and when their needs will be handled; 2. There is a meaningful risk that if any of the clients lets the owner know (even inadvertently) that you’re leaving before you tell him, this could be bad for you and give the owner something to hang his hat on in litigation–whether or not you have an employment agreement).

A few more things to consider:

• Will your clients really be “at sea”–are they that fragile?–if they are notified after you leave?  It’s really so much cleaner if you can wait.

• Check the client agreements to make sure that there are no non-solicitation or exclusivity provisions in their contracts–for example, that if they are solicited by another agency (or by former employees of the agency), they’ll give the owner prior notice.

• Depending on the clients’ feelings of loyalty to the owner–if you tell them before you tell him, they might be put off in the sense of your not acting totally aboveboard and with integrity.  More of a character issue and their feeling of trust working with you going forward than a legal issue.

You may have plenty of opportunities to get it (legally) right . . . but not as many to hear me speak on the subject! 

For those of you near Brooklyn, N.Y., on July 15, stop by the Brooklyn Creative League, where I’ll be talking about everything you need to know about business law in 90 minutes.  (Well, not quite . . . but close!)  In this entertaining and lively session, I’ll provide entrepreneurs with an overview of the most common legal issues they will face as they start and build their businesses.  I’ll touch on:

• How to choose the right form of business
• Working with business partners
• What to look out for in your commercial leases
• How clear contracts make for happy clients/customers
• Intellectual property: what to protect and how to protect it
• Choosing the right attorney/advisory team

RSVP: Contact the Brooklyn Creative League at info@BrooklynCreativeLeague.com or (718) 576-2104.

Date:  Wednesday, July 15, 2009
Time:  9:30 to 11 a.m.
Location: Brooklyn Creative League, 540 President Street (between 3rd and 4th avenues)
(Take N/R Subway to Union Street)
Price:  Free for members; $10 non-members

Although I wrote this article as an “ode to the end of summer,” it applies just as well at the beginning.  The invitations may be fewer and farther between in this economy, but you may still get invited to a golf outing or two this season.  I used to approach them with dread (especially as my golfing talents leave a lot to be desired).  But once I saw how they could provide me with valuable information, I appreciated them more.  Want theInsider’s Guide to Networking on the Gold Course? Read on for more. . . .

Ready to chase your dreams of being an entrepreneur? Yes, I mean you. Why not you?

Listen in to this lively and informative interview of Robert Tuchman, author of YOUNG GUNS: The Fearless Entrepreneur’s Guide to Chasing Your Dreams and Breaking Out on Your Own. Robert talks about why the theme of “why not you?” has to resonate powerfully for budding business owners. He shares war stories (mistakes), lessons learned and benefits gleaned from having a solid professional team behind him . . .  even from the get-go.

For more information about Robert and the book, visit his website at www.YoungBusinessExecutives.com.