Making It Legal:

Today’s Basic Training question can be answered simply with a Sarah Palin-esque answer:  “You betcha!”

Q: Are you required to add state taxes to online business?

A: Even though online businesses don’t have the same physical “presence” as their bricks-and-mortar counterparts, they are still required to charge sales tax (and remit it to the local authorities) on all sales within their state. Generally, you’re not required to charge sales tax for sales made to out-of-state residents. But all that can change in a heartbeat, especially in a tough economy where legislatures are looking for ways to fill the public treasury (in other words, raise taxes). Because the rules and the tax rates can change, make sure to stay in touch with your accountant to get set up properly and stay apprised of new developments.

When leaving a business partnership, entrepreneurs often overlook the fact that untangling the details of the business can go on for months after the date of departure. Here’s one of the problems that can arise if you haven’t worked the appropriate safeguards into the exiting process:

Q: We separated from our former business partner in the 3rd quarter 2008, at which time he took over the entire company. Earlier this year he told us he would need to file an ‘08 tax extension for the company because he wasn’t able to pay any amount owed at filing time AND he still owed the CPA from the last year’s services. We also found out that he has not provided the CPA with any of the company’s tax documents from ‘08 and has missed the corporate extension deadlines. 

Even though we filed for an extension, paid an estimated amount and have submitted all our personal tax documents to the CPA (we all use the same guy), our personal tax filing is in limbo pending information from the company’s filings.

How can we move forward and what can we do to force our ex-partner to get the paperwork in?

A: Assuming you have the right provisions in your business separation agreement, your former partner is in breach of contract. The next step is to send a lawyer’s letter demanding copies of the company’s financial statements and possibly threatening a lawsuit to compel him to turn over the documents. There’s no reason he can’t run basic P&Ls, balance sheets, etc., to at least give you a baseline (unless, of course, he hasn’t done any bookkeeping since you left him). That said, you may have the ability to amend your tax returns once you get this information, so all is not lost–but it is inconvenient. It might be worth exploring with your accountants whether you can “extrapolate” the company’s earnings (bearing in mind that you were only present for three quarters of the year) from what you knew of the company’s financial situation as of the date you parted company. Ideally, the ex-partner should be held liable for any costs and fees you may have to incur if he didn’t meet his contractual obligations.

You may also want to reach out to an independent accountant for guidance, just to be sure that your CPA is giving you fair and unbiased advice, and isn’t tainted by any conflict of interest.

Q: Is there is a way for one to tell whether or not one is personally liable for a business credit card?

A: If the card is in your name along with a company name and the credit card statements are addressed to the company, that c-o-u-l-d be an indication that the account is in the company name alone. But that still wouldn’t answer the question of whether there’s a personal guaranty underlying it.

The best way to check is just to call the credit card company and ask. And see if it will provide you with a copy of the initial credit agreement that you signed. In the future, make sure you keep a copy of all credit card applications so that you know for sure.

Q: Does an S Corporation protect your personal assets?  It has become obvious I need help with this.  Any ideas you have would be very much appreciated.

A: Generally, yes, a corporation will protect the business owner’s personal assets.  The “S” in “S Corp” is merely a way of designating the way in which the corporation will be taxed.

However, there are circumstances where people can come after the business owner personally, despite operating as an S Corp.  They include:

• Payment of payroll taxes
• Payment of sales taxes
• Failing to maintain certain corporate formalities–for example, not having a separate bank account for the business, not preparing annual minutes for the corporation, not issuing stock certificates, inadequate capitalization or siphoning the assets from the corporation in a way that leaves it unable to pay its debts.

There are other entities (like an LLC) that can protect your assets, too–again, provided you follow the formalities. But asset protection is not the only reason to choose an entity.  Speak with your attorney and your accountant to figure out which form would best meet your needs.

With so much stuff on the internet available and ripoff-able, what steps can we take to fight back?

Q: I have several blogs, and I wrote several articles that I have published to article directories. Doing research on my topics I found my article posted on another website and another author put his name to it. I e-mailed the author and he said he didn’t put that there, he never saw the article, and I asked him to take it down. Well, it’s still there.  What should I do?

A: If the article is still there, it could be for a couple of reasons: 1. Either the “author” is telling fibs, thinking you won’t do anything or 2. there’s a technological glitch somewhere that the “author” doesn’t have access to correct.

Under Section 512 of the Digital Millennium Copyright Act, you can write to the website/blog service provider to alert the provider to the situation.  Be sure to include the following information:

1. Your name, address and electronic signature.
2. The infringing materials and their internet location or, if the service provider is an “information location tool” such as a search engine, the reference or link to the infringing materials
3. Sufficient information to identify the copyrighted works (e.g., the title and link to the article)
4. A statement by the copyright owner (you) that you have a good-faith belief that there is no legal basis for the use of the materials complained about, and
5. A statement that the notice you’re sending is accurate and, under penalty of perjury, that the complaining party is authorized to act on the behalf of the owner (e.g., the “owner” may be your company and you’re the president; or if you’re one and the same, say that you are bringing the complaint individually and you are the individual owner).

Once you send the notice, the service provider is required to remove, or disable access to, the material.

I like street fairs as much as the next gal (maybe more!), but can Kate Spade r-e-a-l-l-y be selling those charming handbags for only $10?

Q:  Is there any way I can I sell replicas legally in the United States?  How can I be sure I’m being protected?

A:  It is absolutely illegal to sell replica merchandise bearing the trade name of the original company on it. This is trademark infringement for which there can be serious fines.  If you wanted to sell replica merchandise, the only way to ensure that you would be protected is to contact the company and ask to license their trademarks.  However, be prepared to pay a stiff license fee if the brand is “hot” (as in popular, not stolen).  Be careful, too, with knockoffs that are made to look deceptively like the original merchandise (e.g., Louis Vuitton handbags) but don’t use the exact logo–that could spell trouble for you, too.  Best bet, if you want to be protected, is to take a sample of what you want to sell and consult with an intellectual property attorney about the pros and cons.

Q: My company is into trading of plastic and software products. I have tied up with an individual in London who owns copyright on a security software. I would like to be his distributor for African and Asian regions, as I have resellers in those regions who have orders for the same.

My question to you is can I produce the software in CD form on behalf of the copyright holder in India if he gives me the permission to do so as he holds the key generation software to unlock the same software?

A: Generally, if the holder of the intellectual property rights gives you permissions, you can do whatever you agreed to.  But that agreement should be in writing.  To cover yourself, you’ll want to clarify some additional issues, as well (of course, in writing):

• That your London contact is the rightful copyright owner of the software (you mentioned that your London contact and an Indian contact have the rights–either they have the rights jointly, or only one of them can own it.  You cannot assert legitimate rights to make CDs of the software if you know that one person ripped it off from the rightful owner.
• Whether your London contact has other intellectual property rights vis-à-vis the software (such as patents)
• Whether other distributors have been authorized for your territory
• The period of time that you’ll be entitled to distribute the software
• That you in fact have permission to produce the software in CD form (or any other authorized forms)

Distribution agreements can get complicated–and there may be international trade regulations or tariffs involved in distributing this software.  Make sure to speak to an attorney who knows this area well.

Q: For how long are employee non-compete agreements normally valid?  If a person signs such an agreement, leaves the company for a period of time and then comes back to the company, is he/she still bound by such an agreement even if he did not sign it again?  Is such an agreement valid for customers with which the company is no longer doing business?  What if the agreement mentions any and all past and present customers?

A.: Frustratingly, there isn’t a hard-and-fast rule on how long these types of agreements are valid.  In some cases, courts have set outer limits on permissible time frames, but the reasonableness can depend on the length of employment with the company, the level of employment with the company and the geographic scope of the restriction (for example, are you prohibited from working anywhere in the U.S.? Or for a competing company within a 10-mile radius?).

Courts don’t like to see people prevented from supporting themselves, so they construe non-competition provisions (as in “You can’t work for a competing company”) more narrowly.  But as to soliciting customers, they tend to uphold those, for they are the lifeblood of the business. If the agreement says “you may not solicit any present or past customers,” then don’t do it.  A non-solicitation provision is not the same as a non-competition provision.  If the agreement doesn’t say anything about soliciting customers, the non-competition generally won’t be expanded to include customers.  However, sometimes a provision may be called “non-competition” (in the heading), but cover a range of issues, including the non-solicitation of clients.  That’s where consulting with a local employment attorney will be beneficial so that you can get a clear read on the language and the conduct it’s prohibiting.

As to the issue of leaving the company and then coming back, the non-competition provision is moot, as you’ve returned to the same company.  The company can’t be in competition with itself.  Unless the company has made non-competition an aspect of company policy (e.g., through an employment manual), you generally “start fresh” when you start (or restart) an employment relationship.  But again, as different states can vary on the issue (and the law changes frequently), check with an employment attorney who is familiar with this area and the recent court decisions on the subject.

Q.:  I’m wondering– is it still possible that I can capitalize on an idea/concept that is 21 years old.  I was diligent in obtaining corporate backing-so I contacted several corporations that were big in the industry. I was trying to indulge in as many contacts as possible. I guess I talked to the wrong person and 4 or 5 yrs later there was a patent issued on the idea that i had submitted 4 yrs-prior.  To date, there’s no indication of my concept on the market, yes, there’’s some shallow rendition of it but the concept or idea I had in mind hasn’t been exploited. Is it possible to regain this idea and re-invent it, and would be impossible to gain protection? I’m just wondering . . . 20 years later.

A.:  All is not lost, necessarily, even 20 years later.  You may be able to pursue your invention.  However, you would need to be sure that the concept you want to explore meets the Patent Office’s criteria for being “novel” (not previously patented, known, or used in the U.S.).  It also needs to be “non-obvious,” that is, sufficiently different from what has been described or filed before and/or fills a need not previously met.  In other words, is there room for the two patents to co-exist without overlapping?  If this sounds like grasping smoke, you’re not far wrong.  To get it right this time, consult with a patent attorney about the intricacies of your invention and how it differs from the one you say was ripped off.  And don’t speak to any contacts without having a signed confidentiality agreement in hand!

Q.: I have always been advised, by CPAs, that until a small company has a specific NET income of approximately $100,000, incorporating is out of the question.  The fees associated with Inc. may not be worth the trouble of incorporating. Wrong? If wrong, why? Thank you.

A.: A $100,000 threshold?  Hmmm.  Plenty of companies are incorporated every day for businesses that are just starting and have no income whatsoever.  Depending on your state, incorporation costs only about $300 to $800–and is a one-time expense–so I don’t see why a business earning a net income of, say, $50,000 wouldn’t be able to absorb that. In fact, the owners of small business corporations have been known to put a lot of expenses through the company, precisely so that they don’t show a lot of net income for taxation purposes.  The corporation could have a gross income of $250,000, but with salaries, rent, expenses, taxes, etc., it only shows a net income of (for example) $80,000 for income tax purposes.  Is that company too small to incorporate?  I don’t think so.

There are important legal reasons to incorporate.  A disgruntled vendor who sues you doesn’t care whether you’re earning $25,000 or $250,000  If you aren’t operating your business through a corporation (or limited liability company), your personal assets are at risk.  Or if a customer comes into your business, trips, falls and smashes her head open, you could be personally responsible for any damages.  Your earnings capacity isn’t the issue:  your asset protection is.

Finally, if you’re looking to work as an independent contractor, more and more companies want to be sure they’re dealing with corporations or LLCs so that there aren’t any misunderstandings about payroll taxes and entitlement to employee benefits.  You could find that there are fewer opportunities open to you–especially for longer-term projects–because bigger businesses don’t want to get caught in the IRS/Department of Labor’s net.

Q: If a person is a 50 percent owner in an LLC corporation, is it illegal for that person who owns another company that does the same type of work to go and do work or operate under that business?  Someone mentioned to me that it is a conflict under a law regarding corporate obligation.

A: Your question is a good one, and the answer is not black-and-white.

Generally, unless you have a provision in your operating agreement (or in your state’s law) that prohibits someone from working in two potentially competing companies at once, it’s not outright illegal for someone to do so. However, it certainly raises questions of loyalty.  After all, if you’re involved in one or more companies and a potential client comes in, through which company do you service the client?

State laws do vary, so I’d recommend that you speak to a local attorney to get a definitive answer to your question.  You can find attorneys through your local bar association–look for ones that focus on corporate and LLC law.

Q: How much does a lawyer charge to look at a lease?  I am trying to figure out what is important.  I was hoping you might be able to give me some insight.

A: Lawyers’ fees to review a lease generally depend on the amount of time it takes to do the job.  That, in turn, depends on a number of factors, including:

• The billable rate of the attorney
• The length of the lease (or sublease) . . . which is often a reflection of the size (and quality) of the space, the amount of the base monthly rent and the sophistication/experience of the landlord
• The kinds of provisions that may need to be added to the lease to protect you
• The extent to which you want the lawyer to be involved in any negotiations with the landlord, which reflects the extent to which you have been provided with a “take it or leave it” offer from the landlord.

Some attorneys may be able to do the work for a fixed fee, so be sure to ask them if they’re able to perform this kind of service on a fixed-fee rate.  If not, you can certainly ask for an estimate based on the scope of the lease and their billable rate.