Making It Legal:

Today’s basic training involves a sad story. A woman gave her heart to another . . . and to his business. What thanks does she get? She gets jilted, in more ways than one. Yet another reason to have a business prenup if your personal relationship sours.  Read on . . .

Q.:  I was working with my fiancé on a business idea we both developed. We are co-founders of this business. However, while I was working around the clock on this business, he went behind my back and put it in his name. He did this because, he says, he had the intentions of marrying me and thought it would be “cleaner” to just get married and split half (I have e-mail records of all of this). I also have e-mail records of our correspondence of our business, as well as my booking of a social conference for us to attend, plane tickets, etc. I created this entire website with him, and have even been a ghost writer on his account as well.

Sadly, a month before we got married, he decided to leave me. Is there some legal way to keep some of the business, or at least get a stake in it? 

A.:  Unfortunately, in these kinds of situations, your only recourse is to sue him and hope that the e-mail trail that you have — and the intellectual property you have created — is sufficient to support your claims. This can be an expensive prospect, so I’d recommend that you speak to an attorney in your area who focuses on business litigation to evaluate the strength of your position and the evidence you have, and to estimate the fees and costs. You may find from that consultation that you would be better off putting your time, money and energy into developing a competing business that outdoes your ex-fiance’s. As they say, “Living well is the best revenge.”

Q. :  I want to register a Charity in the USA. I’m a citizen of Nepal and currently residing in Nepal. To promote the charity and its presence in US I want to register it in USA. How can I go about this?

A.:  When you register a charity in the United States, you actually have to choose a specific state where you intend to register (there is no country-wide law concerning the initial registration of charities).  The choice of “which state is best for registration” may depend on (1) where you think more of your donors will be based, (2) where your charity’s board is likely to live, or (3) other factors, depending on the purpose of the charity. Generally, anyone wanting to form a not-for-profit corporation in the U.S. will need to follow these steps:

1. Choose a state and determine the registration requirements (which you can often learn on the websites of the Secretary of State of the state you’ve chosen)
2. Determine who will serve as your initial Board of Directors (some states require a minimum of 3 people U.S. residents in order to register)
3. Register as a not-for-profit corporation in that state
4. File the appropriate forms with the state’s tax department to ensure proper tax treatment
5. File an application with the Internal Revenue Service to receive not-for-profit tax status (without it, your U.S. donors will not be able to receive a full tax write-off for their donations).

Because there are a number of factors to consider, and as you are currently residing in Nepal, think seriously about working with an attorney in the US (better yet, in the state where you want to register) who specializes in not-for-profit organizations.  It’s a slightly quirky area, so not all business attorneys are familiar with the ins and outs.

Q: Just wondering if my kids can sell their Lego creations online? I’m mostly concerned about the “Lego” brand name infringements. That is, if my kids were to make their own original creations using Lego pieces and advertise them on the internet as, oh, I don’t know, “Jake and Joe’s original Lego designs”–and sell the completed creations–without implying their creations are bigger, better and more valuable than Lego’s . . . could they do that?

A: While you can sell Lego creations online (check out this artist who has actually made a “business” out of large-scale Lego creations–http://www.brickartist.com/), you have a number of issues to consider. They include:

• If your children are under the age of 18, in those states, they cannot open bank accounts or enter into business relationships. In other words, the responsibility will fall on your shoulders (or that of another responsible adult).
• If your children used someone else’s creations (or instructions) as a model for the designs they created, there could be an issue with copyright infringement.
• There may be truth-in-advertising laws in your state that govern your description of the designs. If you are going to tout the fact that Lego pieces were used in the construction of the creations, you should divulge whether any non-Lego pieces were used.
• You will also want to be careful about the way you refer to Lego in your description of the creations. It’s one thing to state factually that the creations were made from Lego pieces; it’s quite another to start trading off the Lego name and goodwill by implying that the creations have a greater value, physical strength or quality because of the use of Lego pieces.

There was a case about this kind of issue not too long ago involving the Tiffany jewelry store, which was quite upset that its trademark was used to describe possibly counterfeit merchandise being sold on eBay. The court said “too bad”: As long as consumers are not confused about the source of the goods (in your case, that Lego itself is not selling these creations), and there’s no indication that Lego is endorsing what your kids are creating, you can say (if true) that the creations are original designs made with Lego pieces (or words to that effect). To make sure that you’re in compliance with all appropriate laws, it would be worthwhile consulting with a local intellectual property attorney to make sure that you have all your ducks in a row for these online sales.

Q: I have a business partner (”John”). He is majority shareholder with a 55/45 split. We act primarily as a subcontractor for a small number of other companies. We do not have an operating agreement. We typically travel and complete projects together. Due to a scheduling conflict, I cannot go on our next project. Knowing this, he has contacted a friend to go with him (my partner does not currently have a valid driver’s license) without my knowledge. John has purchased airfare with his own money and I believe his intent is to have the final payment made to him. In the past, we have not always been able to complete projects together but have still had our 55/45 split. Is he essentially stealing (embezzling) from me?

A: From what little you’ve shared, there isn’t enough evidence to prove that your partner is embezzling from you. The fact that he contacted a friend to join him on the business trip could have a very innocent explanation–such as (as you noted) that he needs someone to handle the driving because you can’t be there. There could also be a personal explanation–such as, the friend is having marital difficulties and getting out of town with your partner is a welcome diversion. As your partner is a 55 percent shareholder, in theory, he has the right to ask a non-owner to accompany him on the project without your prior consent, as long as you are not required to pay for the non-owner’s travel expenses, and that the confidentiality of your client’s information remains intact.

Your belief that your partner is embezzling from you–on its own–is not enough to prove that’s what’s really going on. As they say, “the proof is in the pudding.” Know what the project should have generated for your company (in other words, review your contract with that client). Keep close tabs on the financial records so you’ll know when payment is made. More important, if you are starting to harbor suspicions about the integrity of your partner, this would be a good time to invite in a third-party facilitator to help get your communication with your partner back on track. Or, if it’s time that you and your partner parted company, to work out your mutual exit in an amicable manner.

Q: I have an S Corp that includes myself and my partner, 50/50 ownership. I put in all the capital and do 90 percent of the work. I cannot get my partner to leave the business. What do I do?

A: Whether, and how, you can “kick the bum out” depends on whether you have a written shareholders’ agreement. If you do, and if it addresses issues such as “deadlock,” then you can follow the procedures in the agreement. If the agreement is silent about deadlocks (or if you don’t have a written agreement), then it’s very likely you’ll have to bring a lawsuit to either buy your partner out of the business or dissolve the business. Neither is a particularly attractive option, but the “heavy hand” may be just the leverage you need to get this partner to see sense/cents–as litigation can be costly. 

Also, if you’re doing 90 percent of the work, you may want to consider the pros and cons of threatening to walk away from the business–as without you, there may be no business. Best to consult with a corporate litigation attorney in your area to understand all your options under your state’s law and to get a rough estimate of what it might cost.

Q: I have worked for my dad for more than a decade. He recently told me he wants to stop working but says he is not retiring. He wants to be paid the same amount of money and he wants himself and his wife to keep being covered by medical insurance through the business. He said he would give me a percentage of the business–I think 10 percent at the start and then the rest in 10 years. This sounds very unfair to me and a great deal for him. I have tried to talk to him to see if he is flexible on some of these points, and he says no. I’ve tried to setup a sit-down with him to try and reason with him but he keeps canceling. Do I have any rights to any of the business since I am his son and have worked to build the business up?

A: The short answer is that without either a written agreement concerning ownership, or an agreeable parent who will transfer it, you could be in for a difficult ride. You don’t have any rights in the business (while he’s alive) simply because you are his son. While there could be a strong “fairness” argument for making you an owner because of all the time and effort you’ve put into the business, “fairness” is often a matter for the courts. And once litigation starts, there’s no guarantee how it will turn out, or whether there’ll even be a business left to take over once you’re done.

Rather than sitting down with just the family, this might be a ripe opportunity for all of you to meet with a professional mediator. Sometimes, having a neutral third party in the mix helps people act more rationally.

Courts have already come down hard on people who snap up domain names that belong to well-known corporations, and then try to ransom them back for large sums of money.  Does that apply to Twitter names as well?

Q: Does cybersquatting also apply to sites such as twitter.com/trademark and facebook.com/trademark ?

A: Not just cyberquatting, but trademark laws also apply when choosing a “handle” to use on various social networking sites. If you’re going to choose a username, there needs to be a reasonable connection between the user name you have chosen and your business.  In addition, co-opting someone else’s name on the grounds that you are a “fan” can also get you into trouble. As an example, take a look at how StartupNation.com fought back.

Many of these social networking sites are obligated by law to freeze accounts or suspend activity if there is a dispute concerning the propriety of a given name or if infringing intellectual property appears on another site/page.

I’m often asked, “Why can’t I just incorporate in Delaware?” Well, for many small businesses, it doesn’t make legal or financial sense to incorporate in Delaware if all of your business activities are going to take place in, say, North Dakota. In many instances, you’ll end up doubling your formation filing fees, adding to the level and complexity of the tax returns you’ll need to file, and increasing your costs.

One of the cost increases comes in the form of needing a “registered agent” to accept legal papers for you in the state of formation. What are the requirements for a registered agent? Ryan Roberts, Esq. has a cogent post on the subject, but here are a few highlights:

• No P.O. boxes
• Available during normal business hours
• Keeping your business address on file current

Today’s Basic Training query comes from a solopreneur who is stymied by needing to take the next step in forming a business entity.  It certainly can get confusing.  There are legal considerations, tax considerations, and cost considerations, just to name a few. Plus, there’s the pressure to make the perfect choice before your business has really had a chance to unfold. No wonder entrepreneurs get that “deer-in-the-headlights” look when they think of it!

Q.:  I am in Alabama, and I am an independent insurance agent. My CPA is saying that I need to incorporate my business for tax reasons. I am the owner and the only employee. I am 1099′nd under my personal social security number.  I have a dba for my business name.  I’m searching to see if I need to do an LLC, or an C, or S Corp. I am confused because it is only me and an LLC looks to be for maybe a partnership. I want to save on my taxes, but I am confused on which way to go. I have talked to other tax preparers and they are no help either. As of now I use my personal checking account for everything. I was told that I need to get an EIN, and keep everything separate and I would pay myself a salary.

A.:  When choosing a form of business entity, there is always a delicate balance between the legal and tax issues involved.

Here are some general guidelines:

1. It’s often smart to form a business entity–not just for tax reasons, but also to get the benefits of shielding your personal liability. Both corporations and LLCs are designed to shield you from personal liability UNLESS (like with lawyers), state law doesn’t permit you to shield yourself from malpractice/professional liability.
2. If you are the only owner of your business, and you don’t foresee bringing in any other business owners, many states permit LLCs and corporations to be owned by one person. If that is the case in Alabama (and if the costs for forming LLCs and corporations are similar), at that point your decision of which form to choose may well rest on which form will provide you with better tax advantages.
3. Because forming a business entity involves both legal and tax considerations, speaking to tax preparers will only give you part of the guidance you need. That’s why it’s important to also consult with a local business attorney, so that you can get the full scoop on your legal options. You may want to reach out to your local bar association for referrals, or speak to your colleagues to find out who they have used for their business formation issues. 
4. Once you speak to a local business attorney to get clear on your options and preferences for business form, then confirm your assessment with your accountant to make sure that the best choice from a legal perspective is also the best choice from a tax perspective. LLCs and corporations (both S and C) are taxed somewhat differently. Based on what you’ve been earning over the last couple of years, your CPA should be able to estimate what you would pay in taxes if you were an LLC versus an S Corp versus a C Corp.  if your CPA cannot do this for you, you may want to switch to an accountant who is more familiar with the different tax regimens.
5. For reasons of “good business hygiene,” you should definitely consider obtaining a separate business bank account– whether or not you form a separate entity. Usually, all it takes is to go into your bank with a copy of your business registration.
6. Once you’ve formed a new entity, you can easily obtain an EIN online through www.irs.gov.   

As tax time closes in, it’s no surprise that people will do whatever they can to avoid paying their taxes. And while you have a right to question certain determinations, there comes a point where you cross a line from the thoughtful to the ridiculous.

From the IRS website, here are just a few of the line-crossing arguments you should not waste one iota of your time making, because they will not fly.  Not only that, but you’ll get fined $5,000 for even trying (another good reason to have a competent accountant advising you):

• I don’t have to file a tax return–it’s a voluntary system.
• I don’t have to pay taxes–that’s voluntary, too.
• I can avoid taxes by forming a corporation as a “religious leader.”
• My First Amendment rights to freedom of expression mean I can protest by not paying taxes.
• Wages and tips received for personal services are not taxable.

As they say, “Don’t mess with the IRS!”

A wise tax attorney colleague of mine once said, “Tax deductible does not mean ‘free.’ ” Likewise, fat-free does not mean calorie-free.  And freely viewable (online) does not mean you can freely take it and use it for your own purposes.

This week’s Basic Training query wonders if it’s OK to take images found on a Google Image search. The short answer:  No.  Even if the photo was on a not-for-profit website? Still no. Even if the site is for a good cause (hey, they’re not-for-profts–they don’t care about money, do they? No.  Even if I want to use it in connection with a good cause?  No, no and no.  You may not use that image.  Not without permission.

Just because you find an image online doesn’t mean that the owner is giving up all intellectual property rights to it . . . and the right to determine how the photo is used is a privilege of the owner/creator of the image.  Although there are some exceptions to this rule, you’re on safest ground if you contact the owner, describe the use you plan to make of the photo (website only? Brochures? Slides at a gala event?) and ask for permission (get it in writing!).  The owner may ask for compensation.

If you’d rather not (or can’t) pay, then look for shareware or royalty-free images (although you’ll likely have to pay a nominal fee there, too).  Otherwise, you risk finding yourself on the wrong end of a copyright-infringement lawsuit.

Yes, your time is at a premium . . . but all it takes is one great idea, one spark of inspiration to really heat up your company, right? And what better way to get that than reading about some of those deep in the trenches of entrepreneurship?

Here’s Bootstrapper’s list of must-read blogs for entrepreneurs. Full disclosure, the list is a little old, and some of the blogs may not be posting regularly any more.

But when I was poking around, as an example, I came across Pamela Slim’s Escape from Cubicle Nation (which keeps very current) and was really inspired by her post, “How do you want to lead your life?“  She engages in the subject, “What does leadership mean to you?” I, too, have bought into the traditional leadership model of “the power of numbers”: what I earn, the size of my company, the size of my database, the number of speaking engagements I do a year, the amount of my sales. The bigger the better. And to the extent that the numbers are not as large as I want them to be (who says size doesn’t matter?), I feel I’ve fallen short of the mark. Yet, Slim’s post reminded me that that’s not the only perspective on leadership.

You see, all it takes is one chance encounter to shift your thinking!

Many thanks to Ryan Roberts for sharing the list.