Legal Issues affecting Small Business Owners

1. Legal Issues affecting Small Business Owners Presented at City of Chicago’s Small Business Expo July 17, 2009 Daliah Saper Saper Law Offices 312-527-4100 dsaper@saperlaw.com www.saperlaw.com

2. DISCLAIMER

3. Outline of Today’s Presentation: • I. Choosing a legal and accounting team • II. Choosing a business entity • III. Trademarks and Copyrights • IV. Important Contracts

4. I. Choosing a solid legal and accounting team. • Someone who you can build a long term relationship with. • Someone who has an understanding of your industry. • Someone who can anticipate your legal needs. • Someone who can serve as a resource and a person with whom you can network. • Find this person through referrals, other business owners, call the Chicago Bar Association.

5. About Saper Law: • Trademarks • Copyrights • Trade Secrets • Corporate Matters • Internet and Cyber Space • Entertainment • Defamation • IP Licensing • Advertising • Media • Sponsorship and Advertising Agreements • Business Contracts • Saper Law is an intellectual property and business law firm with significant transactional and both federal and state litigation experience. We primarily specialize in the following areas of law:

6. II. Choosing a Business Entity

7. Considerations when choosing a business entity: • Cost / Maintenance • State filing fees, annual filings, etc. • Tax Liability • Pass-through taxation / Double taxation, and other issues determined by your accountant. • Legal Liability • Personally liable or Protect your own assets with a corporate shield. • Ownership / Management • Shareholders or Partners? Differing degrees of flexibility. Who do you want to be the decision-makers?

8. Types of Business Entities: • Sole proprietorship • General partnership • "C" Corporation • "S" Corporation • Limited Liability Company

9. Sole Proprietorship • Few recurring costs beyond state business license fees and fees to maintain business name. (No state filing necessary.) • Individual and business are identical. • You file taxes for the business on Schedule C of your personal income tax return. • Not protected from personal liability.

10. Sole Proprietorship: Example • Grandma’s homemade sweaters that she sells on eBay and to family and friends. • Jimmy’s grass-cutting services. • Any business can, in theory, be a sole proprietorship.

11. General Partnership • Two or more legal entities (persons or other businesses) form a general partnership. • Each partner is liable for any of the other partners’ mistakes. • All partners are considered self-employed for purposes of income tax. • The partnership itself doesn't pay any taxes.

12. General Partnership: Example • Two dentists working together in an office. • Flower shop owned by two friends. • Two people wanting to make a movie.

13. "C" Corporation • $175 fee in Illinois. • Limited liability unless a court finds that you do not follow corporate formalities and the corporation is really an "alter ego" - Piercing the Corporate Veil. • Can have multiple classes of stock. • Double taxation - Income is taxed at the corporate level and shareholders have to pay taxes whenever they receive income from the corporation.

14. “C” Corporation: Example • Many big companies you have seen (Sony, Apple Computer, etc.)

15. "S" Corporation • $175 fee in Illinois. • Most complex to create and administer, but if you have a good legal and accounting team, this can alleviate much of the headaches associated with an S Corporation. • Max 75 shareholders, only one class of stock, shareholders must be domestic individuals. • Allows shareholders to claim share of corporation's income on personal tax form, eliminating "double taxation." • Piercing the corporate veil.

16. “S” Corporation: Example • Small video production company. • Any of the small-business examples from before (flower shop, etc.) can be set up as an “S” Corporation.

17. Limited Liability Company (LLC) • $500 fee in Illinois. • LLCs enjoy the tax and liability benefits of corporations and the management structure of a partnership. • Percentage interests instead of shares. • Very flexible - operating agreement can be specifically tailored to the type of business. • Piercing the corporate veil.

18. Limited Liability Company: Example • Film productions • Professional service organizations • Real estate ventures • Small businesses with more than one partner

19. Which business entity should I choose? • Frances makes pottery and sells it at flea markets. • Joachim wants to start a car wash. • Pathik wants to open a restaurant. • Three college friends (Maria, Arman, and Winston) want to start a software company.

20. Simple Steps for Setting up a Business Entity • 1) Decide which state you want to form your company in. • 2) Choose a name for the company (and make sure it’s available, (this is different than a trademark search) • 3) Fill out the appropriate form(s). • www.cyberdriveillinois.com

21. Intellectual Property Considerations

22. What is a Trademark? • A Trademark is a distinctive sign, symbol, or indicator which is used to identify the particular source of products or services. Trademarks may also be used to distinguish a particular product from other similar or competing products. • Trademarks will typically take the form of a: • name, • word, • phrase, • logo, • symbol, • design, • image, • even smell! • ……..or a combination of these elements.

23. Common Law v. Registered Trademarks • You have a Common Law Trademark as soon as you start selling your products or services. • BUT: common law trademarksonly afford the business owner protection in the area in which he or she has conducted business • The Symbol ™ represents an unregistered trademark.

24. Common Law v. Registered Trademarks Cont. • Federally Registered Trademarks – The symbol ® is a notice to the public that a particular trademark is federally registered. • A Federally Registered Trademark is much more valuable than a Common Law Trademark because it allows the business owner to assert his trademark against a subsequent user ANYWHERE in the United States. • Even if the business hasn’t started transacting business in the other States.

25. CHOOSING A GOOD TRADEMARK • The strength of any particular trademark will depend on the marks capability to distinguish itself from that of other goods or services. Generally, the strength of a mark is categorized along a spectrum of distinctiveness along five terms (from most to least distinctive). • Fanciful – Marks that have been invented for the sole purpose of acting as a trademark.(Kleenex, Xerox). • Arbitrary – Utilizes a device that has a common meaning but no relation to the mark itself (Apple). • Suggestive – Marks that suggest a particular quality or characteristic of the goods and services (Microsoft, Netscape). • Descriptive – Devices that merely describe the services or goods on which the mark is used (Container Store). • Generic – Devices that actually name a product and are incapable of trademark (Modem, E-mail).

26. What are the steps to getting a trademark registration? • Conduct a trademark search • Prepare the Application (First use? Description? Class?) • Submit the Application (All electronic) • Wait for an Examiner to review your file • Correspond with the Examiner (Office Actions) • If all goes well, you’re on to publication, and then hopefully registration.

27. Search Process • The first step in the registration process is to search the USPTO to see if anyone is claiming trademark rights in a particular mark. • A simple knock out search can be done through the USPTO website www.uspto.gov. Through this website you can search for any and all registered and to be registered trademarks. • Due to the immense number of Federally Registered Trademarks you can also hire a search company that will search all possible trademark databases before you file, as well as after you file---to catch any infringers. • ITS VERY IMPORTANT TO CONDUCT A TRADEMARK SEARCH

28. Intent to Use v. Use Based Trademarks • Federal trademark rights and protections are ultimately based on actual use in commerce. • Intent to use – Filing an intent to use trademark application allows the applicant to file for trademark protection before committing all of the costs of marketing and promoting the mark. An applicant who files an intent to use application must make actual use of the mark before it can be registered. • Use Based – According to the USPTO an applicant filing a use based application must actually already be using the mark in commerce in connection with the goods and/or services identified in the application.

29. Trademark Protection • After your trademark has been registered you’re not done... • Maintenance – Trademarks must be maintained through proper use and due diligence. This involves keeping your mark active in the stream of commerce and ensuring that your mark does not become generic. • Watching – Many trademark owners list their marks with various trademark watching services. These services are particularly helpful when a company seeks to expand their enterprise in the USA and abroad. • Enforcement – Enforcement consists of pursuing adverse users. A particularly cheap and effective method of enforcing against an adverse user is by having an attorney file a “cease and desist” letter. While litigation may prove necessary it should be avoided whenever possible.

30. What is a Copyright? • A copyright gives an author or other creative person certain protections in their work as soon as the work is created. To get a copyright the author’s work must be: • Fixed in a “tangible medium”—you have to be able to read it, see it, or hear it. For example, an impromptu speech that isn’t written down is not copyrightable. • Original—you made it up all by yourself. • Minimal creativity—the work is the product of at least a minimal level of creativity. (Pretty low standard)

31. Questions about Trademarks? • Any questions before we move on to Copyrights?

32. What Kinds of Works are Protected? • Literary works • Musical works, including any accompanying words • Dramatic works, including any accompanying music • Pantomimes and choreographic works • Pictorial, graphic, and sculptural works • Motion pictures and other audiovisual works • Sound recordings

33. Who usually seeks copyright protection? Some examples: • Designers • Artists for their paintings, drawings, sculptures, etc. • Photographers • Authors for novels, textbooks, plays, movies • Business owners for manuals, website content, advertising, etc. • Musicians for musical compositions • Software Developers for their computer code • Etc.

34. What Kind of Legal Rights do Copyright Owners Get? Copyright owners enjoy the exclusive right to: • reproduce the work • prepare derivative works based upon the work • distribute copies of the work to the public by sale or other transfer of ownership, or by rental, lease, or lending • perform the work publicly • display the copyrighted work publicly • in the case of sound recordings, to perform the work publicly by means of digital audio transmission • in the case of a “work of visual art” the author has certain rights of attribution and integrity

35. Sounds Great! How do I get a copyright? • You technically have a copyright as soon as you “fix it into a tangible medium” BUT, and this is a big BUT: • You must register you work with the United States Copyright Office in order to enforce your rights.

36. Common Myths: Q: Isn’t putting a © symbol next to what I create enough? A: No…this just puts people on notice. You still need to register in order to sue. Q: What if I put my work in a self addressed envelope and mail it back to myself? A: No again. You still need to register your work in order to sue.

37. So how do I register? Depending on what you are copyrighting, you will need to fill out one of several forms available at www.copyright.gov • The cost of a copyright application online is $35.00. • In some cases, you can register a series of works for one application fee.

38. How long does a (C) last?: • Copyrights do not last forever. Depending on the type of work, the copyright will last for 70 years after you die, or 120 years from its initial creation. Once the copyright expires, the work enters the “public domain.” Think the Mona Lisa…

39. What if I want to use someone else’s work? • You will always need to ask permission to use any part of (even if it’s a little teeny itty bit) of a film/video/music/photograph/text/ game/ that’s not yours. • Well…almost always.

40. When Can I get away with NOT asking for Permission? • Works for which the copyright has expired. (tough to figure out unless its really really old) • Works clearly and explicitly donated to the public domain. • Works that have not been fixed in a tangible form of expression (for example, choreographic works that have not been notated or recorded, or spontaneous speeches or performances that have not been written or recorded). • Works consisting entirely of information that is common property and contains no original authorship (for example, standard calendars, height and weight charts, tape measures and rulers, and lists or tables taken from public documents or other common sources).

41. IMPORTANT CONTRACT ISSUES • As they relate to “Licensing” and Intellectual Property.

42. Employee vs. Independent Contractor Now its time to discuss ownership rights when you a) hire an employee and b) when you hire an independent Contractor.

43. What is a “Work Made for Hire” The Copyright Act defines a “work made for hire” as: (1)  a work prepared by an employee within the scope of his or her employment; or (2) a work specially ordered or commissioned for use as a contribution to a collective work: • as a part of a motion picture • as a part of other audiovisual work,  • as a translation,  • as a supplementary work,  • as a compilation,  • as an instructional text,  • as a test,  • as answer material for a test, or  • as an atlas

44. Employees • Any work created by your employees are automatically owned by….. YOU, THE EMPLOYER. No extra paperwork needed.

45. Employee The implications of this: Since you, the employer own the work, your employee can’t then use what he/she created later at a new job…or even to post it on his/her website or include it in a portfolio. He/she can only do these things if he/she: GETS PERMISSION.

46. Independent Contractor • If you are hiring a freelancer or an independent contractor, the independent contractor retains ownership of everything he/she creates. • This is true even if the client pays the IC $$$$$$ for the work. • Unless….

47. Work for Hire Agreement • A smart business owner will ask the Independent Contractor he hires to sign a written “work-made-for-hire” agreement. • That way, even though the Independent Contractor created the work, the business owner owns the copyright.

48. Work for hire..continued • A lot of the times, the commissioned work doesn’t exactly fit the “work-for-hire” requirements. • In that case, the business owner should ask the IC to also “ASSIGN” his/her rights---in writing.

49. Assignment vs. Licensing • Assignment means you give the client ALL of your copyrights. • If you don’t want to give up ALL your rights, you may LICENSE part of your rights.

50. Case Studies and War Stories • Artist using pictures of works in the public domain—from postcards purchased at the Art Institute. • Documentary Film using the song “Happy Birthday”