The financial barrier to starting any kind of new business is the list of startup costs. Even if all you are doing is opening a lemonade stand on your front sidewalk – and who hasn’t done that at some point during childhood? – you need to invest in lemons, sugar, ice, drinking glasses, a tumbler, and a table. The reason lemonade stands have such low startup costs is that the source of all of those startup items is usually mom’s kitchen. And fortunately, regulatory authorities are willing to look the other way, since most lemonade stands violate innumerable laws, including city zoning laws, county health regulations, state and federal tax-filing requirements, child labor laws, and more; adherence would make lemonade stands prohibitively expensive.
When people write business plans for real businesses, the most overlooked of the startup costs are legal and accounting. All too many small business ventures in the long run wind up paying dearly for that oversight.
Certainly each type of business has its own unique set of legal issues, and other “Legal Commentary” columns address those issues for Web businesses. The following constitutes a checklist of some of them common to most types of business ventures. It is a list worth looking at even if you are a few years in.
•Business name. This is one that a good many people miss, and you can identify those names that were not thought out by either a ghastly business name or by the fact that the name had to be changed upon threat of a trademark infringement action. And this is actually one of the more difficult tasks on the list, although it would seem easy.
There are several questions to ask, and the answers each must be correct. Most obvious is whether your business name is the same or similar to another. But equally important is whether your trade name tarnishes a famous trademark. If some popular trade name or trademark resembles yours, you will be in peril. And it is very tempting to do that; if you find some company has a clever, well-known trade name, you can just tweak it a little to match your business, and you have a clever trade name. To do so, however, could leave you accused of “tarnishing” the famous trademark. So don’t call your new video-on-demand business “TNT Pornovision”; you will be hearing from Ted Turner’s legal staff.
Another consideration is the “trademarkability” of your name. It is very difficult to obtain a trademark on a name that is descriptive. The worst is the name of a location, like Chicago Transmission Service for a company in Chicago that services transmissions. You can’t have a monopoly on the description of your business; and you can’t have a monopoly on transmission services in Chicago by virtue of your trade name. So-called “fanciful” trademarks are easiest to protect, the best examples being those words that don’t mean anything – Exxon, for example, which was the product of millions of dollars in advertising research. Put on your thinking cap and do tons of research! Best is to retain a trademark search service (attorneys can do this for you). Your business name must be unique and have no secondary meaning.
*Business Structure. The relevant business structures are proprietorships, partnerships, corporations, and LLCs. But the first and perhaps most important issue, regardless of which structure you eventually select, is whether to have partners. If you are the money guy, you should think long and hard before partnering up with a creative person or operating person. You can hire them; you can make profit-sharing agreements with them; you can give them incentive bonuses; you can do all kinds of things to motivate the person who has his hand on the throttle. Making a partner out of that person, however, raises all kinds of problems. What if he dies? Comes to dislike you? Steals from the company? Runs off with your wife? What if you both decide that you can’t stand each other anymore, but the company (as you are hoping it will) grows so large that neither of you can afford to buy out the other, which happens all the time. You can deal with some of those potential problems in a partnership agreement or the corporation counterpart (buy-sell agreement, etc.), but not all of them. So, unless you absolutely need partners to raise the requisite start-up money on to function, own the whole thing yourself.
Most any business worth having should be a corporation or LLC. There are many reasons for this, and it is particularly important if you own a portfolio of copyrights and/or other intellectual property. That way, if ownership of the business ever changes, nobody is required to file a slew of transfer documents with the Copyright Office. Ask your attorney and accountant to choose between an LLC and a corporation.
Finally, incorporating in Nevada if you don’t live there doesn’t get you anything. In the first place, you are required to pay taxes in the state where you live regardless of the state of incorporation. And if you play by the book, you are required to qualify your foreign corporation to do business in the state where you are, which usually costs the same as incorporating there in the first place.
*Insurance. No matter how small your business happens to be, you must consider insurance. Find a good business insurance broker, and inquire as to what the broker recommends. There is no charge for that service, which means you might want to inquire of more than one of them. If you buy your personal insurance from a broker or agency, that probably is a good source of a referral; your CPA and attorney are others.
*Employees. This is a biggie because it is the most probable source of a lawsuit. Before hiring your first employee, purchase one of those “how to” books on employment law; if you live in a larger state, you probably can find one for your state. The chamber of commerce is also a good source of information. Such sources will outline requirements such as withholding, overtime pay, and workers compensation insurance. You absolutely must have a written employee policy book if you have any employees, even one. There are also mandatory postings and all sorts of other non-obvious requirements.
Often, new businesses will get the labor they need from independent contractors. That’s fine, but be sure that the independent contractor is not really an employee because, if you guess wrong, you may wind up paying the supposed independent contractor’s taxes.
Independent contractors generally are only those who work when they want, work on a job-by-job basis, use their own supplies, and do the same work for other people. And it is good to have a written agreement with any independent contractor, just like any other business deal. Thus, for example, if you hire a Web site designer who you regard as an independent contractor, have a written contract and an arrangement such that the work is done at his location, on his computer, at whatever time he wants to do it (obviously, the agreement can include a deadline for the project). And be sure to send a 1099 at the end of the year.
*Bean Counting. This is another place where too many new businesses try to cut corners. You should get a CPA, not just a tax preparer; and a CPA is imperative if you have any employees. Unfortunately, the most expensive part is startup – getting things set up properly to make tax preparation easier at the end of the year. Once you get your systems established, your accountant’s services will be confined to routine items, principally filing tax returns.
One important rule is a hybrid legal-accounting one: Don’t mix your personal money and your company’s. Get a company bank account and a company credit card, and don’t buy groceries with a company check or supplies with a personal credit card. Ever! If you take money out of the company, do it by check and earmark it as a salary advance. If you need to put money in, document it as a loan. Violation of this rule can both cause colossal tax problems and strip you of the legal insulation that your corporation affords.
*Legalman. You knew this was coming; right? “But why,” you wonder, “is ‘Legal Commentary’ recommending reading employee-law books and doing all of this other stuff and then saying I need a lawyer?” The idea here is to save a few bucks. If you come to your attorney with a basic understanding of what you are supposed to do, the attorney can fine-tune your proposed system, rather than write it from scratch. But that only works if do your homework first. Otherwise, the attorney is required to start from scratch, anyway. Also, the advice your attorney gives you will make a great deal more sense and be easier to follow if you start with some general understanding of the relevant topics.
Don’t fill your own teeth, either.
Clyde DeWitt is a partner in the Los Angeles, Calif.-based, national law firm of Weston, Garrou & DeWitt. He can be reached through AVN Online’s offices, at his office at 12121 Wilshire Boulevard, Suite 900, Los Angeles, CA 90025, or at [email protected]. This column does not constitute legal advice but, rather, serves to inform readers of legal news, developments in cases, and editorial comment about legal developments and trends. Readers who believe anything reported in this column might impact them should contact their personal attorneys.
