July 2007 – The Business of Creativity

New Clients

I’ve not posted under the “New Clients” category lately, but not out of a lack of great new clients coming into the firm. Many of my new clients are in start-up mode, with confidential stuff happening, so I’ve not been able to share.

The great thing is the range of creative stuff happening, from software initiatives, to bio-technology, to metaphysics, lifestyles, novelty gifts, all the way to real estate development, health-care service providers, and international import companies. It’s really great to live along Colorado’s front range and in a great arts and technology community like Fort Collins.

We’ve opened almost 70 new client files in 2007, so you can tell the business of creativity is alive and growing in Fort Collins.

International Alliance of Holistic Lawyers

I just joined this organization…

IAHL Mission Statement:

The International Alliance of Holistic Lawyers’ mission is to transform the practice of law, through education and support of holistic practice.

Our Vision:

The IAHL envisions a world where lawyers are valued as healers, helpers, counselors, problem-solvers, and peacemakers. Conflicts are seen as opportunities for growth. Lawyers model balanced lives and are respected for their contributions to the greater good.

If more people signed on to that vision statement, the world would be a better place. 🙂

Here’s their Web site: http://www.iahl.org/

Business Start-Up – Style Magazine

I wrote this article for the Business to Business Issue of Style Magazine in June. I hope it helps…

So You Wanna Start a Business?
© Kevin E. Houchin 2007

Not long ago, if you wanted to go into business with someone and not lose your house if your associates made a bone-headed move, you had to form a corporation. Today you have options, but options don’t necessarily make decisions easier. Just think about the menus at different restaurants, options are great, but they can be confusing and sometimes overwhelming. Forming a business can be the same way, but if you follow these steps, life will be a lot easier. I’m not going to be able to go through ALL the variables in the space of this article, so think of this article as the “daily special” menu at your favorite lunch joint, and be sure to ask your server (that would be your lawyer) about how to modify the dish to your particular taste.

Here we go: Default Position = LLC

Forming a Limited Liability Company (LLC) is always my default position for new companies. The reasons for this position are that:

1. As the name says, you limit your personal liability to the investment you’ve made in the business. In other words, if your associates or employees mess up and end up bankrupting the business, you won’t lose your house. Of course, if YOU mess up, for instance you have a car accident on company business, you’re still liable to lose your personal (non business) assets, but this is true no matter what form of business you create. So, one of the biggest reasons to incorporate historically, has now been equaled in an easier, more flexible business form.

2. Forming an LLC is relatively easy. It only costs $25 to file with the Colorado Secretary of State and it can be done online in about 15 minutes, assuming you do not have more than a handful of initial “members” (owners of the LLC).

3. You can operate the business relatively informally, like a partnership, and save a bunch of organizational overhead–which translates into more time to run your company, and less time in the lawyer’s office creating necessary paper work.

4. You have flexibility to creatively allocate profits and losses between the members. For instance, if one of the initial investors is really looking for some losses to offset other income and lower her tax bill, an LLC offers that flexibility.

5. Finally, an LLC is a “pass-through” entity for tax purposes, meaning that the income or loss from the business operations isn’t taxed at the business level, and then again at the individual level (as in a standard corporation), thus avoiding “double-taxation.”

One important thing to remember is that if you have “members” (owners) of an LLC that you’re not married to, it’s VERY important to create an “Operating Agreement.” Think of forming a business with someone else as a marriage, and the Operating Agreement of an LLC, or the By-Laws of a corporation, as the pre-nuptial agreement. It’s best to figure out what happens when you split up or sell out while everyone is still in love with the idea of hooking up. Crafting the Operating Agreement is one of the key reasons to hire a lawyer.

LLCs are OWNED and usually MANAGED by the “members” as would happen in a partnership, without a Board of Directors getting in the middle. The Operating Agreement spells out how this works, and most importantly, how ownership interests in the company change hands–voluntarily or otherwise.

So, why would you even consider forming a corporation? The easy answer is that corporate “shares” are generally easier to buy and sell then membership in an LLC. So, if you plan to bring in outside investors, it’s best to get started as a corporation right off the bat. The start-up costs are going to be about the same, but you’ll save time, headaches, and money down the road.

Initially you’ll probably want to form a “Subchapter S Corporation” or “S-Corp” for short. This classification is based on Section 1361(b) of the Federal Tax code and limits the pass-through eligibility to corporations with 75 or fewer shareholders, prohibits more than one class of stock, and limits permissible shareholders to individuals, estates and certain types of trusts and tax-exempt organizations. It also prohibits any nonresident alien shareholders. A lot of companies start out as S-Corporations, and then drop the status and become “normal,” “C-Corporations” as they grow.

Venture capitalists are used to working with C-Corporations, so if venture investment is key to your plan, get used to the idea of “corporate formalities,” because they’ll be part of your life.

One of those formalities is that a corporation is OWNED by the shareholders, but MANAGED by a Board of Directors. There are many rules here, generally to protect the shareholders and make sure the Board of Directors is acting in the best interests of the shareholders, rather than in the best interests of themselves (as in the case of Enron, WorldCom, and the other scandals). If you only have a handful of owners, and they all work in the business, this level of formality is probably overkill. If you’re planning to take the company public, and will probably need several rounds of capital investment, this level of formality is very necessary.

If you decide to form a corporation, you will need to draft “by-laws” instead of and “operating agreement.” You will actually issue “shares.” If you’re not concerned about S-Corporation taxation, then you might actually issue several “classes” of shares that can be complex, or relatively simple. You will need to elect a Board of Directors including a President, Secretary, and Treasurer. You’ll need to document your meetings formally and keep a record book of Board meetings.

In summary, the first goal of business formation is to limit liability, which is accomplished through either LLC or Corporate form. The next consideration is taxation; you want to get the pass-through status if you can qualify to avoid “double-taxation.” After that, things get a little more complex and reflect your short and long-term capital needs. Working through these complexities is why you pay an attorney.

Kevin E. Houchin is principal of Houchin & Associates, PLLC – a copyright, trademark, arts & entertainment, business development, and branding firm located in Fort Collins, Colorado. To contact Kevin, call 970-493-1070, visit www.guidingvalue.com or email kevin@houchinassociates.com.

Creative Power – Scene Magazine Column – July 07

As an intellectual property and business development attorney, creative people surround me. I want it that way. I love it that way. I’ve been surrounded by creative people all my life, from the farm I was raised on (it takes creativity to get a few tons of tractor out of a mud hole), the guys in my fraternity house (engineers mostly), my fellow fine art undergraduates, the advertising pros I worked with before going to law school, my fellow law students, and now my clients. You’re surrounded by creative people right now too–just look around and notice all the creative energy filling the air around you.

Some people think creativity and successful business are opposites. They’re wrong. Creativity is the life-blood of business. Creativity is the POWER behind success in business and in life. You are probably no stranger to this, but sometimes things like invoices and deadlines distract us all.

Look around again. Look beyond the walls of your cubical, office, or studio. The business of creativity is changing. Look at Google. Look at YouTube. Look at MySpace. Visit CreativeCommons.org. The change may not seem that obvious, but it’s there and it’s very POWERFUL. The change is simply this – the face of creativity is leaving the fear-and-scarcity-based model of “protecting” creative work and moving toward an open-and-abundance-based model of “sharing” creative work. This is a profound shift enabled by digital technology. Those who understand, embrace, master, and BALANCE this shift first will make a living being creative and sharing the fruits of that creativity at the same time. That seems like true freedom to me…not a bad way to go through life.

While this is a profound shift, I think it’s very important to understand that this is not a new goal. The framers of the US Constitution understood that for society to advance, creativity (inventions and art) had to be shared. Each successive person must have access to the previous generation of creativity to build new ideas. Humanity advances through creativity. This truth goes back further than the Constitution. Check out the words of folks like Solomon, Jesus, Mohamed, and Buddha, and don’t forget to read the text of the Tao. It’s not just being creative that matters–it’s sharing that creative “fruit” with others that brings reconciliation and power.

In my law practice it’s easy to spot the people filled with this power. They’re the one’s who have easily committed everything they are and have to the idea, process, gizmo, or other form of creative expression. They’re “all-in.” They aren’t scared. They’ve surrendered their fear of being ripped off. They know that whatever they do in the future, they’re ALREADY successful. The only reason they’ve come to me is to make sure they are building the right balance of giving to society vs. receiving enough benefit to enable creation of the next contribution–be it painting, song, architectural work, cooking widget, branding package, or whatever fuels their passion.

I have some other clients who are wonderfully, prolifically creative, but sometimes get a bit caught up in the fear of getting ripped off. Obviously, one doesn’t want to invest literally years of one’s life in a creative effort, only to have the blessings of that effort redirected to someone who hasn’t invested the energy. Yes, there are people out there who are like creative vampires–sucking the benefits of the creative effort away from the artist or inventor, and sometimes those people can be hard to spot. Your lawyer can, and should, be a channel for your fears, allowing you to release that negative influence and concentrate on the true creative power of your natural calling. You should focus your creative energy upon sharing the fruit of your labor.

Sharing is the key to the successful creative business. It always has been, and it always will be. Whoever shares the most, will receive the most. Whoever provides the most value will receive the most value. You might say “Houchin, that’s crazy. Look at Microsoft.” Yes, for years Microsoft has zealously protected their brands and inventions. Some say the company has been a creative vampire, resulting in huge profits. One can also look at this company and say they have provided a great deal of value at a very reasonable price to a huge number of people. I CHOOSE to use MS Word on my Mac because it gives me the most value for my money. In one sense, this is a perfect example of sharing and receiving. But you don’t have to look far to notice things are changing. The open-source concept is starting to get real traction in the software industry. Royalty-free models have been working in music, photography, and art for years. Google Alerts may be putting traditional clipping services out of business. It doesn’t cost anything for a MySpace page or to watch videos on YouTube. CreativeCommons.org gives away intellectual property licenses that help people share. The process of sharing evolves, just like the results of creativity.

The power of creativity is found in sharing the results. How powerful are you now? How powerful will you be in the future?

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Kevin E. Houchin principal of Houchin & Associates, PLLC – a copyright, trademark, arts & entertainment, business development, and branding firm located in Fort Collins, Colorado. To contact Kevin, call 970-493-1070 or email kevin.houchin@houchinlaw.com.