Business Formation – Page 10 – The Business of Creativity

September 2007 Scene Magazine Article: TM Myths

OOPS! I forgot to post this earlier this month…

Trademark Myths
© 2007 Kevin E. Houchin

There’s a lot of misinformation floating around the business world about trademarks. Smart business people are waking up to the fact that this area of LAW is critical to successful BRANDING, which as we all know is the foundation of sales, revenue, and ultimate business success or failure. It doesn’t matter if you are selling widgets, houses, luxury cars, guitars, or brooms – your brand is one of your biggest assets, and trademark law is the protective mote around your brand. Here are top mistaken assumptions business people tend to make about trademarks.

10. I changed a letter and got the domain name, so I’m OK.
Wrong! The test for trademark infringement is not if a letter or word is different. It’s whether or not consumers would be confused as to the source of the goods and services.

9. Someone else is already using the name, but they haven’t filed a registration, so if I file first, I’ll be OK.
Wrong! The tests for trademark infringement isn’t who registered first, it’s who used the trademark in commerce first.

8. Just using the “TM” symbol gives me all the protection I need.
Wrong! While it’s smart to use the “TM” symbol next to anything you want to claim as an indicator that your company is the source of the goods and services, just using the “TM” will not give a generic or merely descriptive trademark any protection unless you can prove the trademark has achieved what’s called “secondary meaning” in your marketplace.

7. I can use my competitor’s brand in my Google Adwords buy without any problems.
Wrong! Just because Google doesn’t check for trademark infringement and will let you place the ad doesn’t mean your competitor won’t be ready to slap you with an infringement suit if you use their name as a keyword to distract consumers from their site and lead them to yours.

6. I own the domain name, so I can stop anyone else from using something similar.
Wrong! Even if you got there first to register a domain name, the test is who USES the mark first. Sitting on a domain name doesn’t count. Launching a Web site that includes the name for a product, but not actually selling the product, doesn’t count. You have to use the name appropriately to get protection, which means if you’re offering a product, the name has to be on the actual product. If you’re offering a service, then a Web page is usually good enough.

5. I filed the LLC papers with the Secretary of State on this name, so I’ll be OK.
Wrong! Filing your name with the Secretary of State is basically the same as getting the domain name. Their test is just if the string of letters is different. Again, trademark infringement is about consumer confusion, which is a much more difficult standard than just changing a letter or two.

4. As long as I’ve used my product or company name in commerce, nobody else can use it for anything.
Wrong! You could have a great trademark for a marketing firm, but I could potentially use that name for my line of clothing – as long as we’re marketing to different people and my customers wouldn’t be confused about whether you are the source, sponsor, or are otherwise affiliated with my products. Again, it’s about consumer confusion, and that’s sometimes hard to define.

3. I paid the $50 to register my trademark with the secretary of state, so I’m covered.
Wrong! You’re probably covered in Colorado (or whatever state), but that does nothing for your business with people in any other state. State-specific trademark filing is practically a relic from the pre-internet days when it took more than just launching a Web site to have an interstate or international business presence.

2. I’ve invested a lot of money in this name, logo, stationery, and marketing materials, they can’t just make me toss it all and start over.
Wrong! This is exactly what a prior user can make you do, and make you pay damages and/or profits on top of that. It’s just this risk that makes investing a branding strategy that doesn’t include a trademark plan such a dumb move.

1. I have the domain name and I use the “TM” on my stuff, so it’s not worth the expense to register my trademark.
Wrong! Having the domain name is a good indicator these days that you’re the first user of the mark, and using the TM is very effective at putting potential infringers on notice that you’re claiming the mark as an indicator of source for your goods or services. However, in today’s competitive market place, registering the trademark with the United States Patent and Trademark Office is in most cases worth the expense if you think you will ever need to enforce your rights. The power of the registration will both increase the chance of a quick resolution, and lower the litigation costs of an infringement suit.

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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 or email kevin.houchin@houchinlaw.com.

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.

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.