The Business of Creativity – Page 41 – Houchin Consulting PLLC

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

Creative POWER
© 2007 Kevin E. Houchin

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.

Great Web Site – Presentations

http://www.speakingonspeaking.com/

I talk about “No Lame Names” and part of “Kissing Toads” is about presentations, but this site is REALLY very good – and it has a good name…even better than “no lame presentations.”

Scene Magazine – June 2007 – Young Family Wills

Young Family Wills
© 2007 Kevin E. Houchin, Esq.

When I get asked the same question 5 or six times in the same week, I know it’s the topic of my next column. This week’s question has been, “what information do I need to give you to do my will.” It’s come from folks in my circle of friends, and since I have young kids, most of my friends are in the same situation. If you have kids under 18, and you’re not worth several million bucks, then this article is for you. If you don’t have kids, it gets easier. If you have several million bucks, call me!

So, there are 4 main questions that need to be answered:

1.   Who will clean out your garage?
2.   Who will raise your kids?
3.   Who will handle the money for your kids?
4.   When can the kids handle the money for themselves?

Most of my friends are married, and in Colorado everything goes to your spouse anyway, so the real issue is what happens if BOTH of you pass at the same time. Hey, we live next to I-25 and we get on airplanes. Stuff happens. Accordingly, the default answer to all the questions above is your spouse is something happens to you, and then we name an alternate or two in case your spouse is not available to handle the tasks.

One thing to keep in mind is that these roles can all be delegated to the same person, or they can be assigned to different people. The choice is yours.

Who will clean out your garage?

The person that has to take care of handling all you stuff is called the “Personal Representative.” This person should be local so they can show up at the courthouse, work with the lawyer to transfer your assets to their appropriate destinations, and yes, clean out your garage. It’s an gig that lasts around a year or two.

Who will raise your kids?

If your kids are under 18 when you and your spouse pass on, your kids need to live with someone. If YOU don’t make the choice, the Court will make the choice for you, and you might not be happy with the decision. You should designate one person as the first choice, and one as the second. Don’t name couples, because they might split up – you never know. This person will have your kids until they’re 18, so choose someone that you believe to be a good stand-in parent.

Who will handle the money?

Assuming you have some assets and maybe some life insurance, you might be dropping some serious money on some young kids. I know I don’t want to hand my life insurance benefits to a 12 year old, so the assets need to go into a “trust” for the “benefit” of my kids until such a time as I think they can handle the money themselves. The person that handles the money is called the “Trustee” and is on the hook until the terms of the arrangement are satisfied. This person generally has very broad discretion to use the money for the benefit of your kids, so pick someone financially responsible and that you, well – TRUST.

When do the kids get the money?

It depends on how much you think they’ll get. If they’ll only end up with a few grand, then it’s not worth the effort to make someone be the trustee. If you’ve got a couple million in life insurance, then it’s a different story. I like to “distribute” principal funds from the trust as follows: 1/3 at age 21, ½ of what’s left at age 25, and the full balance, which terminates the trust and lets the trustee off the hook for keeping the checkbook, at age 30. Some other attorneys like to do the same at 25, 30, and 35. There are no “rules” for this. I like 21 because it would make a great college graduation gift, 25 because there might be graduate school, a house down payment, or kids coming along, and 30 because by that age the trustee should be off the hook, and my kids should know how to manage money. Along those lines, it’s good to set an amount of the trust balance, say $50,000 below which the trust is simply terminated and the funds distributed to the kid(s).

Those are the major questions relating to wills for young family’s. Of course you’ll need to give your lawyer full names, birthdates, etc for the family too. You do NOT have to give them a full accounting of your assets. Most wills are written to basically throw your assets into a “bucket” and then discuss how to divide the bucket. The will document should also make reference to an outside document that you keep with the will that acts as a running list of who gets the silverware and other tangible personal property. These things CAN be added in the will document itself, but generally aren’t – doing so just adds to the legal fees now and later.

Please be aware that for a will to be worth the paper it’s printed on, there are certain formalities that need to be followed in the signing process, such as the signor needs to make certain declarations, with the witnesses present, etc. This ceremony is why you hire a lawyer to help and coordinate the process.

While your at it, you should also complete 3 other documents. A General Durable Power of Attorney lets your spouse sell your stuff to pay bills if needed. A Durable Healthcare Power of Attorney that lets your agent make healthcare decisions for you if you’re unable. And a “living will” that lets everyone, especially your doctors, know your wishes if you are terminally ill and unable to make decisions for yourself.

These can be difficult questions to answer – practically and emotionally. However, when you think about a Court making the decisions for you, it’s a real motivator to get these documents completed.

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@houchinassociates.com. Yes, he does wills for young families too.