Volume 3, No. 9
November 2007

Guest Editorial . . . "Ax The Tax" by Todd Anderson, SBAM Pages

Be Sure To Read BIZ MO's Regular Feature Writers:

Mike Gould
Small Business &
The Internet:
Im In Ur Meme Typin
My Storee

Mel Muskovitz
on Employment Issues What Employers Need To Know About: Holiday Pay

Ann Arbor Area BUSINESS MONTHLY magazine brings the reader the latest business news and information important to the businesspeople in Washtenaw County. Each month articles cover real estate, legal, Internet, employee concerns and the climate of business in the greater Ann Arbor area. There is news about company employees and feature articles on local businesses. We cover business news from Ann Arbor, Chelsea, Dexter, Manchester, Milan, Saline, Whitmore Lake, and Ypsilanti.

Make Sure Your Business
Is Legally Okay

Susan Kornfield, local attorney with Bodman, LLP
Susan Kornfield, local attorney with Bodman, LLP, specializes in intellectual property law.
Attorney Fred Steingold has authored several legal books for start-up businesses.
Attorney Fred Steingold has authored several legal books for start-up businesses.

By Sarah Swanson

Entrepreneurs often dream of operating their own small business, and they may believe that having creative energy and a marketable product or service is enough to bring success. However, ignoring the laws that pertain to owning a small business can turn that dream into a tangled web of legal issues. Being informed about small business law can help protect assets, increase market share, and keep that dream company running smoothly day to day.

"Small business people are action people," notes Ann Arbor Attorney Fred Steingold. "They are often impatient with paperwork and plunge ahead and self-teach off the Internet or through books. Some get along just fine. A lawyer sees the ones who are more cautious or the ones who have run into trouble."

Business owners may be surprised to learn the many ways in which legal counsel can benefit their companies. Minimally all businesses should know about liability and taxes, according to Steingold.

"You need to know your degree of liability for business debts," advises Steingold. For instance, a business needs to decide if forming a limited liability company (LLC) makes sense depending on the complexity and hazards of the business. Otherwise, owners open themselves to personal liability which can include their homes, their bank accounts, and their stock options.

"You wind up at risk needlessly," says Steingold. The filing fee to form an LLC is a modest cost of $50 to $60 plus the attorney's fee. Business attorneys are very familiar with forming LLCs, and thus can save the business owner time and possible added expense.

Clients can seek help from a business attorney or certified public accountant (CPA) to learn how the business may affect the owner's tax picture as well. Steinberg says this is crucial for owners to know upfront. A specialized tax lawyer can help sort out the complex rules set by the Internal Revenue Service if needed.

Perhaps one of the most important areas between businesses and law has to do with intellectual property which includes intangible rights such as trademarks, trade secrets, copyrights, and patents. Ann Arbor Attorney Susan Kornfield, a partner at Bodman LLP, is an intellectual property lawyer who also chairs the Intellectual Property Practice Group and is an Adjunct Professor of Copyright at the University of Michigan Law School. She says intellectual property is valuable to companies and thus should be properly protected.

An intellectual property attorney can help business owners decide what needs to be protected, how it needs to be protected, and how to proceed if a competitor infringes on their company's rights.

Choosing and protecting a strong name is vitally important for any business. A trademark is the name, the brand, or the identifier of a business. A trademark can be used for as long as the mark is connected with the services and goods. Using words or symbols protects a business to some degree, but federal registration gives extra protection and is highly recommended.

"What do you want your name to symbolize?" asks Kornfield. "For example, Amazon.com conjures the image of the big Amazon forest. UTube is cool sounding and easy to remember."

"Trademarks are assets," says Scott Hauman, Director of Planning for Q LTD, a strategic design consultancy with offices in Ann Arbor and San Francisco. "They have value, and for small businesses that symbol, that trademark, that registry adds confidence and professionalism."

Kornfield and Hauman stress that a great name, and one that is protected through a trademark, gives a company a competitive edge and a defense against competitors.

Copyrights apply to music, books, motion pictures, photographs, and even architectural images. Businesses can protect the look and feel of their company so that customers immediately identify with the company based on its decor. Kornfield recalls, "The Yankee Candle Company had a lawsuit over another store that developed the same look and feel as their candle store." Steingold says a local Ann Arbor deli brought a similar suit against a new competitor several years ago. Copyrights are registered federally and protect the creator for numerous years.

According to Kornfield, trade secrets are "the secrets to your business which give you the competitive edge. For example, Coke has a secret formula. You might know the ingredients and even the quantities, but you still won't know exactly where the ingredients came from and so on." There is not a formal registration for trade secrets.

Patents are a powerful right and a "legal monopoly," according to Kornfield. Patents which are issued by the federal government give exclusive rights in the United States and keep competitors from selling, using, and making a registered product. Patents last a limited number of years and usually apply to science and technology fields including medical supplies and pharmaceuticals.

How intellectual property will be protected in the Internet age remains yet to be seen with the illegal downloading of movies and music, according to Steingold. Intellectual property can be appropriately protected on the Web, but monitoring it is difficult.

Businesses are faced with a host of other legal concerns as well. Small companies with employees may find the rules, regulations, and paperwork staggering. Business owners need to know their responsibilities under federal and state laws. There are also laws about antidiscrimination, payroll and tax withholding, minimum wage, and overtime. CPAs and specific software can help owners understand these laws. A legal expert specializing in employment law might be warranted in some cases.

"The law has evolved pretty favorably to employees," says Steingold. A lawyer might be able to advise business owners who have difficult employees for example.

Small business owners can consult with attorneys about matters such as leases, licensing, zoning laws, buying and selling businesses, and many other aspects of owning a business. This includes interpreting leases and deciphering stipulations on hidden charges, rights to releasing the space, regulations of the lease, and whether or not a competing business can lease in the same building.

Steingold says a number of businesses need to be licensed through the state including barbers, home contractors, and real estate brokers. Attorneys can help business owners ensure they are abiding by these laws as needed. This includes zoning regulations at the local level. While some very low-impact businesses can operate out of residential homes, many companies cannot. Being aware of local ordinances can save a lot of headaches for owners.

Despite all of the useful legal information available to businesses, some owners are still reluctant to become fully informed through legal counsel.

"The biggest mistake small businesses make is they think lawyers are going to be very expensive," says Kornfield. "For a couple of hundred bucks a small business can learn what they need to do today and what they can wait on." Some attorneys will even offer a free consultation.

"You can learn a lot from a one hour exploratory appointment," says Steingold, who says Ann Arbor attorney rates generally run $200-$300 per hour.

Hauman says Q LTD is "always recommending the formal path," particularly for a new business going through a formal naming process. Although Q LTD can do preliminary searches to see if a name looks like a good option, they recommend their clients take the legal route since attorneys know the laws well. Sometimes clients seek legal counsel first and then are referred to companies like Q LTD to find a more memorable name which will lead to a stronger trademark.

"If you do the trademark right, you can save so much money down the road," Hauman says. "It is sad when a company with good ideas is later forced to remove their signs and change their name. This is enough to put a small business under."

Hauman says Q LTD is also on the other side of the process as a small business itself. The company protects its name and relies on legal counsel to monitor the market through a database to ensure that no one else is using their trademark.

"There are over 485 records utilizing 'Q' in our category," says Hauman. "And although 'Q' is generic, no one else is going to be able to use Q LTD." He cites a case where a Chicago company created a name a little too close to Q LTD. Because Q LTD is properly registered, their legal counsel sent a "cease and desist" letter to the Chicago company who obliged and stopped using the name.

Contracts are another area where businesses can protect themselves legally. Steingold says there are two situations where business owners should definitely have written contracts, whether they are formalized through a lawyer or are completed through other means.

"One situation would be where two or more owners haven't carefully defined responsibility. This is dangerous for a business if there is a dispute," says Steingold. "Put it in writing about what role each will play and how they will get paid." This kind of dispute can break down good relationships and cause unnecessary disagreement without proper documentation.

Third party contractual relationships can also be problematic if deadlines and responsibilities are not clearly outlined. Steingold says, "Commercial litigation is usually the result of not having a contract or having an ambiguous contract." Contracts need to be clear, but they do not have to be formal; contracts can be an exchange of letters or a signed proposal.

With hundreds of lawyers on the market, business owners may feel intimidated about their options. Kornfield recommends asking for referrals from larger companies and responsible strategic partners. Ask about an attorney's client base and whether that attorney is on any advisory committees. Lawyers who do speaking engagements or who write are often up to date on their topics. Finding a good rapport is important for long-term relationships between attorneys and business clients as well.

Books and the Internet can help business owners get an overview of the legal implications of owning a company. Still Steingold offers, "My advice is to run it by a lawyer to make sure you haven't made any mistakes."

Steingold has authored several legal books for NOLO publishers including the Legal Guide for Starting and Running a Small Business, Legal Forms for Starting and Running a Small Business, and The Employer's Legal Handbook, a best seller in its genre.

The Internal Revenue Service website (www.irs.gov) and government sites such as the State of Michigan (www.michigan.gov) are user friendly and reliable, and some forms are downloadable. Business owners should be aware that other Internet sites may not be accurate. Kornfield advises new business owners not to navigate the Internet for hours trying to interpret the complexity of the laws, but rather let reputable business lawyers share what they do every day.

"Good lawyers will go to lunch with their clients and help clients think about their business in new ways," Kornfield says. "They are a part of your business team and can help you make a legal plan."

Attorneys can help small business owners start up, grow, and maintain their dream companies.

"A lot of attorneys really care that your business not only succeeds, but thrives," says Kornfield. Lawyers can be a great resource for networking. Steingold says attorneys can recommend restraint for business owners, such as determining when compromise makes more sense than a lawsuit and keeping an eye on what is important in the big picture.

"Entrepreneurs as a class are so energetic and enthusiastic. They are a fun group of people to work with," says Steingold. "Sometimes a lawyer can be a sounding board and be objective. We can serve that role, and having a trusted person to talk to is helpful."