CHAPTER 8
protecting your business, your ideas, and yourself

WHEN YOU START a business, hiring pricey professionals probably won’t be high on your list of ways to spend money. You may think to yourself that lawyers and CPAs mean big bucks, and you don’t have money to burn. But the case for hiring a professional accountant is fairly easy to make: You’ll need someone to help you set up your books professionally and to make sure you don’t get in trouble with the Internal Revenue Service (IRS). (More about tax issues later in the chapter.)

The case for hiring an attorney isn’t as obvious, so a lot of small businesses just start off without any professional legal advice. Perhaps they just aren’t knowledgeable about the legal complexities involved with starting a business. Some new business owners believe that unless they’re involved in a risky business, there’s no need to worry about establishing a legal structure for their business. Other owners realize there are legal issues to adddress, but they don’t want to spend the money right away, and they think they can get by for a while without doing so.

To save money, many new entrepreneurs choose to use the do-it-yourself legal options available today. You can get forms from your state’s secretary of state’s office or find them on legal information websites. Many of these options are satisfactory, but they should not replace professional legal advice. I recommend that you then invest in having all your legal documents reviewed by an attorney before you finalize everything.

I know that with a plethora of information at your fingertips, it is easy to imagine that you can handle all the legal work on your own. But keep in mind that not everything is black-and-white. The language used on forms seems straightforward, but it’s never as simple as it appears. One could easily assume the lawyers who created the forms deliberately made them confusing for job security reasons. But as an attorney, I can assure you that’s not true. There are nuances involved with making legal decisions about your company, and unless you have the legal training, you couldn’t possibly understand them. If you wait until you’re dealing with a legal problem to hire an attorney, you’ll generally find it’s too late. And talk about racking up legal fees—just watch the billable hours churn away as prior work is cleared up. The fees you’ll pay for legal services in advance of a problem are insignificant compared to what you’ll pay an attorney to get you out of trouble. Plus, dealing with legal problems creates an emotional and productivity drain on you and your business. So be proactive. Make an attorney and an accountant important parts of your start-up team. It will be money well spent.

A Perfect Case in Point

In Chapter 6, we talked about what’s in a name. If you decided to do business under a name other than your own, or the legal name of your corporation, then the law requires you to file what’s known as a “fictitious name registration.” You’ve probably heard it referred to as a DBA, or “doing business as. …” For example, if I decided to launch a catering business as a sole proprietor and call it Susan Solovic’s Meals to Go, I wouldn’t have to file a fictitious name registration because the business has my name in it. However, if I called my catering business Mainly Meals, then I’d need to file the fictitious name registration. Why is this? Primarily because if someone needs to sue Mainly Meals, the public needs to know who is behind that business. The fictitious name registration shows I am the owner of that name. The same would be true if I had incorporated as Solovic Enterprises Catering, Inc., and then wanted to do business as Mainly Meals. Solovic Enterprises Catering, Inc., would need to be noted in public records as the owner of the name Mainly Meals.

During the brief period I practiced law, five male friends decided to incorporate their business on their own. When you incorporate, you can select a name for your company as long as no other business has already registered that name. So my friends named their company ABC, Inc.

After they incorporated, they decided they didn’t like the name they had chosen for their business and they wanted to operate under a different name. So they filed a fictitious name registration for Five Guys Biz. About one year later, I received a frantic call from one of the quintet. They’d all been sued personally by a creditor of their business. “They can’t sue us personally,” my friend exclaimed. “We’re incorporated!”

So I called the attorney who filed the suit against them and asked why he sued them individually instead of suing the corporation. “Have you seen their fictitious name registration?” he asked. When I admitted I hadn’t, he smugly agreed to fax it to me. (We were still using faxes then.)

As soon as I read the document, I knew my friends were in trouble. As I noted, corporations can transact business under a name that’s different from their official one by filing a fictitious name registration that states that this company is now operating with this name. However, that’s not what my friends’ paperwork indicated. It said the five of them were doing business individually under the new name. That’s why the attorney was able to bring suit against them personally instead of their corporation. Ultimately we settled the case, but the expense put them out of business.

How to Hire an Attorney

Finding the right professional advisers is important. Don’t rely on your family attorney or your friend’s buddy unless you are confident he or she has the experience you need. You’ll need an attorney who specializes in business law for small to midsize businesses. Other business owners are often the best source of referral. Find out whom they trust and what they like about their attorneys. Generally speaking, lawyers are not warm and fuzzy people. (I can say that, since I am one.) So if someone talks about his or her attorney in glowing terms, that’s a good indication that the individual is someone you can count on for your business needs.

You’ll also need an attorney who speaks in plain English. Unless you’ve gone through law school or have worked in areas related to business law, you can’t be expected to understand all the legal jargon. A good attorney will patiently explain things in terms that you, a business owner, can easily comprehend. No attorney should ever talk down to you or make you feel foolish for not being familiar with the legal mumbo jumbo. You should feel comfortable asking as many questions as you’d like. Remember—the only dumb questions are the ones you don’t ask. After all, it’s your business, and any decisions you make resulting from legal advice may affect your success. In fact, if you don’t feel comfortable with the advice you’ve received, there’s nothing wrong with getting a second opinion, just as you would if you had a medical problem.

Which is better—a lawyer in a small firm or one in a large firm? That depends. Theoretically, a sole practitioner or a lawyer in a small firm will have lower fees than a big-firm attorney. However, don’t rule out a large firm if your concern is just the cost. Large firms have associates and paralegals who often do much of the work at lower hourly rates. And the benefit of working with a large law firm is that it has more clout. In other words, if you ever have a legal problem, a letter from a prestigious firm is going to be more intimidating than one from a local attorney who works out of his or her home.

Since lawyers are in business to make money, that means they need clients. So don’t be afraid to negotiate fees or request a fixed price for a particular project. A fixed fee allows you to budget for the expense so you can better manage your cash flow.

Finally, always check an attorney’s references and see whether there are any complaints filed against him or her with the Bar Association in your state and the American Bar Association.

Protecting Yourself from Personal Liability

There are four basic organizational structures that apply to small-business operations: sole proprietorship, partnership, coporation, and limited liability company (LLC). I’m frequently asked: “Do I need a formal organization structure for my business to make it legal?” First, as long as you’re not running a business that’s against the law, then your business is automatically legal. (I actually heard a college business school dean refer to small businesses as being legal and illegal. I couldn’t believe it.) The real question is whether or not you want to establish a legal structure for your business. The primary reason you should strongly consider it is to protect yourself from personal liability.

Some people assume that they don’t need to establish a legal structure for their business because they believe, or have been advised, that there is very little risk associated with operating their business. Cautiously, I would say that’s true for some small-business ventures, such as a hobby business or a part-time business for which you have no plans of expanding to a full-time enterprise. Still, even if you’re in a small operation, you are not automatically safe. These days anyone can—and does—sue anyone for anything. Believe me, there is an attorney out there who will take the case, and suddenly you’ll find yourself in court even if there’s little or no justification.

If you don’t have a legal structure for your business, and you happen to lose the suit, then the judgment will be against you personally. As a result, your personal financial well-being could be significantly harmed and the judgment could damage your reputation and future business opportunities. However, when you establish a formal legal structure for your business, creditors of the business normally can’t go after your personal assets to pay your business debts and/or claims arising from lawsuits. (There are exceptions so, again, consult with a legal professional.)

The structure you choose for your business will have long-term implications, so it’s important to choose wisely. Consider the big-picture vision you have for your company (see Chapter 1). Some types of legal structures limit your ability to raise capital, so if you foresee that, down the road, you might need investment capital to build the business, then your entity choice is critical. It’s also important to carefully review the tax consequences of the various legal structures. An accountant or attorney can explain the tax implications to you or you can do your own research on the Internet. However, be careful that, if you resort to the Internet, you make sure you obtain your information from a trustworthy site, such as the IRS or Small Business Administration (SBA), or a specialized legal resource site such as LegalZoom.com, BizFilings.com, Company Corporation.com, or NoloPress.com.

What Type of Legal Structure Do I Need?

Although there are a number of organizational structures that could apply to a small business, the four types I mentioned previously are the most common. What follows is an overview of each.

Sole Proprietorship

The easiest and quickest way to start a business is as a sole proprietorship. Why? Because all you really need to do is to start. In fact, you may already have a sole proprietorship and not even know it. If you do any freelance work, sell merchandise on Interent sites such as eBay or Craigslist, market crafts on the weekend at a flea market, or pick up odd jobs now and then without an established business structure, then by default you are a sole proprietorship.

Even though a sole proprietorship is simple to set up, that doesn’t mean you can forgo good business-management practices. You will still need to set up and maintain a professional bookkeeping system to keep track of business income and expenses, separate from personal ones.

For tax purposes, a sole proprietorship is what is known as a “pass-through entity.” Legally, it isn’t separate from you as an individual, so at tax time you report all business income or losses on an IRS Schedule C form, which is filed with your personal income tax.

Keep in mind, however, that even though establishing a sole proprietorship doesn’t require any special legal filings, there may be other legal issues to consider, such as business licenses and permits. Make sure you check with your local municipality and a professional adviser such as your CPA or attorney. The secretary of state’s office in your state may have a checklist you can use to ensure you follow the proper procedures.

The key points of a sole proprietorship are:

• No filings required with the state

• Owned and operated by a single individual

• No protection from personal liability

• Limited ability to raise funds

Partnership

Partnerships are much like sole proprietorships, but they are for two or more individuals. To create a partnership, all you have to do is decide to go into business with someone else. No legal filings are required.

However, there are perils to partnerships that obviously don’t apply when you’re working in a sole proprietorship. For example, the word “partner” is used liberally in business conversation without much regard for the implications of its use. If you hold someone out to the public as your partner, and it is reasonable for the public to rely on that representation, then you could be legally bound for any and all actions of that individual regardless of the true nature of your relationship. So if you are in a partnership—real or perceived—the actions of one partner bind the other partners and each can individually and separately be held responsible for the whole. As an example, simply stated: If your partner commits fraud and skips the country, you’ll be left holding the bag. So be careful about how you use the term. And remember, as with a sole proprietorship, a partnership provides no protection from personal liability.

If you decide a partnership is right for you, then make sure you have a partnership agreement in place. I have seen many “friends” decide to go into business as partners. Excited about their new business venture, and secure in their friendships, they can’t imagine anything ever going wrong. But things often do go wrong, so you need to think about how to manage a potential conflict or breakup. A partnership agreement is like a business prenuptial agreement, and every partnership needs one. The agreement should establish how the partnership can be managed or dissolved if the partners no longer agree on the direction of the business.

Like the sole proprietorship, a partnership is a “pass-through entity.” Partners receive a partnership return—IRS Form 1065—which is filed with each partner’s personal income tax return. Profits and losses from the business are reported via this form.

The key points of a partnership are:

• No formal filing requirements.

• A partnership agreement is recommended, setting forth rights and responsibilities.

• No protection from personal liability; partners are responsible for the acts of others.

Corporation

When you hear the word “corporation,” you probably think of big organizations. But a corporation doesn’t have to be big. In fact, a corporation can consist of a single shareholder. A corporation is a legal structure that is separate from its owner(s), which is very different from the sole proprietorship and partnership structures.

Because a corporation is a separate entity, as the owner you are generally protected from personal liability. There are exceptions to personal liability protection, which you should discuss with your attorney. As a rule of thumb, however, if you maintain the requisite corporate formalities defined by the statutes of the state in which you incorporate, you most likely will have protection.

Protection from personal liability is the major reason business owners choose to incorporate their businesses. Should your business be unable to pay its debts, unless you’ve signed personal guarantees your creditors can go after assets of the company, not your personal assets or those of any other shareholders.

To establish a corporation, you must file an Articles of Incorporation document in your state. You also need to create bylaws for the company, issue shares of stock, maintain a corporate record book, and file annual registration forms with the secretary of state’s office in the state of incorporation. In most cases, you must establish a board of directors and elect officers. (Check your state statutes, as state requirements vary.) There are expenses associated with establishing a corporation, which you will avoid if you choose a sole proprietorship or partnership. And I strongly recommend hiring an attorney or CPA to guide you through the incorporation process. Once again, it’s okay to begin the process on your own, if you prefer, but rely on the expertise of an attorney or CPA to ensure everything is done correctly.

There are two popular types of corporations for small businesses, both of which offer personal liability protection, but have different tax consequences. A “C” corporation is taxed as a separate entity, files its own tax return, and is taxed at a corporate rate. An “S” corporation doesn’t file a separate return or pay taxes itself; all profits and losses pass through to the shareholders, who are assessed taxes at their individual income tax rate. Shareholders of an “S” corporation receive an 1120S Schedule K–1 form, which is filed with their personal income tax return.

Most small-business owners prefer to be an “S” corporation because it avoids what is commonly known as the “double taxation” trap. That means a corporation’s income can be taxed twice—once when it’s earned on the corporate level and again when it’s paid to you, the shareholder, in dividends.

Initially, the “S” corporation may seem to you like the logical choice. But if your goal is to attract investors, the “S” corporation has limitations. Consult with an attorny or tax professional before you decide which type of corporation is best for you. The considerations are complicated and it’s often costly to change down the road.

Points to keep in mind about a corporation:

• Articles of Incorporation must be filed with the state; each state charges a fee for the filing.

• Corporation must be kept in good standing by filing annual registration reports.

• There must be a board of directors and the corporation must have officers.

• There must be bylaws and documentation of annual meetings of shareholders and board of directors. (Check your state statutes.)

• Shareholders are generally not subject to personal liability.

Limited Liability Company

A limited liability company (LLC) is a type of legal structure that is attractive to many new business owners because it minimizes the risk of personal liability without involving corporate formalities. To form an LLC you must file Articles of Organization (which are similar to Articles of Incorporation) with the appropriate state agency and pay a filing fee. Instead of bylaws, an LLC has what is known as an operating agreement. Once again, while there are websites that provide templates and forms for drafting operating agreements, the content is boilerplate, which may not be appropriate for your business. Therefore, it is advisable to work with a professional to ensure the agreement is written appropriately for your business needs.

Unlike corporations, LLCs are not bound by formal corporate governance requirements. Consisting of members rather than shareholders, LLCs don’t issue stock. They are not required to elect officers, hold board meetings, or keep corporate records. Nor is there a requirement to file an annual registration report with the state’s secretary of state office.

An LLC may be taxed like an “S” corporation as a pass-through entity, but the LLC is not bound by many of the restrictions that accompany “S” corporation status. For example, an “S” corporation may not have more than 100 shareholders, all of whom must be U.S. citizens or residents. However, any type of person or entity may become a member of an LLC, which is beneficial if you plan to attract investment capital.

Points to keep in mind about a limited liability company are:

• Must file Articles of Organization and pay filing fees to the state.

• Members are generally not subject to personal liability.

• Fewer legal formalities than corporations; no annual filings or meetings required.

• An operating agreement is recommended.

• LLCs are typically pass-through entities.

•     •     •

Again, consult with a professional adviser such as a CPA or attorney to make sure you choose the appropriate structure for your business.

Federal Employer Identification Number

Once you have established your business structure, you may need to obtain a Federal Employer Identification Number (EIN). Basically, an EIN is your company’s Social Security number. It has nothing to do with whether or not you have employees. Every business needs an EIN unless you are a sole proprietorship, or in some states a single-member LLC, in which case you use your Social Security for tax purposes.

It’s easy to apply for your EIN. You can obtain the IRS Form SS-4 online (www.irs.gov) and mail or fax it in. But the easiest way of all is to use the IRS phone-in system, which enables you to get your number the same day: (800) 829-4933.

Intellectual Property

The term “intellectual property” involves a lot of different things regarding your business, from trademarks and copyrights to patents. Some types of intellectual property are much easier to protect and manage than others, but regardless of the nature of your company’s intellectual property, it is a valuable asset and you absolutely must make sure you protect it.

Imagine starting your business under one name and then learning someone else has launched a similar business using the same name and that person has successfully acquired a trademark for the name as well. You may not have to change the name of your business because you are protected by what’s known as “prior usage” (meaning you were using the name prior to its being trademarked). However, if you decide to expand, you most likely will have to do so with a differnt name, particularly if using your current name causes confusion in the marketplace.

Therefore, it’s wise to think about protecting your intellectual property early on in your business start-up. The following are some common matters pertainting to intellectual property. This certainly won’t cover everything you would need to know, and because this is a complex area of law, you should consult with an attorney who specializes in intellectual property.

Trademarks

What is a trademark? Quite simply, a trademark is your brand. It can include your company name, logo design, tagline, or a combination of all of these things that represent your business. A trademark is unique to your business. One misconception in the market is that you can copyright your business name; that’s not true because copyrights do not apply to business names. (Copyright is explained later in this chapter.)

Prior to choosing a name for your business, it’s always a good idea to do a name search to make sure no one has already obtained a trademark. Don’t fall in love with a business name until you have done your due diligence. You can research existing trademarks online for free using the Trademark Electronic Search System database provided by the U.S. Patent and Trademark Office (www.uspto.gov). However, the database information on the site can be confusing and difficult to decipher. So, once again, an attorney who specializes in this area of law is better equipped to make a more accurate determination.

If there is no registered trademark for the business name you want to use and you want to trademark it for your business, you can file a trademark application online using the Trademark Electronic Application System. Fees associated with the application can be paid online by credit card, by establishing a USPTO account, or via electronic funds transfer.

Why register your trademark? If your business is successful, you don’t want others benefiting from your business success by opening a similar business and giving it the same name or one that’s very similar to your brand. That would confuse customers and cost you potential business. Your brand has tremendous value, and a trademark provides the protection you need.

Do you need an attorney to file a trademark? Technically, you don’t. As noted earlier, there are online systems through which you can file for trademark protection yourself. However, you do so at your own peril. The process is not user-friendly, and if you aren’t familiar with all the technicalities, you may not provide yourself with the broadest scope of protection. The cost of an attorney’s fees up front may be insignificant compared to legal fees down the road.

Consider Poppy Gall and Carolyn Cooke’s million-dollar-plus company, Isis, which manufactures a line of outerwear for active women. The company’s original name was Juno, but they were hit with a cease-and-desist order because there was a plus-size women’s clothing company with the same name. If Poppy and Carolyn had done their due diligence by conducting a trademark search themselves—or better yet, hired an attorney to determine whether there was a conflict—they would have saved $25,000 in subsequent legal and design fees, plus the frustration of having to rebrand their young company.

Once you have obtained a trademark for your business, you must vigorously defend it or it will lose its value. For example, Kleenex is a trademarked brand name; when the name appears on the product or in advertising, the symbol ™ directly follows the name. Yet, think about how many times people use the word “Kleenex” when they mean “facial tissue.” That common-language use of a brand name may put the value of the trademark in jeopardy.

One way to police the use of your trademark is to establish search-engine alerts for the brand name. For example, I have alerts for SBTV.com, SBTV, Small Business Television, and ItsYourBiz.com because these are all trademarked. The alerts help me discover infringements of our trademarks. Usually it is a simple process to protect the brand. I send an email or call the offending party, alerting them about the infringement, and the persons or company are very cooperative and stop using the trademarked name.

The biggest challenge in this regard is when the infringement occurs with a non-U.S. company. Unfortunately, a trademark issued by the USPTO does not provide international protection. However, if you plan to do business globally, you may seek registration in other countries by filing an “international application” with the International Bureau of the World Intellectual Property Organization (www.wipo.int). Consult the USPTO website or an experienced intellectual property attorney for more in-depth information about international trademark rights.

Copyrights

A copyright is automatically secured when an original work is created in a tangible form. That means that you don’t have to mail yourself a copy of your work for a copyright to attach, and you don’t have to register it with the U.S. Copyright Office. Though you can’t copyright an idea, once you transfer the idea to a tangible format, then you technically own the copyright to that original work.

You may notice on many published works, such as newscasts, sport broadcasts, newspaper articles, and books, that there is a notice of copyright. While that is not officially required, it is a good idea to include it as a way of protecting yourself. To include a copyright notice on your original work, use the copyright symbol ©, or simply write the word “copyright.” Then insert the year of publication or origination and the copyright owner’s name. So, for example, my copyright for this book is: ©2012 Susan Wilson Solovic.

Copyright notices can prevent others from using any marketing materials you have created to promote or describe your business. Similarly, you should include the copyright notice for online elements such as a blog, a website, or an e-newsletter. Materials used in seminars to train or educate customers should also include the copyright notice so as to discourage someone else from using your efforts for their benefit.

Because I write many columns and blog posts for a variety of companies and media organizations, I use search-engine tools to alert me if anyone is picking up and using my material. Some people have literally copied my writing and presented it as their own, even though this is an obvious copyright infringement. There are both civil and criminal penalties for copyright violations, and the severity of the penalties depends on the situation.

Finally, though registration with the U.S. Copyright Office is not mandatory for protection, doing so for major works, such as a screenplay or a software program, is still a good idea. Registration provides a public record of your copyright ownership, and you must be registered in order to file a lawsuit for any infringement of your work. You can search registered copyrights and register your own copyright online for as little as $35. There’s more information about the scope of copyright protection at the U.S. Copyright Office’s website, www.copyright.gov.

Patents

According to the SBA, small businesses generate 13 times more patents per employee than do large companies. Let’s face it: Entre -preneurs are innovators, and America provides ample opportunity for people with great ideas to successfully bring them to market. However, for every great idea that succeeds in moving from the mind to the marketplace, there are countless others that never get off the ground.

Although it has never been credited to anyone, one of my favorite quotes says it best: “Everyone who has ever taken a shower has had an idea. It’s the person who gets out of the shower, dries off, and does something about it that makes a difference.” So if you have a great idea for a product or service in your business, here are the things you need to know at the outset to ensure your idea makes it to market:

1. What types of things are patentable? To patent something, it has to be original. And make sure no one else has beaten you to the punch. Just because you haven’t seen it on the market, that doesn’t mean someone hasn’t already thought of it. For instance, did you know that for every idea you generate, at least 200 people before you have already thought of it? (Of course, that doesn’t mean they have acted on their idea, so do your research.)

2. What kinds of patents exist? The three most common types of patents are:

(a) Utility patent: These are issued for the invention of a new and useful process, machine, manufacture or composition of matter, or a new and useful improvement thereof; (b) Design patent: These are issued for new, original, and ornamental designs for an article of manufacture; (c) Plant patent: These are issued for a new and distinct, invented or discovered asexually reproduced plant, including cultivated mutants, hybrids, and newly found seedlings.

3. Does someone already own the patent? Do your research. Before you invest too much time and money in your idea, conduct an Internet search with key words that apply to your product idea and see what pops up. You can also conduct a patent search on the U.S. Patent and Trademark Office website (www.uspto.gov).

4. How do I present my idea? Once you have determined that your product is truly unique, you need to invest in a prototype and conduct market research. You should describe your invention with such completeness that others could make or use it. Also, just like the type of market research you do when you have an idea for a business start-up, you’ll need to demonstrate that there is a viable market opportunity for your invention. Are there people out there willing to buy and use the product if it becomes available? Your prototype should help you make that determination and establish the costs associated with bringing the product to market, as well.

5. How I document my inventive process? It’s important to keep accurate records, so be sure to put all your ideas, notes, and drawings in an inventor’s journal, and have it signed, witnessed, and dated. Be careful about disclosing your ideas to others. Make sure you get a confidentiality or nondisclosure document signed before discussing your ideas with others. “ ‘Be afraid to share your idea’ is very good advice,” says attorney Chris Kelleher. “The reason being that until you actually file for some type of patent application, if you disclose your idea to anyone else who isn’t contractually obligated to keep their mouth shut, then they can use that idea and may be able to beat you to the patent office.”

The patent process differs from copyright protection, in that the first patent filed is the one that wins, whereas copyright attaches automatically to a tangible medium as soon as it is created. Also, you should know up front that, for the patent process, patience is not a virtue—it’s a necessity. It can take years to complete (literally, years!), and it can cost a significant amount of money, depending on the complexity of the patent. So if you’re serious about obtaining a patent, dig in and get ready for the long haul.

Do you need an attorney? In this case, the answer is an unequivocal yes. There are no shortcuts. The patent process is not forgiving, and if you make a mistake, even in the early stages, you could blow your entire opportunity. Specifically, you’ll need an attorney who has experience in filing patents—ideally one with experience in your particular field.

Caution: Avoid the infomercial scams. There are lots of commercials and advertisements for companies that promise to run with your idea and do everything for you. They intimate an easy road to making millions with your invention. But there is no such thing as an easy road to success. To avoid getting scammed, ask for references and success rates. If the representative employs high-pressure sales tactics, that should be a huge red flag. Make sure you understand what the total package of services will cost. If you don’t get a clear answer then beware, it’s probably a scam.

For every successful invention you see on a product infomercial or QVC, there are thousands and thousands that never got off the ground. History shows that only one out of every 5,000 inventions has a successful product launch. And a very small percentage of these products ever generate a meaningful amount of money for the inventors. In fact, many entrepreneur/inventors with whom I’ve spoken are still hoping simply to recover their initial investments.

Words to the wise: Ask questions—and move cautiously.

For additional information on obtaining a patent, visit www.uspto.gov, www.uiausa.org, and www.ItsYourBiz.com.

A Handshake Is Nice … but Get It in Writing

No matter how well you believe you know someone, or how much you trust someone, when it comes to business, always, always get things in writing. Without a written document defining responsibilities and expectations, when something goes wrong, it’s just your word against someone else’s. That’s not a good position to be in, and it’s definitely bad business.

Yes, a lot of people say they do business on the honor system. And in an ideal world, I would support that 100 percent. In fact, at times I have operated from that perspective in my own business. But it takes getting burned only once before you realize that it’s simply good business practice for all parties involved to formalize your agreement in writing.

I served on a jury for a civil case in which a contractor sued a property owner for money owed on what the contractor referred to as a “contract.” The property owner countersued the contractor for reimbursement of money he claimed he had to pay to have the work redone because it was not done according to “contract” specifications. The problem was that neither party had bothered to sign an actual contract, and each had a different version of the same document that they claimed represented an agreement. It was a very boring trial, but in the end the jury did not award anything to either party because neither could prove its claim.

I wished I could have been a television judge hearing this case because I would have ridiculed both parties for their stupidity. The defendant, the property owner, was the proprietor of a paint contracting company, and the plaintiff, the general contractor, said he’d been in business for more than 30 years. Both of them should have known better, and the result of their sloppy business practices cost them a significant amount of money.

You don’t always need to incur the expense of a formal contract filled with legal jargon, but you do need to create a document that outlines precisely what each party will do, when it will be done, what the pricing will be, and any other specifics that are necessary for the satisfactory completion of the project.

When working with an outside vendor providing services such as photography, website design, or graphic design, remember to make the contract a work-for-hire agreement. In other words, make sure you own the sole rights to whatever work the vendor does for you. If you don’t establish that up front, your rights to the product could be limited. For example, suppose a photo is taken for your company brochure. Without a work-for-hire contract, you may be limited to using the photo for that particular project only. If you use it for anything else, the photographer can argue that, because he owns the copyright, you must pay for any use beyond the scope of the original work.

So get it in writing! Memories are short. Never work with a vendor or a customer without a written agreement. I can’t overstate how important this is. The key components of any agreement are:

• An overview of the scope of the work/project

• A list of deliverables

• A start date and completion date (you may also add milestones between the two)

• Ownership of intellectual property rights (e.g., copyright)

• Compensation and payment terms

• Termination provisions (i.e., what happens if either party wants out of the agreement)