Types of Attorneys

Like doctors, lawyers are becoming increasingly specialized. Someone who does mostly wills, house closings and other “non-business” matters is probably not a good fit for your business. At the very least, you will need the following sets of skills. The more skills reside in the same human being, the better!

1. Contracts. You will need a lawyer who can understand your business quickly; prepare the standard form contracts you will need with customers, clients and suppliers; and help you respond to contracts that other people will want you to sign.
2. Business organizations. You will need a lawyer who can help you decide whether a corporation or limited liability company (LLC) is the better way to organize your business, and prepare the necessary paperwork.
3. Real estate. Leases of commercial space–such as offices and retail stores–are highly complex and are always drafted to benefit the landlord. Because they tend to be “printed form” documents, you may be tempted to think they are not negotiable. Not so. Your attorney should have a standard “tenant’s addendum,” containing provisions that benefit you, that can be added to the printed form lease document.
4. Taxes and licenses. Although your accountant will prepare and file your business tax returns each year, your lawyer should know how to register your business for federal and state tax identification numbers, and understand the tax consequences of the more basic business transactions in which your business will engage.
5. Intellectual property. If you are in a media, design or other creative-type business, it is certainly a “plus” if your lawyer can help you register your products and services for federal trademark and copyright protection. Generally, though, these tasks are performed by specialists who do nothing but “intellectual property” legal work. If your lawyer says he or she “specializes in small businesses,” then he or she should have a close working relationship with one or more intellectual property specialist.

When the dreaded tax season comes around, whether you operate an online business or not, you’ll be feeling pretty much the same way every business person does. Here are some facts about your taxes that might help ease your fears and your woes.

Do you operate your business from your home? The majority of online entrepreneurs do, and that entitles you to take some significant tax deductions if you meet certain IRS conditions. For one, your home office must be used “exclusively” and “regularly” for business use. That means the primary purpose of that space is for business, such as contacting clients or managing your books.

It also means that the space is not used for family or personal activities, unless you want to start dividing up that time by saying 75 percent of the time the home office is used for business and 25 percent of the time it’s used for playing games or doing homework.

The second IRS stipulation is fairly easy for most online business owners to meet: Your home office must be your “principal place of business.” Essentially, that phrase just means that the business activities you conduct in your home office can’t be conducted anywhere else, such as in a rented office space.

If you meet both of those requirements, then you can deduct many of the costs associated with your home, including property taxes, utility bills, insurance costs, mortgage or rent payments, even the cost maintaining your property. Of course, if your mortgage payment is $800 per month, you can’t deduct that entire amount if you only use a small portion of your home for business.

You need to determine what percentage of your home is used as a home office, then you’ll use that figure to calculate the deductions you can take. For example, if your home office represents 10 percent of your home’s square footage, and your mortgage payment is $800 per month, then you could deduct $80 every month, which would be $960 for the year. The same applies to all the other expenses related to your home.

You do need to be aware of one thing when calculating these deductions: You can’t use them to demonstrate a net loss during that tax year. For example, if your online business generated $50,000 in revenue in 2004, but you could claim $60,000 worth of home business deductions that year, then you can’t claim a net loss of $10,000. Instead, you could only report zero net gain. However, you can carry that remaining $10,000 onto next year’s taxes to help you reduce your tax burden.

To calculate your home office deductions, you’ll need to complete Form 8829 and report that total amount on Schedule C. All of these forms are available online at the IRS’s website. Remember that you can also deduct other business expenses, such as the cost of owning your domain name, paying your web-hosting company, designing your website and accessing the internet. (These fees will have to be pro-rated, however, if your family or you use the internet for non-business-related activities.)

Another tax-related issue that might be bothering you is what to do with any and all of the people who did work for your online business, such as the web-design company that helped you establish a presence on the internet, the copywriters who created press releases and marketing letters to help you gain new business and publicity, and the person who answers your customer calls or responds to customer e-mails.

By law, you have to report how much you paid these individuals during the tax year, but you also have to know how to report that information and which forms to send to those individuals.

You have two choices: They could be independent contractors or employees. There is a big difference between them. With independent contractors, you aren’t responsible for paying Social Security, Medicare or unemployment taxes, while with an employee you have to cover all those expenses. For that reason, most online business owners choose to work with independent contractors.

While the IRS has established a set of 20 questions that can help you determine whether an individual doing work for you is an employee or an independent contractor, one of the easiest ways to make that determination is to ask yourself one question: Do I control “what will be done and how it will be done”? If you answered yes, then the individual is an employee, and you will need to send him a W-2 regardless of how long he worked for you and how much money he earned.

If you answered no, then the individual is classified as an independent contractor by the IRS. With an independent contractor, you still can control “what will be done,” but you can’t control “how it will be done.” You would send them a Form-1099 if they did more than $600 worth of work for you during the year.

Because classifying the individuals who do work for your online business is important (the IRS could force you to pay the back taxes and even a penalty if you don’t classify an employee correctly), you should always have them sign a contract stating that they are doing work for you as an independent contractor. That way, both parties know what their specific relationship is going to be from the beginning, and you don’t have to sort everything out during tax time.

Here is a partial list of the most important legal issues you face on the internet. Learn them.

Age

The age of your users impacts the website. According to Federal Trade Commission regulations through the Children’s Online Privacy Protection Act (COPPA), a website must get a parent’s permission for children under 13 to disclose information.

Also, remember that children under 18 should not be permitted to view information which is adult in nature. In addition, children under 18 may not be able to agree to contracts such as your website user agreement and purchase contracts. Finally, FTC also regulates advertising and other content directed at children.

Bulletin Boards, Chat Rooms, Etc.

Any posting ability by users should be subject to site submission rules and a user agreement. The rules should obtain users’ consent not to post pornographic, defamatory or infringing materials and, through your user agreement, consent to your company not being liable for other users taking such actions.

Copyright

The footer of your site should display a copyright notice for the content of the site. The notice should read “� [date] [copyright owner name] All rights reserved.” You should also deposit a copy of the site with the Copyright Office to record ownership of the site’s content, look and feel.

Finally, under the Digital Millennium Copyright Act, depending on the purpose and the users’ activities on the site, your company may be eligible to register for limited liability offered by the act for the site. You should consult your attorney for review of the act and how to register.

Domain Name

When building your website, domain names are an important part. Often they are directly tied to your business name, your logos and your brand. Businesses often fail to give proper thought to which domain name to choose.

Picking a domain name should have the same careful thought as naming other products or services. Choosing a domain name should include analysis of trademark law in relationship to the name. Under current law, domain names may be awarded to trademark holders over others through arbitration or litigation. This means that having trademark registration in the same name as your domain name may ensure that you retain ownership of the name.

Export

If persons from other countries use your site, then you are exporting. If you sell to such persons, you are exporting the item you sell and entering into contracts with persons of other countries. If you use encryption on the site, then you are exporting technology regulated by the Department of Commerce and Defense.

Various government departments regulate the countries with which U.S. companies may do business and when a company needs an export license to transmit items, technology or information abroad. Doing business with certain countries, such as Iraq, Iran, Cuba, North Korea, Syria, Yugoslavia and others, is severely restricted.

Depending on the information on your site, what kind of business you do, the technology and information involved, your site may be subject to these regulations, and you should consult with your attorney about these business decisions.

Framing

It is important to be careful how your website frames to other sites. There have been trademark cases regarding consumer confusion over which site is which, and which site is the source of the content and data.

Also, be careful, because some sites’ “terms and conditions” and/or “user agreements” prohibit collecting and reprinting data displayed on the site–even if such data is factual, such as times and places for events.

Giveaways

Sweepstakes, contests, lotteries and giveaways are governed by state and national laws as to how they must be conducted. Florida and New York require registration with the state if the prizes are over $5,000 in value. Most important, you should have rules outlining the terms and conditions of the giveaway.

The rules are an offer from the sponsor which the entrant accepts by entering. The offer, plus the acceptance, make a binding contract covering the giveaway.

Home Page

On the footer of the home page of the site, you should have a link to your privacy policy, your user agreement or terms and conditions, and your copyright notice.

Insurance

Be sure that your business insurance covers website activities. Often website activities are excluded from errors and omissions and other business insurance.

Lloyds of London and a few other companies have insurance specifically covering materials and sales via websites, including security of credit card numbers and other important data.

Jurisdiction

One of the primary reasons for having a user agreement is to better address the issues of jurisdiction. Under current law, website owners may be subject to jurisdiction and law in any state or country where its users are located. Being subject to the law of so many different locations makes trying to comply with the law and trying to assess your risk tricky.

An attorney can help you consider which markets are your highest risk and how to lower your risks through consultation with local counsel or blocking users from those regions. Additionally, you should consider that many foreign jurisdictions do not offer protections for intellectual property which are comparable to the U.S.

Therefore, if a user in such a region steals content or software from your site, you may have little recourse by law, and a hard battle to fight on foreign soil and in a foreign language.

Linking

When linking to other sites, you should consider two factors. One is what word or image you are using for the link and whether it is a trademark of another site or company. If so, you need the trademark owner’s permission to post the company’s trademark on your site.

Second, you should always link to the home page of a website since there have been “deep linking” cases claiming loss of advertising revenue which would have been gained if the users had been directed through the home page.

Metatags

Courts have not permitted use of another company’s trademarks as metatags on competitors’ sites. These cases arose when company A used company B’s trademarked term in the metatagging of company A’s site so that when a user looked for company B, company A would come up in the listing. For example, it would not be permitted for Coke to use the metatag “Pepsi” on the Coke website.

Notification

Under the Digital Millennium Copyright Act, there are required procedures for someone to notify a website that materials on the site may infringe on that person’s copyright. If the Digital Millennium Copyright Act applies, these procedures should be outlined in a notification policy on the site.

Obscenity

Materials which are considered “obscene” by state or federal law are not permitted on the internet and, especially, may not be viewed by children. What is obscene is based on the local standards of the viewing community. This makes prior determinations of what is acceptable somewhat complex. If you have questions about your site and its content, you should review them with your attorney.

Privacy Policy

If you collect any information from users of your site, using cookies or otherwise, the Federal Trade Commission requires you to have a privacy policy. The privacy policy should contain an explanation of how you collect the users’ information, how and where the information is stored, how the user can delete or change the information, and to whom the information is disclosed and for what purpose. The European Union also has similar and strict regulations on collection of information via websites.

Rules for Mail Order

The FTC and some states have guidelines for selling items by mail which have been extended to cover internet sales. These guidelines cover return policies, customer contact and other information about how to inform your customers about your products, shipping and sales procedures.

SEC

The Securities and Exchange Commission considers a website a means of disclosing information to the public about a company. Therefore any information disclosed on your website should be given the same review and consideration that your company gives all public disclosures with regard to “forward-looking statements” and “material” information.

Trademark

Trademarking the name of your company, logo, mottos and domain name is an important part of your business development and should be reflected on your website. Your nationally registered marks should display an � and unregistered marks should display a � or SM.

User Agreement

Having a user agreement or “terms and conditions” may be the most important part of a website. A user agreement requires each user to agree to be bound by a contract governing his or her use of the site by clicking “I agree” before being permitted to use the site.

Be aware that simply posting your legal agreement without forcing the user to click “I agree” prior to use is unlikely to bind your users to the terms. The user must take an active step through which she agrees to the terms and must not be allowed to proceed to use the site without such step.

A user agreement allows a company to:

• dictate how the site may be used (for example, for reading and printing materials)
• dictate how the site may not be used (for example, reverse engineering the coding tricks, copying content, for illegal purposes)
• dictate who may use the site (for example, persons over 18, US citizens)
• dictate procedures or policies for the site (for example, return policies, complaint policies, notification of copyright infringement policies)
• dictate your company’s waiver of implied legal warranties (for example, implied warranties of noninfringement, fitness for particular purposes, etc.)
• dictate the limit of your company’s liability for the site, other users postings on your site, sites you link to, etc.
• dictate jurisdiction for any disputes relating to the site

View Source

The ability for users to view the source code of nearly all websites by using the “view source” command in browsers means that the source code for your website is not protectable by trade secret law.

For something to be protected by trade secret law, it must not be publicly known, the owner must take some effort to keep the information secret, and the information must have monetary value to the owner. If the information is publicly available on the web through “view source,” the information is not a trade secret.

Warranties

Statements on your website about your products and services are express warranties to customers. It is important to carefully review all website text to be sure that what your company promises is true and corresponds with its other policies and advertising.

When you review, look for statements that are absolute statements which may be hard to prove or verify if the Federal Trade Commission were to request that you do so. Examples of such statements are: “Our printer works with all software,” “Our services are the best,” and “We guarantee that our product will always perform perfectly.”

Also, be aware that the FTC has specific guidelines that should be followed for use of the words “free” and “guarantee” in advertising or on your website.

Also, review your website to be sure that the text matches your regular business contracts. For example, your website should not promise a 60-day money-back guarantee if your contract states only a 30-day warranty.

XXX

If your site contains adult materials, be sure to consult your attorney regarding special legal requirements regarding notice prior to entering the site, notice requirements under federal regulations and other laws applicable to the adult entertainment industry.

Your Risk

The law is all about risk. The more time and money you spend following laws and regulations governing your business, the lower your risks of fines or successful claims by government or third parties.

It’s commonly said that business valuation is more art than science. If this is true, then the practice of valuing a start-up business is squarely in the domain of the artist.

Nevertheless, entrepreneurs need to put a value on their start-ups in order to raise money, and investors need to put a value on their investments to generate liquidity. Since neither entrepreneurs nor investors are known for right-brain artistic thinking, this article aims to provide some tips for left-brain thinkers to make sense of start-up valuation.

1. You are what the market says you are. If investors are telling you that your start-up is worth $1 million, then that’s what it’s worth. You might think it’s worth more. You might even know it’s worth more because your company may have more than $1 million is liquid assets, or more than $1 million in receivables, or more than $1 million in sweat equity. But if you’re unable to raise money for your start-up with a valuation above $1 million, then you’ll have to accept the market valuation.
2. But you can also tell the market what you’re worth. Although this might seem to contradict the point made above, it’s possible to tell the market how to value your company. After all, if investors think your start-up is worth $1 million, it’s usually because of something you’ve told them. By definition, start-ups don’t have a history of financial performance on which to base a valuation. Therefore, it’s up to the entrepreneur to develop a process for valuing the company based on comparables and financial projections.
   • Comparables: Find out how much similar companies in your industry and geography are worth. You can use sites such as BizBuySell and BizQuestto determine how much businesses are selling for in your industry. If you have a high-tech or high-growth start-up, accountants and lawyers are among the best advisors to help you determine the market rate for comparable companies at your stage. In my experience, attorneys tend to overvalue star-tups, and accountants tend to undervalue start-ups, so you may want to talk to both before making a decision.
   • Financial forecasts: Although it’s notoriously difficult to forecast revenue at a start-up, you’ll need to do this to determine value-and eventually to defend your valuation. For example, if you’re starting a pet food store, your valuation and financial projections will likely be lower than if you’re starting a speculative biotechnology firm.
3. You’re not really worth anything until you’re profitable. If you’re not profitable, your business probably isn’t worth very much. That is, it doesn’t have as much liquidity as it would have if it were profitable. Many businesses cannot be sold, since there aren’t enough business buyers for every seller. Almost all unprofitable businesses cannot be sold for the same reason.

This makes valuation particularly challenging for a start-up. Since young businesses take time to become profitable, the trick of valuing start-ups is to focus on the future. First, determine how many years it will take to be profitable. A business with a long road to profitability will usually be worth less than one with a quick path to profitability. Next, determine how much comparable companies have been valued at when they reached profitability.

A company that could be worth $5 million at profitability will be worth some fraction of that number at the start-up stage, based on factors such as the likelihood of success, the time frame to exit and the quality of the management team.

It’s easy to get caught up in the excitement of valuing your company at the highest amount possible and forget that you’ll one day have to deliver on the expectations of investors. It’s also tempting to adapt your business model to maximize start-up valuation.

Be careful about overvaluing your start-up with faulty assumptions; it will only make your life more difficult-particularly if your investors have governance rights, such as positions on the company’s board.

Much like artists, entrepreneurs need to use creativity in valuing their start-up businesses. Traditional approaches to valuation based on book values and P/E ratios are akin to painting by numbers. If you want your start-up to be a masterpiece, you’ll need to use the right side of your brain as much as your left to determine value.