There are some different opinions on the rate of failure of small businesses, but most analysts agree that greater than 90% of businesses fail in their first 5 years.  I am always reading stories focused on how a new entrepreneur can join the elite 5-10% that doesn’t go under.  However, just because your business doesn’t close down and can afford to keep the lights on after five years, doesn’t mean it is out of hot water yet.  Once you have found a market and some paying customers, what can you do to increase your revenues and profits?

According to an article I read recently on entrepreneur.com, there are only few ways to exponentially increase the value of your company in a relatively short period of time.

1. Win a government contract.  The US government is the largest buyer of goods and services in the world.  Requests for proposals require a lot of patience and up-front research and work.  But once you win a contract, you are not subject to the level of competition you typically face in the outside markets.
2. Franchise your business.  This only makes sense for certain types of businesses, and requires streamlined operating instructions for your business and a good franchise attorney.
3. License your product. It is critical to protect your intellectual property in order to pull this off.  If your brand is valuable, or you have an innovative service to offer (software works well) then people will pay you royalties simply to put your name on their work.
4. Open a second location.  This may require additional capital, and isn’t always the right fit.  Start with a brand new business plan for the second location, and figure out whether it makes sense.
5. Diversify.  Selling 2 products makes more money than 1.
6. Target a new market.  You are a software engineer, and you design massive, complex software for enterprise class clients.  Is there a simpler solution you could offer to small businesses or individuals?
7. Form an alliance.  Sometimes, it helps to put your competitive nature aside for a bit.  It can be worth paying commission to a rival company to send you clients, if they have a greater marketing reach or a client list that matches your target customer.
8. Merge with or acquire another business.  In these tough economic times, your competitors may be struggling to stay in business.  If one folds, consider hiring its best employees and buying up its assets- customers, intellectual property, and technology can increase your ability to profit.
9. Expand globally.  Prime your product for international sales and find a foreign distributor.  Don’t let different cultures or languages be a barrier to growth.
10. Expand to the internet.  Let’s be honest- if you survived your first five years without an internet presence, then this is the most important (and easiest) step to take to exponentially multiply growth, reaching billions of people globally, instead of just selling in your local marketplace.

MWR Legal has partnered with TXEN to provide Strategic Growth Consulting to clients, focusing on the most important steps to achieve maximum growth.  Learn more at http://www.MWRLegal.com/business_resources.html

This year will see the rollout of several new top level domains. In lieu of .com and .org, we will soon be seeing .NYC for the city of New York and .WM for Wal-Mart.

One of the widely noted new top level domains will be .XXX, which is intended to enable better filtering of adult content from search results.

A Sunrise Period beginning September 7, 2011 will allow Trademark owners to reserve any domain that they do not wish to be associated with .XXX. If you would like us to use your federal TM to reserve (and prevent use of) your TM.XXX we are willing to help. The reservation fee has not yet been set but is expected to be in the $200-$300 range.

If not a current TM owner, we strongly suggest that you apply today and upon registration you will have the ability to enforce domain protocol against infringers across the internet.

Visit MWR Legal to learn more about our Patent and Trademark services and the author of this article, Matthew Burr.

Real estate investment has always been a popular means of increasing personal wealth. Unfortunately, the current state of the housing market has caused potential investors to raise their guard and seek alternative methods when exploring new investment opportunities. Few, however, take advantage of the multitude of alternative investment strategies that exist within the real estate market itself.  A good example of these opportunities is Section 1031 of the Internal Revenue Code.  The Code gives investors an incentive to purchase new property and continue investing while making a profit. 

Under normal circumstances, an investor that is selling a property would face capital gains tax at sale. These taxes leave investors with less money to reinvest after all is said and done, making it difficult for taxpayers to “trade up’ in value to increase their cash flow or net worth. Section 1031 diverts these taxes and leaves investors with 100% of their net proceeds from the sale of an investment property provided another property of “like-kind” is purchased within a 180 day period. The IRS defines a “Like-kind” property as one of the same nature or character, even if they differ in grade or quality. Therefore, a piece of property that has gained value over the years can be sold and exchanged for a new property regardless of the quality of the property purchased. This exchange substantially increases the investor’s ability to trade up in value after an investment since there is no loss in funds due to taxes.

Some investors, however, seek to assure future profitability through a means other than a simple “apples to apples” exchange of property. For such investors, the 1031 Exchange employs a program known as Tenant-In-Common (TIC). In a TIC exchange, investors are allowed to purchase interest in a property instead of an entire property as a single owner. For example: An investor may sell a single home and, in exchange, purchase a portion of another piece of property such as interest in a large retail complex or multi-family apartment building. This type of exchange is still seen as “like kind” under section 1031 and is therefore eligible for the same tax deferral. These exchanges provide an alternative to an “apples to apples” approach to real estate. They also offer investors more economic flexibility while freeing them from the day to day management of their properties.

Finally, Section 721 of The Code allows for a taxpayer to exchange rental or investment (such as those described above) for share in a Real Estate Investment Trust (REIT). This is called a 721 exchange or an upREIT. Typically, investors are able to utilized the upREIT in combination with sale of property and acquisition of a like kind replacement under section 1030.

These forms of investment strategy allow investors to move their equity from property to property (and eventually into a REIT) without losing proceeds to capital gains tax. The end result is REIT’s that allow for large diversified investment portfolios, lower risk, and higher returns for investors large and small.

Business Consultations are provided through MWR Legal, and access to Mr. Martin’s experience, expertise, and networks are a value-added service for MWR Legal clients.

Funding Consultations:  1-2 hours, $300 flat fee.

MWR Legal and Mr. Hall Martin offer mentorship and coaching for entrepreneurs who are interested in raising equity capital.  Mr. Martin will work together with Shari Wynne or Richard Ressler of MWR Legal to meet with startup companies and assess their current situation and needs.  Entrepreneurs do not need to meet specific qualifications for this consultation; if it is determined that a company is not yet ready to approach investors, the consultation will focus on the steps for the entrepreneur to take in order to qualify for investment opportunity in the future.  MWR Legal and Mr. Martin will identify the most critical considerations for funding, describing in detail the local “fundraising landscape,” and guiding entrepreneurs to the most productive available opportunities for exposure.

MWR Legal and Mr. Martin will also work together to offer entrepreneurs advice and direction to alternate sources of funding, depending on each client’s unique situation – SBA loans, banks, asset backed loans, friends and family arrangements, angel investment, and venture capital and other applicable resources.  In addition, clients can arrange for follow up consultations that will match clients with appropriate resources in the community based on each client’s unique needs, including investor or entrepreneur organizations, business classes, networking groups, etc.  These organizations can and should be utilized for coaching, mentorship, and additional preparation for funding.

Entrepreneurs will leave these initial consultations with a clear idea of 1. What and where are the different sources for funding, 2. What are the basic requirements to attain each, and 3. What does the entrepreneur need to do in order to prepare for the capital raising process.  In addition, our clients understand what to expect as far as the timeline for raising capital, what primary benchmarks should be reached and the alternative paths to take to get there.  Some clients may make only a few changes to their business in order to reach that point, while other companies have several options and/or may realize that bootstrapping their company is the best option.  In any case, these consultations will offer the entrepreneur clarity in the direction of his/her business.

For select companies, Mr. Martin and MWR Legal also consult on preparation for “pitching” investors, specifically working with our clients to present what investors are looking for, develop cogent financial models and assumptions and other essential materials needed, and to directly coach our clients to make effective presentations.

MWR Legal consulting clients are considered for high level introductions to qualified and interested investors.

MWR Legal invites you to visit our website at www.MWRLegal.com in order to learn more about the firm.  Call us today if you could benefit from this powerful collaboration!

While beyond the scope of my blog to review all of the changes to the patent system that the AIA may bring, I want to address the most controversial change, which will be the switch from “first to invent” to a “first to file” system of awarding patent priority.

The change is controversial because the loss of “first to invent” seems to many investors to be a poignant surrender to irresistible corporate forces. However, I think giving up “first to invent” makes good sense and its loss, except in exceptional circumstances, should prove insignificant. Beyond that, the financial incentives for the individual inventor under the AIA are extremely advantageous.

The reason the “first to file” system created by the AIA is considered controversial is because it eliminates the long standing American law that a patent will be awarded to the person who first came up with an invention, instead of the person who filed it first in the Patent Office. The current “first to invent” system was thought to reduce the pressure on inventors to race to the Patent Office to file.

“First to Invent” also seemed more in tune with romantic populist American politics at the time; the system was designed to give small companies and garage inventors a tool to dispute the patent claims of large wealthy corporations. Theoretically, this was in order to prevent rich corporations from filing expensive patents on many inventions that they did not invent.

The Patent system (as we know it) was established more than a half century ago with the very American ideal of “looking out for the little guy” in mind. In the original/current patent system, small businesses can directly challenge patent applications, therefore creating a system of checks and balances on deep pocketed corporations.

The direct challenge to a patent is known as an “interference.” In reality, interference claims were rare in the past and are even less relevant in the present day. In fact, it has become an arcane area of patent practice over time – even for an experienced intellectual property attorney.

Interference inquires into concepts like “conception,” “constructive reduction to practice,” “diligence,” and other difficult to prove, often subjective, factors. Although interference was created to give an advantage to startups and individuals, the rarely used system is actually cumbersome, expensive, and seldom successful.

Under the rules of the AIA, the “first to file” rather than the “first to invent” will be granted the patent. The reasons for this change are manifold and do not necessarily reflect a corporate agenda. A major reason for the change is to harmonize the United States patent system with the patent laws in the rest of the civilized world. The United States is the only country that uses a first to invent system. Because of this disparity, it is not uncommon for patent applications filed internationally to claim priority over patent applications originating in the U.S.  An interference claim in the U.S. can cast a cloud over the validity of the U.S. application, thus casting entire families of international patent applications in jeopardy.

Another reason to move from “first to file” is the advent of wireless communications and technology. The AIA is working to formalize a program to “crowd source” the examination of some patent applications to reduce the occurrence of “obvious” patents being granted. Crowd sourcing will invite the public to submit references that bear on the patentability of an invention. A crowd sourcing program has been in limited beta testing in the Patent Office for several years now. If the program is expanded under the AIA it will provide a much quicker mechanism than interference prosecution for an inventor to object to a pending patent application.

Because the internet now allows for a simple provisional patent application to be filed quickly and inexpensively through an online system, there is no excuse not to beat a sluggish, bureaucratic corporation to the patent office. If you conceive of an invention, it is easy to research it online and get  a general feel for whether anyone else has already thought of it. You can browse much of the existing patent art using the Google search engine. While filing the informal provisional only preserves your rights to the invention for a year, it can be initially completed in order to nab an early filing date, giving you a full year to pursue the actual utility patent.

A final, valuable benefit to small companies and garage inventors under the AIA is the new fee schedule. The new system will restructure the current schedule of initial patent filing fees. Currently a two tiered system exists that allows for larger companies to carry the majority of the costs while small businesses pay about half as much for a patent. The AIA will create a third tier that would cover a new class of businesses called “Micro-Entities’ that would pay half as much as those categorized as “Small Businesses.”  Micro-Entities are defined as companies whose primary investors appear on less than 5 prior applications and have a gross income not exceeding 2.5x the national average.  Therefore, your typical American garage inventor will pay half as much as a small business, and small businesses will pay half as much as large corporations. Advantage: Garage inventor.

The AIA and its controversial amendments have garnered strong support (as well as fierce opposition) from investors large and small. However, with over 1.2 million pending patent applications, 700,000 awaiting consideration, and an additional 500,000 in the middle stages of the process, there is a strong consensus that something must be done to create a smoother, quicker, more efficient patent system in the U.S.

I believe that inventors will be happy with the AIA once it passes, as filing becomes less expensive and less difficult. Harmony with worldwide patent practices will benefit innumerable inventors who can go global with their products. And the loss of interference is really no loss at all.

Visit MWR Legal to learn more about our Patent and Trademark services and the author of this article, Matthew Burr.

The challenge is to understand, prioritize, and budget for what is essential. Ideally, companies retain trusted counsel who understand their business and provide cogent, personalized guidance. Unfortunately, bootstrappers often fail to obtain the counsel they need, choosing instead to rely on general source materials (borrowed or copied, or “standardized form documents”) which can be applied out of context and thus fail to create the intended results. There are several common elements of legal infrastructure that should be considered. These legal “action items” are often triggered by fairly predictable stages in the company’s lifecycle.

START UP
There are a few action items that should be addressed at the start of any company.

Corporate Structure. For almost any company, the creation of an entity for liability protection is a necessity. The entity provides a “corporate veil”, which in most cases protects owners’ personal finances from issues (such as lawsuits, contractual obligations, etc.) that may affect the business.
There are several different entity types, requiring varying degrees of complexity and maintenance. Factors such as ownership structure, funding strategy, tax considerations, growth and transition plans, or planned equity incentives all affect entity selection.

Equity Owners’ Agreement. An equity owners’ agreement is a critical document for any entity with two or more owners. This document establishes owner equity and rights in the company, which in turn determines the distribution of profits.
It is essential to define owner duties and responsibilities, including any required contributions. If these are left unclear, a partner who has quit contributing to the success of the company may still be entitled to the benefits of full ownership. Finally, major contingencies are taken into consideration, such as the unexpected death or retirement of a partner.

Intellectual Property. A successful company builds its value through positive brand awareness over time. As brand equity grows, it begins to obtain actual, tangible dollar value. Federal trademark protection protects the brand name from imitation and value dilution.
Other forms of intellectual property, such as copyright, patent, and trade secrets are often advisable to protect a company’s inventions, original works, and property formulas. A review of a company’s intellectual property portfolio can determine which aspects of the business can be protected, and the costs versus the value created by that protection.

Basic Contracts. Basic vendor, client, and employee contracts need to be designed or reviewed (if not drafted) by company legal counsel.

GROWTH
As companies grow, other legal building blocks become necessary. Growth generates additional income, but often creates additional risk.

Contracts. Company contracts, including vendor and client agreements, need to be reviewed periodically to ensure they remain relevant.

Employment. Employment collateral needs to be appropriately established, i.e., confidentiality and non-compete agreements, employment manuals, policies/procedures, contracts, compensation plans, or stock incentives, to support legal compliance and employee retention.
High growth companies often need to bring in management quickly and require compensation agreements that are affordable to the company through creative equity or incentive plans.

Tax. It is important to review and update corporate documentation on an annual basis in order to ensure accuracy, compliance with regulations, and minimize potential taxes.

TRANSACTIONS
Events often drive the need for legal support. Establishing a solid legal foundation enables a company to be ready for key opportunities or challenges.

Funding. The time may come when additional funding is required to achieve business goals. A company taking on investment must be prepared to intelligently negotiate with investors to minimize the loss of equity and comply with all Federal and State securities laws.

Mergers, Sales, and Acquisitions. The terms of these transactions and the full range of implications for the company and all members must be fully considered throughout.

Litigation. It is very important to take threats of litigation seriously and to wisely consider affirmative suits to protect the company. A strong legal foundation will not protect against all threats, but it will enable the company to be better prepared and make informed decisions. It is important to identify the key legal requirements up front to protect a business (and the people in it) from liability, while establishing business structure, ownership, and value. Dollars spent early and wisely will save your company money.

One such institution bears the responsibility of protecting and defending people’s rights – our legal system.  Unfortunately, our current system of laws, based upon hundreds of years of experience in the world before instant global connectivity, fails to adequately answer all of the complex questions that have arisen as to how to enforce analog laws in a digital age.

The digital era has created a crisis in copyright law, especially.  Nowhere in popular culture is this crisis more acute than in the music and film industry.

Exhibit A: Sony BMG Music Entertainment et al. v. Tenenbaum.  The defendant, Joel Tenenbaum, a college physics student at the time, downloaded 31 songs from the file sharing service Kazaa, among others.  His downloading activities were detected by Sony and other copyright owners, and Tenenbaum was sued for copyright infringement. In 2009, the trial judge found him guilty of copyright infringement and a jury awarded the plaintiffs $675,000 dollars in damages, or the equivalent of an outrageous $22,500 per song.  This summer, the damage award was reduced by a judge to a tenth of this amount, to $67,500 – still a hefty fine of $2,250 per illegal download. (LINK)

Exhibit B: Harper v. Maverick Recording Company:  In another high profile case, the United States Supreme Court refused to hear the case of a Texas woman sued by Sony and others for downloading music using peer-to-peer file sharing software.  In this case, an appeals court held that the woman was liable for as much as $750 per song in damages. (LINK)  Copyright law currently provides statutory damages as high as $150,000 for each instance of willful infringement.  It almost seems as if each and every downloaded song represented “an instance” of willful infringement in these cases, which could explain why the jury awards have been so jaw-droppingly large.

Exhibit C:  Arista Records v Lime Group LLC:  In a related development, in a suit brought by the Recording Industry Association of America (RIAA), a judge ordered the popular peer-to-peer file sharing service Limewire to disable its file sharing software.  In addition, the creator of the Limewire service, Mark Gorton, was found personally liable for copyright infringement.  Damages are yet to be determined.  In one report, RIAA was glad to be taking down “the massive piracy machine that Limewire and Gorton used to enrich themselves immensely.” (LINK)

Exhibit D:  US Copyright Group v John Doe {IP 123.12.1234}:  The firm of Dunlap, Grubb, and Weaver out of Virginia has devised an eyebrow raising strategy in the pursuit of infringers under the moniker “US Copyright Group”.  The US Copyright Group reaches out to independent filmmakers whose movies have been pirated by file sharing, and then helps these artists find and bring suit against the masses of downloaders. (LINK)  The infringers are labeled “John Does” in the lawsuit proceedings – until subpoenas uncover their identities.  Instead of pursuing lengthy litigation against these downloaders, however, the US Copyright Group typically settles for two or three thousand dollars, splitting the money with the filmmakers.  Their high-volume litigation tactics have been a great success, leading to the necessity of a “pay your settlement by credit card” link on their website to manage receipts from the thousands of defendants they have caught.

Defenses
These cases are instructive, each in their own way, about copyright law.  Tenenbaum attempted to assert a “fair use” defense for his downloading.  The court’s opinion is a persuasive discussion about the proper role of fair use in copyright law, with the take home point being that not-for-profit personal use of a copy does not mean the copy is a fair use.  Tenenbaum’s defense got me to thinking – if personal use is a defense, why isn’t it a defense against theft?  Could Sony actually have pressed charges for theft, rather than claim a copyright infringement?  Of course, when an item like a book is stolen, the book is physically gone from inventory.  Obtaining a digital copy of a song is not quite stealing because the original file persists unharmed.  Copyright law offers a remedy to this internet-enabled infringement.

In the second case, the Texas woman asserted a defense of “innocent infringement”.  She was 16 when she downloaded music illegally, and she claimed she thought the way she got the music was simply like listening to an online streaming radio station.  The plaintiffs claimed that she was a long time, massive infringer, and that she couldn’t have been innocent because the record companies put copyright notices on the CDs of their music.  This raises the interesting question of whether copyright notices in the physical world should have any bearing in the online world.  Online music files, obviously, do not present visible copyright notices.

In Exhibit C, Limewire was shut down because it was found to be “inducing” people to infringe copyright.  Under a rule developed by the Supreme Court in the “Grokster” case, an earlier peer-to-peer file sharing case, a company or person can be liable indirectly even though its acts were not themselves infringing and even though it did not substantially contribute to infringement, so long as the person induced infringement by others. Providing free peer-to-peer file sharing software is, apparently, an inducement to share files.  The somewhat confusing standard of secondary liability for technology providers is discussed in more depth in the current issue of The Texas Intellectual Property Law Journal, in the feature article:  Pull Too Hard and the Rope May Break. (LINK)

Finally, the US Copyright Group has enriched itself through high volume litigation in which the majority of downloaders generally choose not even to mount a defense.  It is troubling that the attorneys, as I understand the scheme, affirmatively seek out plaintiffs and presumably pitch the strategy, convincing the film makers to pursue unknown infringers.  Although the filmmakers are entitled to compensation, my feelings about this strategy are mixed.  It’s hard to not to be impressed by the cleverness, boldness and sheer scale of the Copyright Group’s strategy.  But at the same time, as an attorney myself, witnessing lawsuits instigated by lawyers leaves me feeling a little queasy – because encouraging litigation tends to blemish the reputation of our entire profession.
History
Getting digital music for free online through peer-to-peer file sharing was defended in the early days of the internet as being analogous to make a cassette tape of a vinyl album so you could listen to it in your car.  Eventually, copies were no longer generated for personal use – you also gave them to friends and especially new girl friends.  This where the expression “mix tape” comes from.  Nowadays, the mix tape has been replaced by audio and video playlists.  And people still burn playlists onto CDs to play in their car or give to friends. To my knowledge, this type of copying has not been challenged.

The internet was an ideal and natural home for buying, sharing, and listening to music and watching film from the moment of its inception.  But before iTunes, there really wasn’t a mass market tool available to buy digital music and movies legally.  This lag in the marketplace left a vacuum that peer-to-peer sharing filled.  Once people became acclimated to downloading free music, it was tough to convince them to switch to iTunes or Amazon to pay for digital music. In the Tenenbaum case, the trial judge chided the defendant for continuing to download music for free long after iTunes – the legal medium – was available. Movies had typically been lower quality, slower to download, and therefore were less infringed upon until recently.

Solutions
In reaction to the eye-popping damage awards copyright owners have won from juries in digital music downloading cases, consumer groups and music journalists have called for an updating of copyright law.  While it is rare to see proposed specific changes to the current law, the creation of a new tier of statutory damages for peer-to-peer copyright infringement might be a useful start.  The new tier could establish penalties severe enough to discourage illegal downloading, but not so severe that infringers are financially ruined, or that damages awards are so absurdly high that the plaintiffs have no hope of getting paid.

The industry could certainly help solve the problem by standardizing the placement of copyright notices on digital files.   iTunes uses proprietary digital rights management (DRM) digital encryption as a technological fix to prevent songs obtained from iTunes to be played back on incompatible devices.  While this solution has irritated many users (and has led many consumers to Amazon to buy non-DRM encrypted music) it does seem to meet the historically acceptable standard- the music can be “burned” onto a CD for your car or your girlfriend, but it cannot be copied for further distribution on other computers.  Many new DVDs and Blu-ray discs are also being sold with “Digital Copy” rights in recognition of this time-honored practice of acceptable copying.

Another suggested solution involves enablers such as Internet Service Providers and telecommunications companies charging subscribers a few pennies per month to create a fund for compensating content creators.  Such a fund might reduce or even eliminate the need for lawsuits on the scale the US Copyright Group engages in.

Now that they have successfully made their point in court, copyright owners would be wise to pursue alternative strategies that better address the problems of illegal downloading.  The end goal of protecting their property should be met without alienating the end consumer.

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Visit MWR Legal to learn more about Intellectual Property services and the author of this article, Matthew Burr.

You may want to go after angel or venture capital.  Perhaps you plan to bootstrap a small company and sell it off in a few years.  Maybe you hope to open a lifestyle business, and manage it yourself until you sell it or pass it on to your children.  You may intend to have one or more partners, or compensate valuable employees with equity.

Each business plan is unique, and “form” documentation simply cannot take into account all the nuances of your plan for the future.

Each type of entity has its pros and cons, and it is important that you pay attention to these details in the beginning.  All have important tax consequences to consider, as well as varying degrees of complexity and maintenance.  Most importantly, your ability to raise money is often affected by the type of entity you choose.

1. The C-Corp

Many automatically default to the C-Corporation as the oldest and most common structure of large businesses.  If your company is going to do business around the country (or the world), raise substantial amounts of private capital, and create a traditional stock-option plan, then the C-Corp may be your best choice.  The problem for small companies, however, is that equity owners of a C-Corp face double taxation- both on the company’s profits and then again on the individual shareholders when the company pays dividends.  If the company sells all of its assets in an exit transaction, the double taxation can really bite.  The C-Corp is also required to maintain more formal records than other types of entities.

2. The S-Corp

The S-Corporation relieves you of the C-Corp’s strenuous double taxation problem, and offers excellent tax benefits to its owners- but you cannot issue preferred stock, and generally only individuals (rather than other companies) have the ability to invest.  There is also a limit on the number of individual investors an S-Corp can have.  If you are actively searching for funding, this can be an unattractive limitation.  Many investors will require an investment of preferred stock so that they can get their return early- before you split the profits- but that is not an option if your company is an S-Corp.

3. LLCs and LLPs

LLC’s are very flexible, and they tend to be a safe choice for an early stage business.  They offer the same liability protection as the other two entities, while allowing the members to pass the income through to their personal taxes like an S-Corp, but without the S-Corp’s restrictive regulations on investors and securities.  The documentation is simpler than that of a C-Corp and there are fewer required government filings.  However, if you need to convert to a C-Corp to attract investors later down the road, the transition can be accomplished fairly easily.

While the above guidelines are helpful when setting up your company, there are many other questions that should be answered about your managing team, your investors, your partners, and your finances before deciding on an entity.  We suggest you allow an attorney to help you make the appropriate decision, and we wish you the best of luck!

Rick Ressler

Managing General Counsel

MWR Legal

512-320-0601

Though the media and the politicians are talking incessantly about taking up the Bush tax cuts in the post-election lame duck session of Congress, there is no assurance they will do so or even reach a compromise. The elections will not affect much of a change in the composition of the House and Senate in the post election lame duck session. The existing Congressmen and Senators will keep their seats until their successors are sworn in, sometime around January 6, 2011. Given the current Congressional gridlock between the parties and the continued dominance of the Democrats in the post election lame duck session, successfully addressing the loss of every Bush tax cut, including the forthcoming reversion of estate and gift tax rates to their lofty pre-Bush tax levels is unlikely.

Even if the parties come back from the election in the Holiday spirit, it is not likely that the existing zero tax rate on taxable estates in 2010 will be made permanent. The urge to make the well to do pay their “fair share” will remain beyond the election as a formidable exploitable populist issue. It’s unlikely that the politicians will refrain from using it. Mr. Obama has used this rhetoric before and he will still hold a veto power after the election. It’s unlikely that the Republicans will obtain a veto proof majority in both houses of Congress in the forthcoming election to force Mr. Obama’s cooperation.

It is therefore more likely that we will see a return of death tax rates with a vengeance. If a compromise is reached, most commentators believe it will be exempt estates valued under $3.5 million and initially impose tax rates on estates valued in excess of that of 35%. Larger estates may well see the higher forthcoming 55% rates already in the law set to come back. If your assets are at or about $3.5 million, this is reason enough to review your current planning and revise your wills and trusts.

Those with estates that might be below this threshold may also want to take a look at their planning. Though tax dollars may not be their prime concern, many people have second spouses or significant others that they want to take care of and kids from previous marriages that are also important. These people may want to take care of their spouses if they predecease them and want to be sure that these spouses don’t disinherit their children. Trust tools used to reduce death taxes can also be used to address these non tax concerns. It’s important to remember that while reducing taxes is a primary concern in any estate plan, making sure your assets go to whom you want is the most important objective.

MWR Legal has considerable experience in addressing tax and non-tax succession planning issues. Please call us at 512-320-0601 and ask for Kenneth M. Krasny.

Kenneth M. Krasny

Copyrighted 2010.

Published with permission

Being an entrepreneur is complicated.  Enterprises often face having too few resources but an abundance of expenses.  Even so, when you choose to make trade-offs, don’t be pennywise but pound foolish.  Spend smart money on a few key legal documents to build essential infrastructure for your company.

By spending this money when you start your company, you can be protected from several critical issues that may seriously damage your business later- and it is far more expensive to have these issues fixed after the fact, than it is to properly address them in the beginning.

Here are three examples of common mistakes we see short-sighted entrepreneurs make:

Ownership:

As with any business relationship, but especially so in the world of start-ups, ownership is issue number one.  You need to document  which members of your team own what share of your company, or risk the fate of Mark Zuckerberg, who has been forced to face numerous lawsuits (and settled out of court for at least $60 million) regarding who truly owns Facebook.  If you have a “friend” or advisor who helps you develop your company’s software, make sure he/she knows what his payment is and that his equity in the company is documented; otherwise, when your business takes off he may suddenly become “a founding partner”.  These documents are relatively inexpensive to create in the beginning compared to the value of protecting your stake in the company.

Partnership Responsibilities:

Your legal documents should state the owners’ duties and responsibilities in the company, and what those will become if something changes.  It is important to distinguish who does what from the beginning of your venture (and while everyone involved is still happy with each other).  We find that a good way to make these distinctions is to provide a checklist of things to consider, such as: “What happens if a partner dies? What happens if a partner wants out? How are you going to handle it if one of the partners decides they want to do something else and they aren’t contributing as much in terms of time or capital?”  When a start-up faces one of these situations without an answer in the middle of a turbulent period, it can be crippling.  If everything has been mapped out beforehand, the answer is already in writing and you have a definite plan to move forwards.

Intellectual Property:

You need to own your name in order to truly own your business, because a recognizable brand has tangible monetary value.  But simply using your name first does not give you an exclusive right to it.  In fact, if another company in a distant state files to trademark your name, they may be able to use ICANN procedures to shut down your website and litigate against you as an infringer.  Conversely, a federal trademark gives you the ability to shut down malicious sites, squatters, and copycat sites that are using your name illegally. By protecting your brand, you increase the value of your company.

While it can be difficult to make the decision to spend more cash in the beginning, remember that you are far more likely to avoid pitfalls and attract investment dollars if you have these issues taken care of.  Dollars spent today can protect your company’s value tomorrow.  Proper legal documentation of your entity, its ownership and management, and your brand can be invaluable as you grow and change.

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