This is the legal crash course every business owner NEEDS to read.
*Please note that this is general education information, not legal advice, and does not replace an attorney-client relationship. Please be sure to consult an attorney and accountant, where needed, to address specific issues relating to your particular business.
Today I have my very own IP attorney, Grant, joining me from Framework Law Group.
Grant and I have been working together since 2015 on various things like registering trademarks for my business, filing licenses, settling issues with clients etc. Every single business owner, whether you're creative or not, needs to read this. This is the crash course on all things business, legal, entities, contracts, IP (intellectual property).
Give us a little intro of who you are and what you do.
Grant: (01:48) I'm happy to be here to talk about some creative law and considerations as I know it's not the most exciting part of being a creative and an entrepreneur. So I’m happy to kind of talk through some practical tips that hopefully will be helpful to the people listening today.
I'm the founding attorney of Framework Law Group, which was a firm I started back in 2014. When I graduated law school, I wanted to help creatives and artists but the jobs that were out there were more in the litigation world. I worked at some stuffy dinosaur firms and saw how they kind of condescended clients and charged crazy rates and I didn't really feel like they were actually providing helpful services to people, especially the type of people I wanted to help. I left those firms and went off on my own to make Framework, which people said was crazy. They're like, Grant, you should go find another job immediately.
But, it was something that I stuck with. I was able to build partnerships, get some good branding, connect with the creative community. And we've been happily working with hundreds of creatives ever since then. I definitely understand the spirit of entrepreneurship and the hardships that it can take to get through year one of business and beyond.
Can you give us a rundown of sole proprietorship, LLCs, etc.?
Grant: (03:40) Yeah, absolutely. So when you are starting a new business, one of the things you want to think about is how are you going to be running this business? And there's a variety of different ways that you can run a business. Some are more simple, some are a little bit more established. So the simplest way to operate a business would be to just act as a sole proprietor—meaning that you as an individual are running the business
So for visualization purposes, let’s use the example of a castle. So you yourselves, you are a castle and you can, put up a shingle and be Jenna creative and you can run whatever business you want as an individual. The only real legal that you would need to get set up in terms of being legit, would be to have a business license that you would register with the city. And that's just to get you on the city's radar for tax purposes so they can see how much business money you're making and then if they want to apply some amount of tax on that. In LA, there's no tax up to $100K and then after that, they tax. That'll vary based on the city. So as a sole proprietor, you’ll want a business license.
If you are selling any tangible goods, you would need to get a seller's permit registered to the state. And again, that's another tax thing that will help you pay sales tax when you’re selling your goods.
And that might be all you need. If you are also operating under a name that's different than your name as an individual, then you would also want to get a DBA. A DBA or a fictitious business name is kind of like a name tag that you put on your castle. So we know that, Jenna, you used to do business as Mon Voir. So if you were an individual doing business as Mon Voir, that would be a different name than you. Now you're doing business as Jenna Rainey, so you would not need a DBA anymore.
That's a sole proprietorship, easy to set up and that there's just a few licenses or permits that you have to register. The downside with that, though, is if there's any risks or liabilities that come up with your business, it is your personal castle that's now under attack. If there's like a breach of contract or a product liability issue or whatever else might come up in connection with your business, your home, your bank account, your assets, those can all potentially be at risk, which, depending on the nature of your business, some are less risky than others, some are more risky, but in many cases people often want to take some steps to help better protect themselves, especially if you've got assets that they want to protect.
The government recognizes that businesses do expose you to more risk. So they give you an opportunity to help protect yourself from those damages associated with your business. And they give you the opportunity to set up an LLC or corporation, which is now building a new castle, which is separate from your personal castle, so that if there are any damages associated with the business, it’s this new castle that would have to absorb those liabilities. In your personal castle, those would all be isolated and safe.
Worst case scenario, your product explodes in someone's house, you get sued for everything, your LLC goes bankrupt, but unless you did something malicious yourself, you should personally be able to walk away from that.
Within any given castle, you're gonna want to have the same licenses and permits that we discussed, registered in connection with that castle. If you’re an individual and then you switch over to an LLC, you're going to now need to register the same licenses and permits with the LLC because it's a new castle.
When’s the right time to be a corporation?
Grant: (08:47) The main benefits of setting up an LLC or corporation are one, like we said, the liability things. So to avoid personal liability for your business, you set one of these up.
Another is tax reasons, depending on the amount of money you're making, an accountant might recommend that you operate your business through either an LLC or an S corporation or maybe a C Corp and make some tax election depending on what they recommend to help you save money on taxes. Because when you're a sole proprietor, all money you're making is basically paid to you 1099 unless you're getting some, W2 payments along the way. And those often have a higher tax rate than if you were paying yourself a salary for your company and then taking profit distributions, which often have a lower rate.
As a brief disclaimer, we'll probably touch on some tax things, especially right now. I am not an accountant and I know just enough to get everybody in trouble. So when I speak about taxes, I'm kind of speaking generally, but you should always consult with an accountant on tax stuff.
So those are two of the big reasons—the liability and the taxes. Other reasons people might set one up would be to just look more official. Or if you're working with business partners, that can usually be a good time to set up an LLC or corporation to help better establish that business relationship or if you're bringing on investors or things like that.
In terms of when you should do it, some lawyers would probably say you should not do business without one of these entities because you don't want to be liable for all this stuff. Other times it can be an accounting question where checking with your CPA, you say, I'm running a creative services business. There's not a lot of risks here. I don't really have that many assets I'm trying to protect. My contract covers my liability or I got insurance for some liability. For tax purposes. Is it time yet?
And that's a conversation to have with your accountant to see whether you're going to save money because there are costs associated with setting up an entity right. It's going to cost you probably some number of hundreds of bucks to set it up. And then in California there's the annual franchise tax of $800 per year that you're paying every year. So depending where you're at, that might be a lot or it might not be a big deal compared to the tax tables.
Note: I highly encourage everyone reading to consult with your accountant about your specific situation to see what’s right for you because every state and city is different!
What are the differences between corporations and LLCs?
Grant: (12:15) Yeah, absolutely. If you decide to make the leap from being a sole proprietor to forming a separate business entity, there are some different entity options out there. And it's definitely always both a legal and tax question as to which entity is going to be the best for you. So often I'll advise on what I think would be the best entity from a legal structure perspective to accomplish your goals as a business. But then there's the follow-up call with the account to say what's going to be best for me from a tax perspective? And then we can kind of harmonize those two considerations to find the best entity.
For small businesses owned by just a couple of people who do not have investors, those businesses are often best set up as either an LLC or an S corporation.
And usually between those two, I lean toward LLC. And the reason I lean toward LLC is because it is easiest to set up. It's the easiest to maintain and it has the most flexibility in terms of how you structure it. For example, with an LLC, you can have managers who manage the company and then you can have other owners of the company who have equity but they are not necessarily involved in the decision making. So you can have different classes of ownership within an LLC.
Whereas with an S Corp, things are a bit more rigid. You're generally only allowed to have one class of ownership. So pretty much anyone who is an owner is going to have some vote based on their ownership percentage. An S Corp's also a bit more rigid in terms of how it operates. For example, when money comes in and you're paying out profit distributions, with an LLC, you don't necessarily have to do those profit distributions proportionate to ownership percentages. With an S Corp, it's more rigid that you are supposed to do profit distributions along those lines.
And with any corporation, there's going to be annual minutes to keep, which not a huge deal to do is kind of just like writing brief one or two page thing at minimum to document business decisions for the year. But with an LLC, you do not have to do that. So there's no more admin upkeep, rigidness associated with the corporation.
The LLC also has the flexibility to be taxed however you want. Often when people are setting up one of these entities for tax purposes, the accountant recommends an S Corp and then my response recommendation is, can we be an LLC taxed as an S Corp? Can we make that S Corp tax election through your existing LLC?
For our clients that are new, small businesses in the creative industry that we're trying to limit liability and maybe save on taxes, I'd say LLC taxed as an S Corp is probably the most common. It's definitely a case by case basis depending on what the professionals recommend.
In terms of the C Corp, that is usually more for startup companies that are looking to raise money from venture capital. C Corp has kind of the classic corporation that's been around for a long time. Investors are very comfortable with that structure. The whole startup process, the manner in which funds come in and go out is well established with the C Corp. So that's the reason that startups go that route.
They often register in Delaware. But that's a whole other topic which maybe we can touch on briefly. In terms of picking the right state for your business entity. Some people talk about, Hey, you should register in Delaware or you should go Nevada for tax reasons or whatever. Sometimes that can be true, but if you are running your business in California, you have to also be registered here.
If you were trying to be slick and register in Nevada for tax reasons, but you're running the business here, you also have to register entity in California and pay California's $800 franchise tax. So for a small business, you might not be benefiting that much from being registered in them in a state separate from where you're operating. If you're a bigger company or there's other good reasons to be set up in a different state and you can check with your accountant or lawyer. But more often than not, if you’re a small business, I say just register in California because you have to be here.
What’s involved with licenses and permits with the different entities?
Grant: (18:05) So we mentioned the business license and the seller's permit and again, whatever entity you have, you'll need to register those in connection with that entity.
Other regulated businesses, like if you're selling cannabis or wine or food, there's going to be other compliance measures that you want to make sure you're on top of. Double check with whatever attorney you're working with to see if there's other compliance that you should be aware of in connection with that.
Once you have set up the entity, in terms of maintaining it and upkeeping it, the main legal thing you have to keep up with is filing a statement of information with the secretary of state every year. And that's like a one or two page form that costs 20 bucks or 25 bucks to file with the secretary of state and that'll be due every year or two depending on your entity.
Then the other main upkeep is with taxes. That's something we should coordinate with your accountant to make sure you're paying your local, city, state, and federal taxes. Deadlines can be different for these business entities. So, don’t necessarily put it off until tax day. I would recommend it as soon as possible as soon as it's in the new year.
That's generally the upkeep you should be aware of. You'll have a separate bank account associated with your business entity. You'll want to take steps to make sure that you're signing all the contracts in connection with the business entities so that you're not personally liable for anything. Basically the name of the game is to use your entity, operate the business as the entity, don't co-mingle your personal funds with the business funds cause that can blur the lines and hurt your limited liability protection and always be in touch with your accountant on taxes.
What about intellectual property, trademarks, and copyright?
Grant: (20:50) So I can talk briefly about the different types of IP, what their differences are and how to go about registering them.
I'll start with trademarks. A trademark is your business identity, which means it can be your business name, it can be your logo, it can be your business slogan or unique product names.
So trademarks specify things that relate to your brand identity, which is different from a copyright, which is more about creative content. So, Jenna for you, for example, your trademark would be Jenna Rainey the name that you present to the world in connection with your goods and services. Your copyrights can be your watercolor paintings, the content on the greeting cards, your books, all that content would be subject to copyright protection.
In terms of how to own trademarks and copyrights, both of them are kind of owned, well, neither one of them require registration in order to claim ownership, but there are benefits to registering them. So ownership of the trademark can occur simply by using it in commerce. As soon as you set up a business and you start advertising your goods and services in connection with a particular name, you are establishing some priority to that name, assuming you were the first to use the name in commerce in connection with those goods and services.
So even if you haven't registered it, if someone else starts trying to sell watercolor books under the name Jenna Rainey, you would have rights to say, Hey, I've already been using that name and connection with those products.
Similarly with a copyright, once you create a creative work, when you get that cool idea out of your head and into some fixed media, whether that's a book or a drawing or audio recording, whatever, you own the rights to that copyright simply by creating it without registering it. However, it can be very helpful to register both these things. With a copyright, although you can claim ownership to it and you can try to stop other people from stealing your copyrights, you actually can't sue someone in court unless you have a registered copyright. So that's a good thing to have if you want to have some bite to your bark.
And then with a trademark, if you don't have a registered trademark, under common law, you would just have priority to it within the geographic areas where you're running business. Whereas if you have a federally registered trademark, you could, you've presumed ownership to the name throughout the United States. And you can also expand that protection internationally if you want to register and other places as well.
Also with a registered trademark, you can use that fancy little, ® symbol with the R in the circle around it.
Jenna: Is that what the difference between the TM and the R is? Like I've heard that if you're, if you don't officially register it, you can still use the TM.
Grant: Correct. The TM is basically you just asserting that you own the market, but that without a registration. The ® means you actually have a registered trademark. And then for copyright, the © with the circle around it. That's kind of like the TM. It just means that you are asserting ownership and I don't think that symbol really changes once you have it registered. I think it's always just a little © C the circle around
How do you register copyrights and trademarks?
Grant: (24:48) In terms of how to go about registering these, copyrights rates are probably a little bit easier to register. A lot of our clients do it themselves. Basically you can do it online. You go to the federal copyright website, you upload your creative content, you identify who owned it, created it, dates, things like that, and then you pay a free that ranges between $30 and $55 depending on the type of application.
And one tip for registering copyrights is it's cheaper and easier to register a bunch of them at once than to do them individually. You are more likely to be able to register a bunch at once if you register them before you publish them. So Jenna, if you've got like 10 greeting cards you're coming out with, I would recommend registering them all at the same time before publishing them because you get them all in under a single fee. Whereas if you wait till after you publish them, you might have to register each one of them separately and the government fees can start to add up.
Jenna: And then for registering your trademark, that's through the US PTO (patent and trademark office)?
Grant: Exactly. So whenever we registered trademark, the first thing we do is we run a conflicts search and reports to make sure that there's not any other trademarks out there that that might cause your application to be rejected or it's not other businesses out there that might cause issues for using the name in the future.
A trademark is a shield and a sword. It's a shield in that if you have that registered trademark, you can feel pretty safe, that it’s less likely someone's going to come after you and stop you from using that name. And it's also a sword in that if you find someone else who's using a similar name, you can go after them and say, Hey, this is my trademark. On the flip side, someone else who is using a name before you also has that sword and that shield. So it's good to make sure that when you're registering it, you're not getting yourself in trouble with another trademark owner.
When we look at those results, we look at both the content of other marks that have been registered or that are being used. And we look at what types of goods and services they're used in connection with. Two people can have the exact same trademark if they are in different classes of goods and services.
I am Framework Law Group. If someone else wanted to make Framework tires, that trademark application would not be flagged for conflict with my mark because legal services and the sale of tires are totally different. It's unlikely for someone who looks at those two companies to get confused and think that they're the same. So the standard that we're looking for is confusion and commerce.
And then similarly we're looking at the content of the two trademarks can't be too similar, which is different from not being exactly the same. So if someone else tried to register Framework Legal Services, I could still say stop doing that. That's too confusingly similar to Framework Law Group.
Do you recommend going through an attorney with expertise for registering trademarks?
Grant: (29:25) Yeah. It's definitely better than not going to an attorney. There's certain pitfalls at each stage. First with the conflict portion, it's important to accurately identify what a conflict is or isn't, so you can make an informed decision there, which can get kind of nuanced in some instances.
And then with the application itself, it's not necessarily a super complicated application. Kind of like the copyright you're filling in who owns the mark, you're going to identify classes of goods and services, you're going to either show that you're using the name in commerce by uploading like a screenshot or a picture of a product or you're going to file on an intent to use basis, meaning that you're not using the name yet but you want to lock down rights to it now.
The federal website or the application is like super dinosaur and intimidating and weird. I mean there's people out there who do the research, find their own trademarks, maybe they have some luck with it. Yeah, I would say if you can afford to spend a little bit of money on it, it's helpful to have an attorney for sure.
What are the government fees associated with trademarks?
Grant: (30:58) So in terms of the government sees in connection with the trademark application, the government's going to charge you $225 -275 for each class of goods and services that you file under. So, you know, books would be a class, creative services could be a separate class, apparel could be a separate class. A lot of businesses just have one, but sometimes there's a few places to cover with government fees there.
There's not a distinction, usually, between like a logo or a slogan or a business name. Those are generally going to be the same view, certainly at the government level.
In terms of attorney fees or like professional service fees, there's legal zoom out there that's basically gonna they're going to help input information into that archaic form, but they're not necessarily going to walk through and analyze every step of the way and make sure you're doing everything correctly. Kind of just paper push. So for them you might be spending just a few hundred bucks. Maybe it's cheaper than other options, but you might not necessarily be getting to you advice and support that actually has value in the process.
From there, smaller firms are probably charging some number of hundreds or thousands of bucks depending on, complex searches, number of trademarks, things like that.
Big corporate dinosaur law firms are going to charge you an exorbitant amount…I've heard of like 2000, 3000, $5,000 per trademark, which is crazy. So I wouldn't go that route.
We often help people prioritize like, so if they want to trademark in a bunch of classes, we can help them identify what's really going to protect their business the best. Maybe they don't need to trademark the tote bags that they also sell.
Jenna: Working with you, it's always been very seamless. So—shameless plug—Framework Law Group is the best.
Tell us about trade secrets, patents, and business concept.
Grant: (33:40) Yeah, I can touch on those super quick. For those we’re talking about inventions like an engineering invention or a biological invention or something like that. Those have to be registered. In order for you to have any ownership, it is first to file who owns it. You're going to almost definitely want to work with an attorney to file that. Usually there's like a special patent attorney who's also an engineer who takes care of that. We don't really do any of that. Awesome. Most of our creative clients, but if something comes up, we send them on someone who knows how to do that.
And then trade secrets are secrets that have value to your business because they are a secret. So a common example of that would be like a food recipe. And for trade secrets there's not an official registration, you don't file anything anywhere. You maintain rights to the trade secret by keeping it a secret. So if you want to keep your recipe a secret, don't publish the the recipe, or if you need to hire a cook to make it, they should sign a confidentiality agreement to agree to not disclose that elsewhere.
One final thing on intellectual property, people often talk about trying to protect their business concept. But business concepts generally are not subject to intellectual property protection. So in the way that Uber is an app-based ride sharing service, and Lyft is also an app-based ride sharing service, they can't secure the exclusive rights to that concept and stop other businesses from doing it. So even if you have a really cool nuanced idea, you usually can't stop others from doing it. But what you can do is do it the best, do it under a strong brand name, secure the trademark secure any copyright content associated with that. Build a good reputation. There's reasons why customers choose Lyft over Uber or whatever.
What's the value of contracts for protecting your business?
Grant: (38:55) I think this is an area where I see people get in the most trouble. Like when people come with some conflict with a business partner or an employee or a potential business partner, it's often due to shoddy contracting or doing contracts too late.
Contracts can be very helpful. People are often scared of contracts as if it's a sign of distrust between the people. Like, cause you're working with your friend and you've got this cool business idea and now you're getting all this like legalese and contracts and lawyers and it seems to kind of like tarnish the organic feel of setting this up.
But on the flip side, I would argue that if you're going into business with anyone, if it's a friend or whoever, it's really important to take the time to figure out what you are doing, who's going to own this business or are you going to be co-owners or is it a different setup? How are you going to handle finances? This is a good a place to check and make sure that you guys are actually going to be a good fit for business partners and put some terms down so you're both on the same page.
That can help mitigate a lot of future heartache if you guys figure that out in advance. And then as things progress, as things inevitably come up, we will have an agreement that you guys already discussed to help you navigate weird problems that come up. And if someone's totally out, well, things go super sour and they're not going well at all, you've got an enforceable contract to point back to, to help protect yourself.
So it's something that I recommend getting in place early and often whenever you are doing business with a client, a business partner, an employee, a contractor, whatever…there's usually some contract that should be in place. It doesn't have to be a 20-page, super dense dinosaur legal contracts. You can often accomplish these things in plain English. I would generally recommend the help of a lawyer. I see clients try to DIY contracts. There's a lot of pitfalls. There's a lot of nuances. There's a lot of details. I've been drafting contracts for creatives for five years now and I feel pretty awesome at it, but I also get better every single year. So it's something that takes time and practice, just like any creative craft.
Some of the things you should really be looking out for… We mentioned if you're doing work with someone, you should establish the nature of your relationship. Are you guys co-owners of this business where you're going to split profits and split ownership of everything and make decisions together? Or are you working with your friend as a contractor or an employee where they're going to make some content or help out with your project, but ultimately you're just going to pay them and then you're going to own everything herself. So those are two different relationships. That was kind of the dispute of the whole Mark Zuckerberg Facebook thing about the hiring. Were they business partners? Did they hire him? Who owns what, all that nonsense. That's the fight I see most often is people being confused about whether they were co-owners or not.
And then another important contract I would recommend… if you're performing creative services and it's really good to have a client service agreement that you provide to all of your clients and that would outline your services rates, intellectual property ownership, limitations on your liability, project changes, cancellation, all of that fun stuff. And that's not necessarily something that you have to redraft every single time you have a new client. Rather you can get one good customized template in place. And then whenever you have new clients you can fill in the dots with who the client is, what the product is. Basically just put together a proposal outlining the business terms, but you can rest assured that the backend legal has already been taken care of in the body of the contract.
Jenna: When it comes to a client job, for example, if somebody was to paint a watercolor wreath and it was used on somebody's wedding invitations, if it's not listed in the contract is there any sort of transfer of ownership when somebody creates something for somebody else or does it still fall under the designer or the artist? Do you need to have any sort of wording in there if you did want to reuse that reef that you painted for somebody else?
Grant: (44:50) Definitely. So if there's not a contract or if the contract is silent to it, sometimes there can be a presumption of transfer of ownership, especially in the employer-employee relationship. So, you know, if you hire someone as an employee, you don't have a contract, but they're creating content for you, there can be a presumption that the employer then owns that content. With a contractor, there's less likely to be an automatic presumption of a transfer ownership unless it's specifically identified in the contract but all the ambiguity can be erased by just clearly expressing it in the contract so that everyone understands what the deal is.
Often in a creative services agreement, I'll say that the creative owns the preliminary works. So if you're like designing a logo, you might do five different versions of the logo you send to your client. They pick one. You retain ownership to the four that they didn't choose. They can own the one that they did choose once they've paid all fees.
Other times creatives will want to not necessarily grant full ownership to their clients. Maybe they're working for Target, and Target wants to license some stationery. Maybe you give them a license to use it for a period of three years in connection with certain products. But you retain rights to use it and license it to other people. You guys kind of outline the scope of what they are or not allowed to do..you can also create something for someone without totally giving it to them but still make money off of it in other ways.
What is a worker agreement?
Grant: (47:41) Similarly how I recommend you have a contract/custom template in your pocket for clients, if you're hiring a contractor or an employee, it is helpful to have a template in place to document that relationship. You know, you owning all the creative content they make for you and limitations on liability and some of the similar concepts we talked about. But now you are employer hiring the worker.
Pretty much any individual or business that you are doing a business with or an affiliate partnership or whatever, it's usually good to have something there. Sometimes that's something that you can have a template ready for a routine transaction. Other times, something new or weird comes up and then you get something new together to document this new type of relationship you formed. But, again, I see the most problems…you can run into problems anywhere obviously, but usually when we have people that are fighting with each other, it's about lack of a contract, tried to do the contracts too late, or it was a bad context.
Final note on that too is sometimes if you have a bigger client like Target, they're going to give you their own contract and that's definitely something you should read to make sure you understand it as much as you can. And then it's also certainly helpful to have a lawyer looking over cause there's a lot of little nuances and pitfalls in legalese to navigate.
Is there anything else you think a creative business owner should know?
Grant: (50:51) Yeah, I mean we pretty much did a high level walk through the 4 main areas I usually talk about when I'm talking with creatives. 1) Make sure you pick the right business entity for your business. 2) Make sure you get the right licenses and permits and other regulatory compliance. 3) Secure your intellectual property, trademarks, copyrights, trade secrets. 4) Make sure you've got good contracts in place for all of your various business relationships.
Those are kind of like the high level starting points to make sure you are on good legal footing. It sounds like a lot, but it's, it's not necessarily the most complicated thing in the world to get your ducks in order.
How can people learn more about your work?
Grant: (52:39) Yeah, totally. Well, thank you so much for having me. I'm happy to share. On our website, you can click on the legal guide and there are notes on all the things that we talked about today, so you can kind of click through to refresh your recollection and there are also some helpful DIY tips on there. And then if you have more questions beyond that, you can submit one of the forms on the site and I'm happy to set up a free call and chat through whatever you need help with. (Instagram: @frameworklawgroup)
So, so good! I'm so glad you made it to the end of this interview. While talking about the legal things are icky and they're just kind of boring, to be honest, that was just INVALUABLE.
If I were able to sit down and listen to an episode that Grant just gave us when I was starting my business or even, you know, three years into my business, that would have been so eye-opening and so transformative to how I moved forward in my business and where I needed to hire an attorney. It would help me so much with the time that I wasted in trying to do things on my own.