The New Media Generation: Advice on Getting Started
The steady advancement of technology has led to a growing number of emerging new businesses whose products and services are very tech-heavy. “New media” is a generic term describing technologies that digitally convey information, which used to be communicated through traditional forms of media (radio, television, print and film), through the use of interactive computer and communications technology. Some familiar examples include the Internet, Facebook, Twitter, Pandora, Spotify, iTunes, Amazon, Yelp!, MP3s, P2P sites, Youtube, DVDs, e-mails, blogs (like this one!), cell phone apps, and the list goes on…
With Beame & Mencher LLP being at the forefront of the new media movement, we thought it would be a useful idea to post some advice on a few business/legal considerations facing all start-ups. While these “tips” focus on new media companies specifically, they can apply to the start-up of any business.
Although there are some wildly successful companies that might attest their success to luck, there’s a saying that luck is only the intersection between opportunity and preparedness. While this post may not spark the next Facebook, it should help prepare you for when such an idea crosses your desk! We will briefly review a few of the key components for starting a business. Specifically, we will look at (1) protecting your brand, (2) selecting the form of your entity and drafting your internal operating documents, and (3) identifying particular contractual relationships unique to new media and technology companies.
Protecting your Brand
A “brand” is a mark or name that is used to identify (and therefore separate) a product or service from that of another. Your brand is much more important than you may think. Your brand will (for a potentially long time) embody your business, its mission, and its reputation. Former CEO of The Walt Disney Company, Michael Eisner, put it best: “A brand is a living entity – and it is enriched or undermined cumulatively over time, the product of a thousand small gestures.”
Think about music media brands like iTunes, Spotify, and Pandora, or social media brands like Facebook, Google+, or Twitter. Whether you see their name or insignia, you automatically think of the company and its products. This is called brand recognition, and it’s one of the most sought after (and valuable) assets of any emerging business. You want people to instinctively recognize your name and/or mark. However, before you can develop the intangible asset that is your brand, you must first own the rights to your name and mark. Registering your name and/or mark with the United States Patent & Trademark Office (USPTO) is the most effective way to ensure that you own your brand and that subsequent parties will be prohibited from using it.
Let’s look at some scenarios. Say you’ve been using your brand name in a specific region of the country but have yet to file for federal registration. The continuous prior use will create a common law trademark right in your mark. However, this common law right will extend only to the places (“regions”) where the mark has been used. At the same time, another person (let’s call him “Tom”) has been utilizing the same name and/or mark for the same use in another region of the country. If you tried to later expand your business and enter Tom’s region, Tom’s previous use may prohibit you from using “your” mark there. Let’s go a step further and say you use your name and mark in your region for a while before applying for federal trademark registration. Before you file the application, however, Tom begins using the same name and mark in his region. Even if your application is approved, you will likely still be prohibited from entering the market where Tom has established common law rights to. Going even further, if both you and Tom are using the same name and mark in different regions and Tom files for federal trademark registration (even though he remains in one region), you may now be completely prohibited from using that mark in any other region of the country not already entered during the life of Tom’s trademark (which doesn’t have an expiration date). As a result, proactively obtaining federal trademark registration can be crucial in securing your name and mark, and establishing a strong infrastructure for your company.
For more details on the process of protecting your brand through federal trademark registration, click here.
Selecting the Business Entity and Drafting Internal Operating Agreements
Business Entity Options
While going through the process for protecting your brand, another important step in any start-up is to determine the business entity’s structure. There are numerous ways you can form your business, each with advantages and disadvantages as compared to others. The following are some of the options that nearly every state recognizes.
Sole Proprietorship (SP)
If you’re the sole owner of your business and don’t go through the formalities to create anything else (like a corporation or an LLC), you will default into this class. The proprietor owns and controls the sole proprietorship and the proprietor has unlimited personal liability for the business. In other words, while you have all the say, you also have all the liability that could extend to your personal bank accounts, other wages, and even property. For example, let’s say you, by yourself, own and operate a small record store. If you organize as a sole proprietorship, you will be personally responsible for all of the business’ control, profits, losses, and liability.
General Partnerships (GP)
If there are two (2) or more owners of a business and no other steps are taken, you will default into a general partnership. A general partnership is very similar to a sole proprietorship. Any liability that is the result of any act by a partner or an agent (“employee”) of the partnership reaches all the partners. This means that you can be personally liable to the actions of your partners, and not just the your own actions. Unless otherwise agreed, all partners have equal rights in the management and conduct of the partnership business.
Limited Partnerships (LP)
In a general partnership, there is one type of owner/investor: a general partner having full rights of management and control. Limited partnerships (LP) have two classes of partner: one or more general partners, whose rights are largely the same as in a general partnership; and one or more limited partners, who have much less expansive rights, but whose obligations are correspondingly limited. In effect, management of the limited partnership is vested in the general partners. Limited partners do not participate in control, do not have the power to act for the firm, and are not personally liable for the debts of the firm. General partners, however, remain personally liable. For this reason, LPs are generally best when the general partner or partners consist of corporations or limited liability companies (yes, corporations and LLCs can be general partners!).
Limited Liability Partnership (LLP)
Essentially a general partnership that provides limited liability for all partners. LLPs are available only to certain professions (attorneys, physicians, dentists, etc.) and require filing an appropriate application with the requisite state official—usually the state’s Secretary of State.
Joint Venture (JV)
A joint venture is an association or cooperative agreement between two or more persons or companies to carry out a single specific undertaking for profit. The distinction between a joint venture and a partnership thus is based on the idea that joint ventures involve a single transaction of limited duration, while partnerships are ongoing business enterprises. Thus, a joint venture is distinguishable from a partnership by the narrowness of its purpose and scope. Courts generally apply the law of partnerships to joint ventures. For example, Google entered into a joint venture with Intel Corp, Sony Corp, and Logitech International to launch “Google TV” – a smart TV with built-in web browsing.
Incorporating is a common business strategy desired for its limited liability feature— shareholders (i.e. owners) are not personally liable to the corporation’s creditors or other third parties claiming damages (monetary, physical, or otherwise). A disadvantage, however, is that corporations are subject to double taxation. Corporations are taxed at the corporate level, and then again at the personal income level (typically shareholder dividends). The existence and attributes of corporations may vary from state to state, though there are three groups within a corporation that remain relatively universal. First, there is a Board of Directors (BOD). This group makes the major policy decisions and acts as a centralized unit via a majority vote (generally). Second, there can be a number of officers. This group (CEO, CFO, COO, etc.) executes the BOD’s policies and provides day-to-day management. The third group is the shareholders (SH). This group is the corporation’s risk-bearers, who collectively have power to elect the directors and approve fundamental changes in the corporation’s rules or structure. Note: while each of these groups may contain different people, most states allow a corporation to be owned by one individual who is the sole member on the board, the sole officer, and the sole shareholder.
Limited Liability Company (LLC)
Since its 1977 inception in Wyoming, LLCs have become one of the most popular forms of business entities in the Unites States. It is a non-corporate entity that provides limited liability and full management rights to all of its owners (usually called “members”) and its legal identity is separate from that of its owners (even though its not a corporation!). LLCs have both the advantages of a corporation and the advantages of a partnership. Like a corporation, LLCs protect their members (owners) from investor-level liability. Like a partnership, LLCs offer pass-through taxation (only taxed at the personal level, compared to the corporate double taxation explained above) and internal governance by contract. They are very flexible and can be structured to meet the needs of nearly any business.
There are numerous ways to form an entity and, as the foregoing options illustrate, there are just as many reasons to choose one over another. As a result, it would be best to consult a professional to determine what type of entity would best suit your present situation and future goals.
Internal Operating Documents
Like a rulebook for operating your company, your internal operating agreement outlines the rights and responsibilities of each party subject to the agreement. The agreement not only governs the relationship between the parties to each other but also the relationship between the parties and the company. Most states require internal operating agreements and, depending on the type of business entity to decide to form, state law may play an involved role in the structure of the agreement. The preventative nature of an internal operating agreement allows a business to run smoothly by providing contingencies in the case of unexpected events. Like registering your brand for trademark protection, drafting a thorough operating agreement is more important than you may be aware. Even if you’re starting a company with friends or family, do not let your emotions and your relationship prevent you from protecting the company, and yourself, for the long term! Here are some common situations to consider:
– States that require internal operating agreements may invalidate your entity’s status and, therefore, strip away your protection against personal liability if you failed to draft an agreement.
– If the original group that created the business breaks up, or even if one person of this group wants to leave, what are that person’s rights? What happens to the company?
– If you only go through the motions and do not put in the time and effort needed to draft a thorough agreement, default laws will govern the sections of your agreement that are silent.
– Should return be based upon investment? Who shares in the profits? …the losses?
– Do all members have a say in management? Who has the final word? How are you to vote if there’s a tie?
These are only a few of all the areas that an internal operating agreement can, and should, address. These agreements allow for the parties who are entering into them the opportunity to acknowledge their rights and responsibilities so there is neither confusion nor disagreement at a later date.
Recognizing the Practices of Your New Industry
One of the main areas that distinguishes one industry from another is its business practices – a social networking company and a construction company both have brands and entity formation considerations, but the contractual relationship of the parties in each is dictated (in part) by industry practices. Think about what it takes for a construction company to complete a project. Generally, the company will need a supplier, a general contractor, and (most importantly) someone to pay for their services. As a result, the contracts between those parties are relatively straightforward and common to the industry. Now think about a new media company like Facebook. Due to its global outreach and accessibility, you can imagine that the types of contracts suitable for the construction company won’t fly here.
The “new” media industry requires “new” ways and styles of contracting. Visionaries, and the lawyers that represent them, are creating new ways of doing business – licensing content, new distribution channels, and new revenue streams that weren’t available as of even a few days ago (see news articles on Clear Channel’s recent agreement to pay performance royalties for sound recordings, such as this one). This means the new media entrepreneur needs to be “in the game” and up to date with the latest industry practices (or better yet, trail blaze new business practices!).
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We live in exciting times. Technology is enabling us to create, and connect, in new ways. If you desire to make a career out of your creativity and vision, knowing and handling your business is imperative. Protecting your brand, structuring the proper entity, and entering contractual relationships that reflect the long-term vision of your company are three ways to get you on your way!
Written by Justin Traino, Legal Intern
 For you literary geeks like me, take a quote from an iconic book about the Salem witch trials, “The Crucible”. When questioned why he’d rather choose death over signing a confession that he was a witch, John Proctor cried out “Because it is my name! Because I cannot have another in my life! Because I lie and sign myself to lies! Because I am not worth the dust on the feet of them that hang! How may I live without my name? I have given you my soul; leave me my name!” While a bit dramatic, you get the point, right? Your business’ name can mean everything, so protecting it is as important as providing a great product or service.