You are ready to start a business. Perhaps you are a young entrepreneur starting a business from scratch. Or, maybe you have worked years for your current employer, and you know you can do it bigger or better. Or perhaps you fall somewhere in between.
Whatever the reason, starting a business is daunting due to the tedious barriers in the way. Starting a business requires things like financing, accounting, marketing, and lease agreements. It may also require legal assistance which may be intimidating.
Not to worry; this guide provides a legal framework to help identify legal issues that may arise when starting or modifying, a business, and what steps to take. (Note, although this guide is Nevada specific, one can use this guide for a business in any state, but the laws of that state may be different).
Step 1 of Starting a Business: Flow-Diagram Check List
What type of business are you creating? Answer these questions first:
Will your business sell products or services?
Do you have a book of business (established customers or clients)?
Will the business operate in multiple states?
These questions help identify if you can legally sell your product or service without infringing on another business's intellectual property rights. Infringing on another's property can stop your business in its tracks and generate a large legal bill.
Step 2: Intellectual Property Concerns
Intellectual property gives rights to a business to exclusively utilize certain information for its benefit only. There are two types, government-protected intellectual property (patents, copyrights, and trademarks) and business protected intellectual property (trade secrets).
No matter if you intend to sell services or products, you must consider both categories; however, government-protected intellectual property applies mostly to products.
Government Protected Intellectual Property (patents, copyrights, and trademarks)
Patents provide a legal right for the owner of the patent to sell a product for a period exclusively. If you plan to manufacture a product it must not infringe on an existing patent. However, patents can expire, or the owner may fail to maintain it. Additionally, if your product's design is different enough, it may not violate an existing patent. Therefore, you must seek the counsel of a patent attorney before selling your product, or you may get sued. On the other hand, if you created, or have an idea for an original product, then you should seek a patent attorney to patent the idea for you. It is costly but failing to do so allows your competitors to steal the idea legally.
Copyrights. Any sort of literary or artistic material can be copyrighted for a period. They are less of concern for entrepreneurs selling products, but you must make sure you are not infringing. For example, you may love Disney and plan to sell Mickey Mouse dolls. But Disney has exclusive copyrights to their characters, and despite being the happiest company on earth, Disney may sue you if the doll resembles Mickey. Ask yourself, where is the source of the idea for the product? If you intend to manufacture toys, is the toy design based on some outside source (Disney, Barbie, etc.)? Seek the counsel of a copyright attorney who can run a search for owners of copyrighted work. Additionally, you may also want to copyright your original work to keep competitors from stealing it.
Trademarks are used by companies to market and sell their brand. Some trademarks are obvious, Coca-Cola and Apple, for example. However, most businesses trademark their logos, and even if you create an original logo(s), you might not realize a different company has a similar one. Thus, it is best to contact a trademark attorney to ensure you are not infringing.
Business Protected Intellectual Property (trade-secrets)
Unlike patents, copyrights, and trademarks, a business cannot apply to the government for the protection of trade secrets. That is because trade secrets are not a specific design or creation. Instead, trade secrets regard the business's goodwill or creations that the business does not copyright or patent.
Goodwill Trade Secret.
For example, imagine a photography business that specializes in wedding photography called “Wedding Snaps.” Wedding Snaps has been in business for thirty years. Ten years ago, Wedding Snaps hired Becky as their project manager, who is an exceptionally talented photographer. Becky believes she is underpaid and does not agree with Wedding Snaps' business decisions. Becky knows she can create a better product on her own, so she decides to form her own business. Before leaving, Becky copies Wedding Snap's customer list on a thumb drive and then solicits her new business to those customers. Becky may be in legal trouble if the customer list is the trade secret of Wedding Snaps (more on that in a bit).
Tangible Trade Secrets
Additionally, imagine Wedding Snaps created a software program where their clients can view digital photos of their wedding before they order them. Becky also downloads a copy of this program before leaving. Has she stolen Wedding Snaps intellectual property? The answer is contingent on whether Wedding Snaps kept the software confidential.
Wedding Snaps cannot patent or copyright its customer list. So, it is up Wedding Snaps to protect this potential trade secret from the public, or anyone who might have access to it, including its employees. Wedding Snaps can accomplish this by using either, or both, of the following two methods:
Non-disclosure agreement. Imagine Becky signed a non-disclosure agreement acknowledging Wedding Snaps owns the customer list and software, prohibiting Becky from using them in her own business. Becky thus violates the agreement if she downloads the customer lists for her business.
Security Measures. Or, imagine Becky never signed a non-disclosure agreement. But Wedding Snaps keeps the customer list confidential. Only a few employees have access to it, and the computer where it is stored is password protected. Even though Becky never signed a non-disclosure, her use of the list in her own business is still illegal because Becky knew that Weeding Snaps intends for the list to be secret. Note, even if Becky never worked for Wedding Snaps, she again cannot utilize the customer lists if she obtained it wrongfully. For example, imagine Becky's friend works for Wedding Snaps, and Becky asks him to download and send the list to her. Such action is stealing and illegal.
Thus, not everything that could potentially be a trade secret. Although a customer list can be a trade secret, it falls short if the business does not attempt to keep it secret. So how do you determine what information is or not a trade secret?
Starting a Business: Potential Trade-Secret Diagram
The answer lies in how easily you can obtain the information independently from your employer or competitor. For example, imagine that Wedding Snaps allows for free downloads of its picture software. What is more, this download appears on Google anytime someone searches “wedding picture software.” Thus, Becky can most likely copy it since its available to everyone, and hence not a secret.
Steps to Decipher Possible Trade-Secrets If you are concerned with potential legal issues by utilizing information, you should ask yourself the following questions:
Did you sign a non-disclosure agreement?
How do you know this information? Is it something you knew before your employment? Or is it something you only know because of your employment?
Is this information valuable?
If you did not have the information, would you or a competitor be willing to purchase it from your employer?
How does your employer maintain the information?
Is it marked “confidential” or “secret”?
How is the information stored? Is it physical, or is it electronically stored?
Is the information in a locked filing cabinet?
If it is electronic information, is it password protected?
Does your employer allow their competitors access to the information?
Does your employer provide copies of the information to the public?
Is the information easily obtainable? That is, if you never worked for your employer, how much effort does it take to create this information?
These and similar inquires, help identify what potential trade secrets are. If you are in doubt, the best practice is not to use that information in your business. Or, seek the counsel of an attorney to make an informed decision. The consequences of stealing trade secrets are dangerous.
Consequences
Before using information for starting your business, you must be sure that it is not the intellectual property of someone else. If you are wrong, the owner of the information can sue for infringement of their property and seek the following damages:
Temporary Restraining Order (TRO) and a Preliminary Injunction- These are orders from a court compelling you to abstain from the use of the protected information, which in turn can prevent business operations;
Compensation- If you infringe on another's intellectual property, the aggrieved business can seek payment;
Criminal- Stealing intellectual property is a felony in Nevada.
Takeaway
The key takeaway is before you start a business, you must ensure your business will not use other's intellectual property. What may seem like an innocent act, could cripple not only your business but you personally. Fortunately, there are options contact an attorney to navigate these issues. Or contact Dragon Law Group for a free consultation.
Step 3 of Starting a Business: Create an Entity
At this point, you checked to make sure your business does not intrude on intellectual property rights. Now you are ready to begin your business. The following provides a step by step process.
Process
Choose your business name. Your business name is important from a marketing and legal perspective. You must select a name that is not in use by another business. Click this link for the Nevada Secretary of State's Office search function.
How many partners and employees will be apart of your business? If you are the only person, then you might be able to run as a sole proprietor, which simply means you are not incorporated. If you do run your business as a sole proprietor, make sure to register your fictitious name (doing business as) in the county where your business located.
Chose the entity for your business:
Limited Liability Company (“LLC”) - popular for most small businesses.
Corporation - not advisable for most small businesses.
Closely held corporation - popular for small businesses.
Business Trust - popular for investment businesses.
4. Create your entity:
Depending on what entity you choose, follow this link on the Nevada Secretary of State office for step by step instructions. Or use the assistance of an attorney to ensure maximum advantages and protections.
5. Obtain your Federal Employer Identification Number (EIN). If your business is an entity, you must have an EIN. You can do this by applying online with the IRS. If you are a sole proprietor, you aren't required to have one, but it is a good idea since you will have to use your SSN instead.
6. Purchase a business license. If you created a Nevada entity, then a business license fee is included in the application costs. However, you must also purchase a separate
business license in the county or city your business operates in.
Additionally, if you do hire employees, you will need worker's compensation insurance and unemployment insurance. You may also need other types of coverage based on the type of business you are. Follow this link for more information.
By completing these steps, you can begin business. If you need assistance for financing or general business advice, Nevada has excellent free resources available. Follow this link for more information.
Step 4 of Starting a Business: Maintaining Legal Issues as You Operate
Finally, after you confirm your business will not infringe on intellectual property rights, created an entity, obtained required insurance, and are compliant with all other preliminary steps, you are now ready for business.
However, you must continue to update the preliminary steps as your business grows and expands. For instance, you might decide to add more partners/owners which require amendments to your company's governing documents. Or, you may need non-disclosure agreements for employees and the people you work with to safe-guard your own intellectual property and trade secrets.
Attorneys can assist in fully optimizing your business's potential. Dragon Law Group would be honored to be your partner. Please contact us or set up a free consultation for more information.
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