Many small businesses have special logos, developed software or have certain unique processes for their business.  With that, this article will provide an overview of the types of intellectual properties and how to protect your property. 

Types of Intellectual Property

            The first step is to determine what type of intellectual property protection you need. There are three types of intellectual property:  trademarks, patents and copyrights. The United States Patent and Trademark Office (USPTO) handle both trademarks and patents while copyrights are handled by the For information on copyrights, contact the Copyright Office (a division of the Library of Congress).

            What Is a Patent?

            A patent for an invention is the grant of a property right to the inventor. The term of a new patent is 20 years from the date on which the application for the patent was filed in the United States or, in special cases, from the date an earlier related application was filed, subject to the payment of maintenance fees. US patent grants are effective only within the US, US territories, and US possessions.

            The right conferred by the patent grant is, in the language of the statute and of the grant itself, “the right to exclude others from making, using, offering for sale, or selling” the invention in the United States or “importing” the invention into the United States. What is granted is not the right to make, use, offer for sale, sell or import, but the right to exclude others from making, using, offering for sale, selling or importing the invention.

What Is a Trademark or Service mark?

            A trademark is a word, name, symbol or device which is used in trade with goods to indicate the source of the goods and to distinguish them from the goods of others. A service mark is the same as a trademark except that it identifies and distinguishes the source of a service rather than a product. The terms “trademark” and “mark” are commonly used to refer to both trademarks and service marks.

            Trademark rights may be used to prevent others from using a confusingly similar mark, but not to prevent others from making the same goods or from selling the same goods or services under a clearly different mark. Trademarks which are used in interstate or foreign commerce may be registered with the Patent and Trademark Office.

            The USPTO website at http://www.uspto.gov/main/trademarks.htm provides a wide variety of information about trademarks and offers electronic filing of trademark applications and other trademark documents. The Trademark Electronic Business Center contains all the information needed for the entire registration process.)

What Is a Copyright?

            Copyright is a form of protection provided to the authors of “original works of authorship” including literary, dramatic, musical, artistic, and certain other intellectual works, both published and unpublished. The 1976 Copyright Act generally gives the owner of copyright the exclusive right to reproduce the copyrighted work, to prepare derivative works, to distribute copies or records of the copyrighted work, to perform the copyrighted work publicly, or to display the copyrighted work publicly.

            The copyright protects the form of expression rather than the subject matter of the writing. For example, a description of a machine could be copyrighted, but this would only prevent others from copying the description; it would not prevent others from writing a description of their own or from making and using the machine.

Some additional differences between a copyright and a trademark are as follows:

1.   The purpose of a copyright is to protect works of authorship as fixed in a tangible form of expression. Thus, copyright covers: a) works of art (2 or 3 dimensional), b) photos, pictures, graphic designs, drawings and other forms of images; c) songs, music and sound recordings of all kinds; d) books, manuscripts, publications and other written works; and e) plays, movies, shows, and other performance arts.

2.   The purpose of a trademark is to protect words, phrases and logos used in federally regulated commerce to identify the source of goods and/or services.

3.   There may be occasions when both copyright and trademark protection are desired with respect to the same business endeavor. For example, a marketing campaign for a new product may introduce a new slogan for use with the product, which also appears in advertisements for the product. However, copyright and trademark protection will cover different things. The advertisement’s text and graphics, as published in a particular vehicle, will be covered by copyright - but this will not protect the slogan as such. The slogan may be protected by trademark law, but this will not cover the rest of the advertisement. If you want both forms of protection, you will have to perform both types of registration.

4.   If you are interested in protecting a title, slogan, or other short word phrase, generally you want a trademark. Copyright law does not protect a bare phrase, slogan, or trade name.

5.   Whether an image should be protected by trademark or copyright law depends on whether its use is intended to identify the source of goods or services. If an image is used temporarily in an ad campaign, it generally is not the type of thing intended to be protected as a logo.

1. Understand the Business Entity

One of the hardest areas for businesses to understand is the choice of business entity in Texas. So many clients simply file a corporate charter online, get a tax identification number and then start selling their widgets. Or, they simply start selling their widgets under their own name and operate a sole proprietorship. Both entities are initially okay until something happens like an unexpected income tax bill or an accident (and thus a threatened lawsuit). Both instances and ones like them need to be discussed before production of the product or providing any service as a business so as to reduce the future exposure to one’s personal pocketbook.

Before anyone sets up a corporation, they need to fully understand the implications of the choice of entity both from a liability and tax point of view. A C corporation will have limited liability for its owners and shareholders; however, it will be taxed twice. Of course, the average person does not want to pay Uncle Sam twice. Therefore, it is imperative to investigate the choice of entity and its consequences. Understandably, liability protection is important; however, it may come with unnecessary effects on your bottom line.

2. Read Contracts—Effective Review Minimizes Future Litigation

In Texas, anyone can contract for most things and if signed, it is generally enforceable. Unfortunately, most business owners (small and large alike) do not read the contracts and simply ask the presenting party, “What does it say?” Typically, a summary of the terms is given and both parties sign. The contract usually goes into a drawer until someone does not pay or breaches one of its terms. Both parties get lawyers involved who read the contracts and usually come up with a clear interpretation of the contract often fitting only one party. The moral of the story is to read the contracts and understand the terms and their effects on your business.

3. Know a Very Good C.P.A.

Next to knowing a good lawyer that you trust, it is key to know a C.P.A. to audit your internal books but to also prepare your franchise and income tax returns. When businesses get started, most owners think they can handle sending invoices, receiving money and balancing the books. However, preparation of the tax returns gets more complicated considering most new business owners don’t know when to file returns, what expenses are deductible or how to file payroll taxes. A good C.P.A. will hold a business owner’s hand and guide him or her along the process. In the end, a good C.P.A. will save you money.

Finally, it is without question to find a good lawyer and especially one that does not tell you that you cannot do something but rather finds a way to make it happen!

        With the New Year finally here, many clients and in general business owners are back to work and focusing on making money.  With this down economy, one of the most pressing issues is making money and paying bills.  One of the first recommendations I have is to not focus on making new money but instead collecting old money or money that was already billed but not collected.  This article is from the Texas State Bar and focuses on individuals collecting those relatively small amounts in small claims court. 

How to Sue in Small Claims Court

            Small claims court is the real “People’s Court.” The purpose of small claims court is to provide an informal, uncomplicated proceeding to resolve small disputes that do not involve enough money to warrant the expense of formal litigation.  Most people who appear in small claims court do not have a lawyer but represent themselves.

What Type of Case Can Be Brought in Small Claims Court?

            Not all disputes can be heard in small claims court. Small claims court cannot hear disputes involving more than $10,000. If you wish to recover more than $10,000, you must consider another court and, in most cases, the assistance of an attorney. In many cases, however, a claim may be reduced to enable you to file in small claims court. Small claims court can only award money. You cannot ask the court to order the other party to do anything, or to refrain from doing something. If you need an order to make someone do something or to stop doing something, other courts are available. If you win in small claims court, you can only win a judgment for a dollar amount (up to $10,000 plus court costs).

Who Can Sue in Small Claims Court?

            Any person who is over 18 years old can file a claim in small claims court. A minor can use the court by having a parent, relative, or “next friend” over 18 years old go with him or her to file a claim and later attend the trial. An association, partnership, or corporation may also file a claim in small claims court.  Be advised however, a corporation must be represented by an attorney since a corporation by law cannot represent itself.

Are There Alternatives to Small Claims Court?

            You should always try to settle a dispute without going to court. Generally, disputes should be settled without a lawsuit.  During any given year, many cases are filed in small claims court that could have been resolved without a lawsuit. If you do file a lawsuit, you will find that you must spend time preparing your case. You will also have to pay certain fees to have your case processed. A trial in small claims court, although informal, can be a time-consuming and emotionally draining experience.

Where Do You File Suit?

            You must normally file suit in the county where the party that is being sued (the defendant) resides, or where the services you are complaining about were performed. The justice of the peace in each county is also the judge for small claims court. The small claims court will be listed in the telephone directory as justices of the peace. If your telephone book has government offices listed separately, look under the listings for justices of the peace in the appropriate county.  You may also search for “Justice Courts” at www.courts.state.tx.us.  If there is more than one justice of the peace in a county, then a small claim normally must be made in the court whose precinct covers the area where the defendant resides.

How Do You File Suit?

            You should collect all the information that will be needed to start your lawsuit before you go to the courthouse. Collect your records, including copies of contracts and agreements. You should also collect the following information:

a) your complete name and address;

b) the complete name and address of each person or business your claim is against. Correct names and addresses are vital to your case because the court cannot grant a judgment against a defendant who is improperly named in the complaint.

c) the amount you intend to claim in damages ($10,000 or less); and

d) a concise statement of the basis for your claim, stated plainly and without technicalities, including the date the claim arose and any other relevant date. You should write this statement in advance. 

Once you are prepared, call the justice of the peace court that you have determined to be the correct one. Find out how much money you will need to pay the fees necessary to start your lawsuit and the exact procedure you need to follow to file your claim. 

            You should personally go to the court to start the suit. Ask to see the clerk in charge of filing small claims. You must complete a small claims statement.  You must swear under oath that your small claims statement is true. You will have to pay the clerk the necessary fees. If you want a jury trial you must request one and pay an additional fee. These fees generally must be paid in cash, money order, or company check. Most courts do not accept personal checks.  Tell the clerk where the defendant may be found and the approximate time of day he or she is likely to be found at that location. This is important because the defendant must be served before the court can grant you any relief.

Gathering Paperwork

To begin the bankruptcy process you must itemize your current income sources; major financial transactions for the last two years; monthly living expenses; debts (secured and unsecured); and property (all assets and possessions, not just real estate). You should also collect your tax returns for the last two years, deeds to any real estate you own, your car(s) titles, and the documents for any loans you may have.

Filing Bankruptcy

Once you have gathered this information and to actually file, either you or your attorney, will need to file a two-page petition and several other forms at your Texas district bankruptcy court. These forms collectively are referred to as the schedules and ask you to describe your current financial status and recent financial transactions (typically within the last two years). You must be entirely truthful and not withhold pertinent information. 

The cost for filing a Chapter 7 bankruptcy is $299 and the fee for a Chapter 13 bankruptcy is $274.

Chapter 13 Requirements

If you are filing a Chapter 13 bankruptcy, a proposed repayment plan must also be submitted. After reasonable monthly expenses have been paid, how much money will you have left over to put toward your outstanding bills? And how will this money be divvied up among those you owe? Priority claims (such as taxes and back child support) must be paid in full; unsecured debts (like credit card debt and medical bills) are usually paid in part.

In addition to the general requirements listed above, the repayment plan must pass three tests:
1) It must be delivered in good faith; 2) Unsecured creditors must be paid at least as much as if a Chapter 7 bankruptcy had been filed. Generally, this is the value of all the nonexempt property you own; 3) All disposable income must be paid into the plan for at least three years (you may use up to five years in order to meet the second test that you pay at least as much as in a Chapter 7).

Automatic Stay

Once you have filed your paperwork with the bankruptcy court, an automatic stay immediately goes into effect. This provision prevents creditors from making direct contact with you or staking a claim on any of your property from the day of filing forward. This will stop any foreclosure proceedings.

Bankruptcy Trustee

Upon filing, the court will assume legal control of your debts and property not covered an exemption. A trustee will be appointed to your case by the court. The job of the trustee is to see that your creditors are paid as much as possible. This person will thoroughly review your paperwork, particularly the assets you have in your possession and the exemptions you wish to claim, and can challenge any element of your case.

341 Meeting of Creditors

Approximately a month after filing, the trustee will call a first meeting of creditors, which the debtor must attend. This proceeding is also referred to as the §341 meeting, named after the corresponding section of the bankruptcy code.

The meeting of creditors typically lasts about five minutes. You will receive notice of the location of the meeting but you may contact the court to confirm the address and time.  Trustees and creditors have 60 days to challenge the debtor’s right to a discharge. If there are no challenges, you will receive a notice from the court that your dischargeable debts have been discharged within roughly three to six months.

Chapter 13 Plan Confirmation

If you filed a Chapter 13 plan will need to attend a hearing before a bankruptcy judge who will either confirm or deny the repayment plan. If your plan is confirmed and you make good on it, the balance (if any) on the dischargeable debts you owe will be eliminated at the end of your term.

With this information, you have a good start to filing bankruptcy whether using a lawyer or filing on your own. Be advised, however, the bankruptcy procedure is taxing and detailed. Failure to follow the proper procedure may result in debts not being discharged.  And, remember if you file pro se (without an attorney), you are held to the same standard as an attorney

            Over the next few weeks, I will address a very important topic that has been on the minds of many Texans during this recession—bankruptcy.  This, often times, is a taboo subject that many choose not to think about or investigate until it is too late.  Bankruptcy should not be feared and instead seen as a chance to start over.  With that, there are several types of bankruptcy filings depending on each debtor’s circumstances (i.e. full discharge or repayment plan). This article will address different types of bankruptcies and their effect on your finances.  Future articles will address the procedure for filing and exempt property.  As always, should you find that you need legal advice, contact an attorney and do not rely on this article as your sole source of advice. 

            Six basic types of bankruptcy cases are provided for under the Bankruptcy Code, and named according to the chapters that describe them.

Chapter 7 – Liquidation

            This orderly, court-supervised procedure requires the bankruptcy trustee to take over the assets of the debtor’s estate, reduce them to cash, and make distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Usually, however, little or no nonexempt property exists in most chapter 7 cases.  A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. The recent amendments to the Bankrcuptcy Code require the debtor to qualify for relief according to the “means test”.  If the debtor’s income is in excess of certain thresholds, Chapter 7 may not be available.

Chapter 13 – Adjustment of Debts of an Individual With Regular Income

            Here, an individual debtor who has a regular source of income is enabled to keep a valuable asset, such as a house, according to a proposed “plan” to repay.  This repayment is done over time – usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan.

            No immediate discharge of debt occurs; instead, the debtor is allowed to pay a percentage of the debt to the creditor over time. Once the payments are made, the bankruptcy trustee will discharge the debt.  The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect.

Chapter 11 – Reorganization

            A Reorganization is used by commercial enterprises that desire to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization. A debtor may file a reorganization plan within 120 days after it files the case and must provide creditors with a disclosure statement containing information adequate to enable creditors to evaluate the plan. The court will approve or deny the plan and if confirmed, the debtor can reduce its debts by repaying a portion of its obligations and discharging others.

            The debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. In the end, the debtor emerges from the bankruptcy with a reorganized business and reduced debt load (presumable one that they can handle).

Chapter 12 – Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income

            This Chapter is reserved for family farmers and fishermen with regular income. The process under chapter 12 is very similar to that of chapter 13, under which the debtor proposes a plan to repay debts over a period of time – no more than three years unless the court approves a longer period, not exceeding five years while utilizing a trustee. The family farmer or fisherman is allowed to continue to operate the business while the plan is being carried out.

Chapter 9 – Adjustment of Debts of a Municipality

            Here, Only a “municipality” (cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts) may file for this reorganization which is much like a reorganization under chapter 11.

Chapter 15 – Ancillary and Other Cross-Border Cases

            This section deals with cases of cross-border insolvency where a debtor or its property is subject to the laws of the United States and one or more foreign countries.

            Clearly, most readers need only be cognizant of the Chapters 7, 11 and 13 depending on the circumstances.  The stigma of bankruptcy is not as bad as thought and many businesses and people not only file but emerge with a renewed energy for business and see much success. 

Now, that Hurricane Ike is gone, many employees are wondering what to do about wages that they did not get while evacuated or away from their workplace.  Worse yet, some employees are wondering if they have any recourse if they were fired for not reporting to work during or after the hurricane.  This article attempts to address these issues generally and point you in the right direction to get answers from the appropriate governmental agencies.

Even if a major hurricane does not hit your city directly, a major hurricane can turn your business and personal life upside down.  Employees need to understand their rights and employers need to communicate clearly their policies when confronted with a major disaster well in advance.  Employers want to avoid chaos when the weatherman says a Category 2 Hurricane like Ike is on its way to your neighborhood and employees want to worry about their personal and real property.  What’s a business to do…

Requiring Employees to Work During a Hurricane

Every employee’s first instinct in a hurricane will be to protect his or her family and property. Most businesses will need someone on the scene during a storm as well as a plan that informs the employees when they can leave without fear of losing their job.

A hurricane or other natural disaster inevitably raises questions concerning payment expectations. For non-exempt employees, employers must pay for all hours worked, and overtime for any work over 40 hours in a workweek. If an hourly employee does not work because of a hurricane-related absence, there is no requirement to pay that employee.

Conversely, if an hourly employee remains on the premises during a storm to watch over critical equipment, that employee must be compensated even if he spends part of the time sleeping or watching the local weatherman chart the hurricane’s path on television. Also, be wary of “volunteers.” Any work that benefits an employer is compensable, so an employee who decides to pitch in with hurricane preparations or cleanup must be paid.

For exempt employees, the rules are different. They cannot be docked for weather-related absences where offices are closed. Salaried employees may, however, be required to work extra time during an emergency without any entitlement to additional compensation.

Communication of Expectations

A hurricane is stressful for everyone in its path. The day before a hurricane hits town is not the best time to communicate your business plan for maintaining operations during the storm. Employees deserve advance notice of what will be expected of them during a crisis, and what plans they should make to meet both their employer’s expectations and their family’s needs.

Accordingly, if your business does not already have a plan in place to deal with the operational and HR issues that may arise in the event of a hurricane, you are already behind.  Update your employee manual NOW!

Termination During/After Mandatory Evacuation

The Texas Labor Code clearly advises employers that they cannot fire employees for following a valid evacuation order.  Therefore, any resident of any city with mandatory evacuation orders should not fear losing their job for following government orders.  If an employee is terminated, that resident may have legal rights. 

What to do if you need help and don’t know where to go…

FEMA Assistance. 

People who worked in Angelina, Austin, Brazoria, Chambers, Cherokee, Fort Bend, Galveston, Grimes, Hardin, Harris, Houston, Jasper, Jefferson, Liberty, Madison, Matagorda, Montgomery, Nacogdoches, Newton, Orange, Polk, Sabine, San Augustine, San Jacinto, Trinity, Tyler, Walker, Waller, and Washington Counties who are out of work due to storms and flooding caused by Hurricane Ike may be eligible for Unemployment Insurance (UI) and/or Disaster Unemployment Assistance (DUA).

Department of Labor.  As many of you know, one of the best websites available to employees and employers alike is the Department of Labor site (www.dol.gov).  Accordingly, below is an exceprt from their website outlining the various programs available and their links:

• Unemployment Insurance (UI)
• The Federal-State Unemployment Insurance Program provides unemployment benefits to eligible workers who are unemployed through no fault of their own. To find your state’s unemployment insurance information, visit http://workforcesecurity.doleta.gov/map.asp.
• Disability Program Navigators
• Persons with disabilities can receive assistance from specialists in finding employment opportunities and government services in their area.  For more information about ETA’s Disability Program Navigators, please visit: http://www.careeronestop.org/disasterrecoveryservices/
• Information on Wages
• Wage and Hour Division (WHD) staff in the affected region are available to provide service to complainants on last paycheck and other wage related issues. WHD staff will also provide compliance assistance to employers and employees on the application of federal law in emergency and disaster relief situations. Employers and employees can call 1-866-4US-WAGE (1-866-487-9243) for help on wage-related issues. All calls are treated confidentially. For more information on the Wage & Hour Division, please visit: http://www.dol.gov/esa/whd/

Questions:

1. I recently fired an employee for dishonesty (stole from the company) and have not paid her final check. This ex-employee owes the company as much as I owe her. I want to simply break even and not pay her. Can I do this?

No, unless you have a court order, are authorized by law or have a written authorization from the employee. Employers are governed by the Texas Payday Act which clearly states that an employer must pay an employee for time worked furthering the business. Failure to pay could result in penalties. The best way to avoid any problem like this in the future is to have a written employee manual outlining reasons for termination and the procedure the company follows. Further, it should state that the employer is entitled to deduct from the employee’s paycheck any amounts owed the employer (i.e. for loans, uniforms, insurance, etc.). The employer should document the employee’s file and include the receipts and evidence for any stolen merchandise.

2. Can I prohibit my employees from sending or receiving personal emails while at work?

Yes, so long as you have a well documented employee manual that puts the employee on notice of your intention of limiting personal emails. The employee manual should be signed by the employee upon receipt. This will enable the employer to enforce the rule. Also, it is important to note that the employer must enforce the rules fairly and show no favoritism. The employer must also be flexible with the personal needs of its employees to ensure retention. It is a tough balancing act but can be done.

3. I have heard you talk a lot about terminating employees and want to know what at-will employment means? I thought I could fire an employee for whatever reason.

At-will employment in Texas means that you can terminate an employee for almost any reason. So long as the employer does not have an employment agreement with the employee and does not discriminate (as the basis for termination) on the basis of race, gender or age, the employer is justified in the termination. That said, the employer should take precaution and be sure to have a well-documented personnel file substantiating the termination since the employee may seek retaliation. It is a tricky area and I advise employers to involve their legal counsel when the issue of employee termination arises.

My wife wants to take 3 months off to care for our sick child and has heard about the Family and Medical Leave Act (FMLA). Does that apply to her?

The following is an excerpt from the Department of Labor website, www.dol.gov, that explains not only what FMLA, but towhom it applies and what an employee is entitled to receive.

The Family and Medical Leave Act (FMLA) provides certain employees with up to 12 weeks of unpaid, job-protected leave per year. It also requires that their group health benefits be maintained during the leave.

FMLA is designed to help employees balance their work and family responsibilities by allowing them to take reasonable unpaid leave for certain family and medical reasons. It also seeks to accommodate the legitimate interests of employers and promote equal employment opportunity for men and women.

FMLA applies to all public agencies, all public and private elementary and secondary schools, and companies with 50 or more employees. These employers must provide an eligible employee with up to 12 weeks of unpaid leave each year for any of the following reasons:

• for the birth and care of the newborn child of an employee;

• for placement with the employee of a child for adoption or foster care;

• to care for an immediate family member (spouse, child, or parent) with a serious health condition; or

• to take medical leave when the employee is unable to work because of a serious health condition.

Employees are eligible for leave if they have worked for their employer at least 12 months, at least 1,250 hours over the past 12 months, and work at a location where the company employs 50 or more employees within 75 miles. Whether an employee has worked the minimum 1,250 hours of service is determined according to FLSA principles for determining compensable hours or work.

Time taken off work due to pregnancy complications can be counted against the 12 weeks of family and medical leave.

So, the answer to your question is maybe. It will be best to analyze your circumstances and talk with your human resources department or direct supervisor.

My Mom died last week and my employer told me that he would not give me the day off. Of course I quit. I want to know if he was required by law to give me the day off.

Unfortunately, that type of leave is usually left up to an agreement between employer and employee. The Fair Labor Standards Act (FLSA) does not require payment for time not worked, including attending a funeral. This same answer applies to sick time, holidays and vacation pay. Of course, if your employer is covered under the Family and Medical Leave Act, you may be able to take non-paid time off.

My employer won’t pay me overtime benefits because he says that I have to get all my work done even if I cant finish it in 40 hours. Does he have to pay me overtime? My friends tell me I can get up to 1 ½ times my hourly pay.

Unless specifically exempt, your employer should pay overtime to all hourly workers that work more than 40 hours per week.

The best way to answer this question is to look at the Department of Labor’s website and specifically their fact sheet on this very topic. Many variables come in to play here that require more specific questions. Go to http://www.dol.gov/esa/regs/compliance/whd/whdfs23.pdf and you should get a general answer to your question.

Also, please note, overtime pay cannot be waived so if it is owed you should request your pay.

Q.  A partner and I are planning to open a small publishing house, and we have five people who are willing to invest money for shares, so we are planning to open as a S Corp.  I have several questions about having shareholders, including:

Do we have to have a Board of Directors? 

What kind of powers do directors actually have? 

What exactly should we cover in our bylaws if we incorporate?  Should we just get stock bylaws we can order somewhere or should they be specific to our company?

If we decide to have shareholders, do we need Buy-Sell Agreements? What should a Buy-Sell agreement cover?  If we decide not to take shareholders and have a partnership, what type of Buy-Sell Agreement should we have and why?     

If we do this business as a S Corp, must we keep Corporate Book, and if so what must be included in the books and how, when, and why must the books be updated?

               First, opening a small business is exciting; however, for the untrained and weary, it is very scary.  Most owners just focus on making the widgets or providing the service and forget all the behind the scenes things that must be done or worse yet, listen to friends who are not qualified.  In your question, you focus on an S Corporation like that is a separate entity recognized by the Texas Secretary of State.  You are partly right. 

                An “S” corporation is not a matter of state corporate law but rather a federal tax election. A for-profit corporation elects to be taxed as an “S” corporation by filing an election with the Internal Revenue Service within a certain time period.  In the eyes of the Texas Secretary of State all Texas corporations are the same.  The IRS and/or competent tax counsel will be able to assist with the decision to be taxed as an “S” corporation and the requirements for filing the election. Setting up an S corporation is not a matter with which the Secretary of State will assist.

Do we have to have a Board of Directors? 

               No.    As you know, a corporation is a legal person with limited liability, centralized management, perpetual duration and ease of ownership transferability.  Owners of a corporation are called shareholders and those who manage the corporation are called directors.  However, Texas state law does allow for shareholders to enter into a shareholder agreement to eliminate directors and manage the corporation.  For a small business this may be advantageous; however, if you ever want to sell stock to a shareholder, it is likely that shareholder will not want to participate in the management of the corporation.

What kind of powers do directors actually have? 

               Directors have as much power as the shareholders of the corporation provide and as allowed by law.  Typically the powers are found in the corporation’s bylaws and are responsible for the day to day management of the company.  An example of the “Powers” section of my standard bylaws looks as follows:

The Directors shall act only as a board and an individual Director shall have no power as such. All corporate powers of the corporation shall be exercised by, or under the authority of, and the business and affairs of the corporation shall be controlled by the Board of Directors, subject, however, to such limitations as are imposed by law, the Articles of Incorporation or these Bylaws as to actions to be authorized or approved by the shareholders. The Board of Directors may, by contract or otherwise, give general or limited or special power and authority to the officers and employees of the corporation to transact the general business, or any special business, of the corporation, and may give powers of attorney to agents of the corporation to transact any special business requiring such authorization.

What exactly should we cover in our bylaws if we incorporate?  Should we just get stock bylaws we can order somewhere or should they be specific to our company?      

               Many forms exist in this electronic age that tempt the small business owner to adopt and place in the new corporate book.  However, with any form, it is simply for the average company and contains no customization for your entity.  Bylaws address important items like when, where and how often shareholder meetings occur, quorum, voting, share issuance, powers of directors and officers and share certificates.  Clearly, these items while not important at the corporation’s outset become very important when the company grows and new shareholders enter the company.  Getting solid reliable bylaws in place will ease your mind down the road.

If we decide to have shareholders, do we need Buy-Sell Agreements? What should a Buy-Sell agreement cover?               

               A buy-sell agreement is important to have in a corporation as it addresses what happens to the shareholder’s shares upon the occurrence of some event (voluntary sale, death, divorce).  So many times in a lawyers practice, he/she will get a phone call from someone that says they are in a corporation and another shareholder is divorcing.  The remaining shareholders don’t want the spouse to own any of the corporation or be involved in any of the management of the corporation. 

               Texas adopts the Spanish tradition of community property as so long as the property was acquired during the marriage, the shares are property of the community.  During the divorce, the Judge will issue a just and right division of the assets which may include some of the shares going to the spouse (of course to the objection of the remaining shareholders).  To solve this problem, the shareholders and their spouses will execute a buy-sell agreement that addresses this issue.  It is always best to address this issue before it becomes an issue. 

               Also, most buy-sell agreements will offer the shares back to the company upon the death or divorce of one of the shareholders utilizing a predetermined procedure set forth in the buy-sell agreement.  This is a complicated yet smart document to have in place immediately upon chartering your new corporation. 

If we do this business as a S Corp, must we keep Corporate Book, and if so what must be included in the books and how, when, and why must the books be updated?

            Every Texas Corporation must keep records traditionally in a corporate book of some sort (it does not have to be a fancy leather bound book…it can be a three ring binder).  The corporation’s bylaws will dictate how often and where the shareholders will meet as well as the directors.  The shareholder’s meeting minutes will go in the corporate book as well as some of the Board of Director’s minutes.  That issue will be addressed in the corporation’s bylaws.  Typically, though, you should remember to place minutes, resolutions, notice waivers or consents without meeting documents into the corporate book.  This whole process we affectionately call “stuffing the corporate book”. 

            Failure to stuff the corporate book, may let an eager Plaintiff’s lawyer “pierce the corporate veil” in the event of a lawsuit.

            Once you decide to go out on your own and start your business, most people forget to think through how to establish the company.  Key elements in deciding among business entities are how the entity will be taxed and who will be liable for its obligations.  The entity itself will always be liable to the extent of its assets, so the question is who will be liable, if anyone, if the entity’s assets are not sufficient to satisfy all claims.  Understandably, management, capital raising, interest transferability, continuity of life and formation issues such as cost and timing are also critical; however, those issues can be discussed after the “entity” is established.

            If the owners are contents with paying federal income taxes at the entity level and then on any earnings distributed to them, then a regular business corporation (without subchapter S-corporate election) will be sufficient.  If the owners do not want the entity’s earnings to be taxed twice, the entity selection process is a little more difficult.  The owner’s choices are:

• General partnership
• Limited liability partnership
• Limited partnership
• Limited liability company
• S-Corporation

            If limited liability is not important and all owners are individuals, then the choice is a general partnership.  Here, the partners are jointly and severally liable for all liabilities. 

            If the owners are willing to accept liability for their own negligence or tort but want to avoid liability for contracts and torts of other partners for which they have no relation and are willing to be subjected to the margin tax, the limited liability partnership is the choice.

            A limited partnership provides tax flow through without the subchapter S restrictions, with no self-employment tax on limited partner income and limited liability but it has some problems.  The partnership must have a general partner which is liable for all partnership obligations.  Limited partners who participate in the management of the entity become liable as general partners generally.  Moreover, the margin tax may be imposed.

            The limited liability company can be structured to have tax flow through and limited liability of an S-corporation or limited partnership without any of the drawbacks however, the margin tax will apply.

            As you can see, Texas has several business entities to choose from and with good planning and legal advice, every owner’s ideas and business will fit within one.  And, remember that any entity can always be changed later if the business changes.