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Shareholder Protections Within a Small Business

All shareholders, no matter the size or jurisdiction, are granted some limited rights when investing in a company. However, shareholders in a small business are wise to negotiate and draft contractual protections in addition to these limited rights. Shareholders of a publicly-traded company have the ability to sell their shares if they are unhappy with… Read More

All shareholders, no matter the size or jurisdiction, are granted some limited rights when investing in a company. However, shareholders in a small business are wise to negotiate and draft contractual protections in addition to these limited rights. Shareholders of a publicly-traded company have the ability to sell their shares if they are unhappy with the trajectory or management of the company, but restrictions on the shares or the lack of a public market makes this type of exit potentially impossible in a smaller company. In lieu of such freedom, it is important for shareholders in privately-held companies to negotiate additional protections for three main reasons:

(1) Management. Shareholders in privately-held companies often have high expectations for their involvement in management decisions. A shareholder agreement should provide increased transparency into how the company will be managed. This includes board representation by the shareholders and actions the board cannot take without unanimous, or super-majority, approval of the shareholders. Actions such as increasing an officer’s salary, the percentage of profits to set aside as retained earnings, or the issuance of additional securities to a third party are examples of actions that could be contingent on shareholder approval.

(2) Liquidity. Shares in private companies are unregistered securities, which means the shareholders do not have an accessible market to sell their interest in the company if they become dissatisfied with how things are progressing. Thus, shareholder agreements can create an opportunity for liquidity. Certain events can trigger a buyout, such as retirement or termination of employment. Prior to such an event, the company and shareholders can agree upon a calculation of the price per share in order to lessen the opportunity for a downstream argument when it comes time for a purchase or transfer of equity to occur.

(3) Transfer Restrictions. Transfer restrictions can protect the core players and allow everyone to weigh in on who may come on board and join the team. Shareholder agreements will typically include restrictions on the ability of a shareholder to sell or otherwise transfer his/her shares without the consent of the other parties. They can also provide the other shareholders an opportunity to purchase the shares before they are sold or transferred to a third party. This right of first refusal helps to ensure that the remaining shareholders are not left working with a new party with whom they otherwise would not have chosen to do business.

The lack of liquidity and the frequent combination of the roles of shareholder and manager means that wise shareholders will put together a shareholder agreement at the beginning stages of their business venture. A well-drafted agreement can help guide the management and allow them to focus on the changes that will take place over the lifecycle of a business. If you’re interested in discussing your current shareholder agreement or drafting a shareholder agreement you can contact us at info@bendlawoffice.com, or at 415 633 6841.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Common pitfalls to avoid when raising money for your business

Nearly all startups and small businesses must at some point consider raising capital. To ensure you’re best suited to take full advantage of a potential opportunity, work hard to avoid these common pitfalls we frequently see. (1) Ghost Ownership A downstream claim to ownership by a party who was once considered a founder or early… Read More

Nearly all startups and small businesses must at some point consider raising capital. To ensure you’re best suited to take full advantage of a potential opportunity, work hard to avoid these common pitfalls we frequently see.

(1) Ghost Ownership

A downstream claim to ownership by a party who was once considered a founder or early stage contributor can create lots of problems. Startups and small businesses frequently start with a couple of friends with a shared business idea or vision. As the idea gets rolling, one or two of the initial founders/contributors may fail to deliver on his/her end of the bargain, and the party is then voluntarily or involuntarily removed from the company.

Because so many early stage companies forgo the assistance of legal counsel, as time marches on it becomes unclear how much, if any, this original founder/contributor owns if the removal process is not managed and documented clearly.

It’s much easier to negotiate with a party who fits this description before a big financing round begins to materialize, the company is rushed, and the early stage contributor now has much more leverage. Thus, working with counsel to sort out these issues early on can go a long way to ensuring a deal doesn’t get blown up.

(2) Organizational Issues

We’ve seen it happen all too frequently. A company has a great idea, but the structure of the company is less than ideal for investors. Choices made at an early stage, which may have made lots of sense at the beginning – such as forming an LLC to create only one layer of tax – can inhibit a startup’s ability to attract the right suitor for its current investment needs.

Once a company is looking to market its offering outside of friends and family, it often finds that investors are hesitant to invest in a “pass through entity” such as an LLC or S-Corp. Instead, investors typically want to invest in a C-Corp structure (and often a Delaware C-Corp, as Delaware is considered “business-friendly,” is a jurisdiction that the investors’ counsel are familiar with, and has well-known, established legal precedent that investors can rely on).

(3) Valuation

Valuation is far from an exact science, but the final valuation determination can have dramatic consequences on both the attractiveness of a fundraising round, and the downstream ownership issues of the founders. Valuing the company too low runs the risk of devaluing the current investors’ equity and overly dilutes their ownership; however, valuing the company too high can make it hard to attract investment and could damage the company’s reputation if the company does not understand how to properly project value.

As your general counsel, we can help manage these considerations to ensure they are taken care of before they become issues that might hold up a prospective deal. Investing in the future with sound legal counsel can seem tough when every dollar matters for an early stage company, but for those with lofty ambitions to raise capital, this investment can pay dividends in the not so distant future. If interested, you can contact us at info@bendlawoffice.com or at 415 633 6841.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

 

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California State Trademark and Service Mark Protection Could Finally Be Here!

Guest Author: Erica Paige Fang The current California Model State Trademark Law provides for the registration of trademarks and service marks with the California Secretary of State and requires the classification of goods and services conform to the classifications adopted by the United States Patent and Trademark Office (USPTO).  This has created a roadblock for… Read More

Guest Author: Erica Paige Fang

The current California Model State Trademark Law provides for the registration of trademarks and service marks with the California Secretary of State and requires the classification of goods and services conform to the classifications adopted by the United States Patent and Trademark Office (USPTO).  This has created a roadblock for business owners in the cannabis industry because the USPTO will not register a mark where the goods and services are related to illegal drugs, and to date, cannabis is still classified as a Schedule 1 substance by the Drug Enforcement Agency and the Food and Drug Administration.

Section 2(a) of the Lanham Act bars registration of trademarks that consist of or comprise immoral, deceptive, or scandalous matter.  15 U.S.C. § 1052(a).  The Examiners at the USPTO have rejected as scandalous and immoral several trademark applications related to illegal drugs, citing the adverse health effects of drug use and the classification as a Schedule 1 substance.  California has refused state registration for cannabis related trademarks and service marks on the same basis.  California Assembly Bill 64 looks to change this and allow a certificate of registration that is issued on or after January 1, 2018 for marks related to medical and nonmedical cannabis goods and services that are lawfully in commerce under state law in the State of California.  The Bill proposes to add Section 14235.5 to the California Business and Professions Code, listing the following classifications that may be used for marks related to medical and nonmedical cannabis goods and services:  (1) 500 for goods that are medical cannabis, medical cannabis products, nonmedical cannabis, or nonmedical cannabis products; (2) 501 for services related to medical cannabis, medical cannabis products, nonmedical cannabis, or nonmedical cannabis products.

Up until this point cannabis businesses have been at a disadvantage because they cannot protect their brand.  This downfall has lead to trouble securing investors and growing the businesses.  The other recreational states, Washington and Oregon, have passed similar legislation to offer trademark protection to cannabis businesses in their respective states.  If AB-64 passes, cannabis businesses will want to have acceptable specimen of use ready and a way to date it back to the first use in commerce in order to make registration as smooth as possible.

AB-64 also looks to restrict the advertising of medical and non-medical cannabis and cannabis products.  Proposition 64 that was passed in November 2016 included some advertising restrictions, prohibiting the placement of billboards advertising cannabis that are located on an interstate highway or state highway that crosses the boarder of any other state.  AB-64 would expand this restriction to prohibit advertising on all interstate and state highways.  So while AB-64 may allow the State to grant trademark protection, where companies use that mark to advertise will have to comply with the state’s restrictions.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

 

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Six Of The Top Pitfalls Of Buying A Business And How To Avoid Them

This article first appeared on Forbes. Buying a business is similar to buying a home. If done correctly, it can have a daily positive impact on your life and increase your net worth. But just as you wouldn’t purchase a lemon for a home, if you purchase the wrong business, it can be a damaging drain… Read More

This article first appeared on Forbes.

Buying a business is similar to buying a home. If done correctly, it can have a daily positive impact on your life and increase your net worth. But just as you wouldn’t purchase a lemon for a home, if you purchase the wrong business, it can be a damaging drain on your financial and emotional resources.

I have helped with the purchase and sale of dozens of businesses, and I find that the same pitfalls come up over and over again. By knowing what they are and avoiding them, you’ll be happy with your business purchase not only on the day you take the keys but for many years to come.

1. Have a narrowly defined non-compete provision.

The last thing you want is to provide the jet fuel for the seller to open a competing business next door. To protect yourself, you should include a non-compete provision that prohibits the seller from participating in a competing business.

The provision should narrowly define the type of similar businesses the seller is prohibited from not only owning but also working in. In addition, the provision should include a set amount of time that the seller is prohibited from operating a similar business within a specific geographic scope. For example, if you are buying a restaurant, you would specify that the seller cannot invest or work in the restaurant industry for five years within 30 miles of the restaurant you are purchasing.

2. Run a lien search. 

A lien is an interest or a legal right that a creditor has on another person’s property. It’s important to make sure that there are no liens attached to the assets you are purchasing. By running a lien search, you can ensure that the assets are not encumbered by a lien, and you’ll know that a third party does not have any interest in the assets you are purchasing.

Have the escrow agent for the business purchase run the lien search, or if you are not using an escrow agent, hire a filing company to do so.

Investing a few hundred dollars in a lien search can pay enormous dividends as it ensures that any problems the seller has with creditors don’t become your problems with creditors.

3. Research the company’s financial history. 

Have a CPA “kick the financial tires” of the business to make sure the purchase price is supported by the company’s revenue and expenses. A solid CPA can not only help you determine whether the asking price for the business is fair but will look under the financial hood of the business to see if the numbers the seller is providing you are actually accurate.

4. Carefully review the commercial lease.

Often, one of the biggest assets of a business is its commercial lease. It is worthwhile to hire an attorney who specializes in commercial leases to highlight the key terms and negotiate fixes for any “gotcha!” clauses. Often sprinkled throughout a commercial lease are additional expenses you should be aware of to determine the true rental price of the property and not just the sticker price.

5. Hold the seller accountable.

Ideally, the seller will sign the purchase agreement not only on behalf of the company but also as an individual. Here’s why this helps you as the buyer: If the seller only signs the purchase agreement on behalf of the seller’s legal entity, that company could be dissolved and you would have no way to hold the seller accountable for the promises made in the agreement.

In contrast, if the agreement is also signed by the seller as an individual, you can still hold the seller accountable even if the seller’s legal entity is dissolved. By requiring not only the legal entity but also the seller to be personally accountable for the promises made in the purchase agreement, you can help make sure that the promises made in the agreement are fulfilled.

6. Have a dynamic purchase price.

If possible, you should consolidate a dynamic purchase price into the purchase agreement. For instance, instead of paying the full purchase price at closing, you can pay a portion of the purchase price then the rest of the balance after agreed-upon metrics have been hit or the seller’s obligations have been fulfilled. This way, you help make sure that the ultimate purchase price matches the value you get from the business.

Navigating the waters of buying a business can be tricky. There can be a variety of pitfalls that vary from deal to deal. But by following the above tips and working with an attorney and a CPA, you ensure that you’re buying a business that’s right for you. When you turn the key on the first day, you’ll have the returns you initially forecasted for many years to come.

The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.

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Taxation of a California Startup

When deciding how to incorporate a business entity, it helps to know how each entity is taxed at the state and federal level. Business structure, liability, management and tax considerations are all factors in determining the best entity for the business, however, because there are many entities that provide liability protection it’s important to carefully consider… Read More

When deciding how to incorporate a business entity, it helps to know how each entity is taxed at the state and federal level. Business structure, liability, management and tax considerations are all factors in determining the best entity for the business, however, because there are many entities that provide liability protection it’s important to carefully consider the annual taxes your startup may face.

For tax purposes, a business entity is treated as one of the following:

  1. Disregarded entity
  2. Partnership
  3. S-corporation
  4. C-corporation

Using broad strokes (only an overview), this post discusses the tax implications of each entity at the state and federal level. This information is pivotal when structuring a start-up enterprise and will be critical moving forward after incorporation because the tax rules that apply to each entity are quite different.

FEDERAL TAXATION

Disregarded Entity

A sole proprietorship is the simplest and most common form of starting a new business. In this type of business entity the owner and the business are one. There is no separate legal entity. For tax purposes, a sole proprietorship will include all sources of income when determining estimated tax payments.

A single member LLC (i.e. one owner) is treated as a “disregarded entity” and a multiple member LLC is treated as a partnership for tax purposes unless the LLC, whether single or multi-member, elects C-corp or S-corp tax status (more on this below).

A single-member LLC owns the assets of the entity for tax purposes and is also subject to the liabilities. Therefore, a single-member LLC, which is treated as a disregarded entity, does not file a US federal income tax return. Instead, the sole member of the LLC reports the LLC’s income and expenses directly on its own income tax return. In other words, a disregarded entity is essentially treated like a sole proprietorship, branch, or division of the owner.

In a single member LLC or a sole proprietorship the activities of the entity will generally be reflected on Form 1040 Schedule C for sole proprietorships, Form 1040 Schedule E, and Form 1040 Schedule F for LLCs.

Partnership

Even though LLCs are recognized as a type of business entity under state corporate law, LLCs do not have their own US federal income tax regime. For tax purposes, an LLC with multiple partners is classified as a C-corp, S-corp or a partnership. An LLC taxed as a partnership allows the LLC members (the “partners”) to have the profits and losses allocated directly to them without the entity level taxation that comes with a C-Corp. This allows the profits and losses to “pass through” directly to the owners.

One important note to consider, when a multi-member LLC is formed the default is to be taxed as a partnership, however, an LLC can elect to be taxed as an S-Corporation, or even a C-Corporation (rare) if desired.

LLCs that are subject to partnership tax rules are not responsible for actually paying the tax on business earnings, instead, LLCs prepare an annual partnership tax return on IRS form 1065. This report is for information purposes only, as each owner is responsible for paying its taxes after the LLC prepares each member a K-1, which documents the profits and losses attributed to each owner.

S-Corporations

An S-corporation is also a pass-through entity for tax purposes; therefore, it generally does not have to pay the entity level tax that C-corporations must pay (more on this to follow). Instead, the S-corp’s profits and losses pass through to its stockholders who include their respective share of those items on their income tax return.

Like standard partnership taxation, an S-corp is a pass-through entity. However, unlike standard partnership taxation an S-Corp has limitations around making S-Corp election. Under federal law, in order to qualify to by an S corporation the corporation must be (1) domestic, (2) have only allowable shareholders (ie. Individuals and certain trusts and estates), (3) have no more than 100 shareholders, (4) have only one class of stock, and (5) Not be an ineligible corporation.

Similar to an LLC, the S-Corporation does not pay income tax, but it is still required to file Form 1120S, which like the LLC taxed as a partnership is for information purposes only. Just like the LLC, the S-Corporation prepares a K-1 for each of it’s shareholders and it is the shareholders responsibility to report their respective profits and losses.

Having touched on both standard partnership taxation, and S-Corp taxation it’s worthwhile pointing out some key differences:

  • All partnership income is generally considered self-employment income to the owners while an S-Corporation, generally only the compensation (such as the salary, and not the distributions) is subject to employment tax
  • An S-Corporation must allocate profits according to share ownership, while an entity taxed as a partnership can generally divide profits in any way it chooses. For example, a shareholder in an S-Corporation who owns 10% of the stock, must receive 10% of the profits. This is not necessarily true in an LLC taxed as a partnership.
  • Finally, entities taxed as a partnership do not qualify for certain statutory benefits which are available to C and S-Corporations. For example, a partnership cannot offer incentive stock options to employees, but they can offer a profit interest (i.e. share of profits, but not ownership) to achieve a similar tax result of a stock option.

C-Corporation

C Corporations are separate entities for both state law and tax purposes. C-Corporations are taxed annually on their earnings, and the shareholders are taxed on these earnings when distributed as dividends (this is considered the dreaded “double taxation”). Once all of the corporation’s deductions and credits have been claimed, the remaining income is normally taxed at using the corporate income tax rates. Unlike individual tax rates, the corporate tax rate is not adjusted every year to account for inflation.

Unlike a disregarded entity, a partnership or an S-Corporation a C-Corporation pays its own tax as if it was an individual tax payer. A C-Corporation reports its income and claims its deductions on Form 1120, and the shareholders report any distributions provided to them on their individual tax return.

CA STATE TAXATION

As a sole proprietor, you will report all of your state and federal tax on your Schedule C.

All California LLCs not classified as a Corporation for tax purposes must pay the annual minimum franchise tax of $800, and an LLC fee (more on this below) payable each year to the Franchise Tax Board. The LLC fee is $900 if the LLC makes between $250,000 and 499,999, it goes to $2,500 if the LLC makes between $500,000 and $999,999, followed by $6,000 if it makes between $1,000,000 and $4,999,999 (and on from there).

A California S Corporation must pay the $800 minimum franchise tax as well as 1.5% of net income earned (take note that the LLC fee is based on gross receipts, while an S-Corporation is based on net income).

Finally, a California C Corporation must pay the annual minimum franchise tax of $800 as well as 8.84% of it’s net income.

CONCLUSION

When structuring an entity it is very important to work with an accountant and lawyer who can help you understand anticipated taxes. We routinely strategize during the formation stage, and we’d be happy to talk more about your upcoming legal needs at 415 633 6841 or at info@bendlawoffice.com.

This article was co-authored by Alex King and Rishi Gupta.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

 

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Marijuana Is Legal! But Business Is Not?

Marijuana Is Legal! But Business Is Not? How to Build Your Recreational Cannabis Brand Before Your License to Sell Is Issued Guest Author: Rachel Davey Last Tuesday, Californians voted YES on Proposition 64 to legalize recreational use of cannabis for adults, ages 21 and over. Massachusetts and Nevada also approved recreational marijuana, and many other… Read More

Marijuana Is Legal! But Business Is Not?

How to Build Your Recreational Cannabis Brand Before Your License to Sell Is Issued

Guest Author: Rachel Davey

Last Tuesday, Californians voted YES on Proposition 64 to legalize recreational use of cannabis for adults, ages 21 and over. Massachusetts and Nevada also approved recreational marijuana, and many other states took strides toward complete legalization. While Prop. 64’s passage was a certain victory for prospective non-medical cannabis retailers, they will have to wait to jump into business.

Immediate Changes

  • Adults over 21 have new rights. They may possess or transport (up to 1 oz.), grow (up to 6 plants, inside home), and use recreational marijuana (in private).
  • There could be a year-long gap before selling non-medical marijuana is legal. State-issued licenses are required to sell and have yet to be issued.
  • The Administration. The new “Bureau of Marijuana Control” will usurp the previous “Bureau of Medical Marijuana Regulation.” It will promulgate and enforce planting, licensing, distribution, and sales rules consistent with Prop. 64.
  • Regulatory Overload- Tempered. 64 states that rules and regulations should not be “unreasonably impracticable” and they must be “based on best available evidence” and mandate only “commercially feasible procedures.”
  • “Gifting” Medical Marijuana to Non-Medical Users. If “gifting” transactions are discovered, responsible medical dispensaries could be shut down, or barred from obtaining a state license to sell non-medical cannabis in the future.
  • Selling Marijuana Without a License Can Result in a Misdemeanor Charge with Up to 6 Months in Jail and $500 in Fines.

Changes by January 1, 2018.

  • Licenses to Sell Issued; Business Begins. 64 only allows non-medical marijuana to be sold by state licensed businesses. Growing, processing, or transporting marijuana for sale also requires this license. The state must begin issuing sales licenses for recreational retailers no later than January 1, 2018.
  • Cannabis Tax. State commercial cultivation and retail excise taxes take effect. Cities and Counties may vote to adopt additional taxes.

The Federal and State Divide: Trademarking Cannabis Goods and Services

There is still a federal and state divide. Federal law will continue to designate marijuana as an illegal drug. And as an illegal drug, cannabis and its related goods and services are not “trademarkable” subject matter that can form the basis of a federal trademark application in the United States Patent and Trademark Office (USPTO).

However, in California, where recreational marijuana is now legal, applicants may file California trademark applications with the Secretary of State. But there is one caveat: California requires “actual use” of the word mark or logo to file a trademark application, rather than the USPTO requirement of “good faith intention to use [within 6 months]” in commerce.

For prospective recreational cannabis sellers, this might seem like impasse: non-medical marijuana names and logos can’t be trademarked until used in commerce, and they can’t be used in commerce until the state issues a retailer a license to sell—which might begin to happen in January 2018. However, waiting to take action in selecting your mark could be fatal to developing your brand.

Before falling in love with, or investing any start up capital into, a brand name for your non-medical marijuana shop, you should think deeply about your chosen name. Not only must you be the “first to use” the mark in conjunction with some goods or services, but also the name itself must have sufficient trademark strength, to be eligible for protection. There are three different levels of “strength” as to some word mark in conjunction with some goods or services:

  1. Inherently Distinctive. These words are the strongest, and are automatically eligible for protection. These words are often arbitrary or fanciful. For example: “Fat Cow” computers is arbitrary, but “Fat Cow” ice cream is not, because it is descriptive of the product. And the word “Google” for a search engine is fanciful.
  2. A descriptive word can only be protected if it becomes distinctive of the Applicant’s goods or services—that is, a substantial segment of the buying population associates the name with its source. The words themselves describe the qualities or characteristics of a good or service (for example, “Park’N Fly” as a service mark for an airport parking and shuttle bus service), describes a geographic location, or is a surname.
  3. Generic words have no power and are not registerable. These words are the generic words for the goods or services they to which they attach. For example, “Car Wash” for a car wash business is generic. One recently-generic term you might be familiar with is “Xerox” for copy machines. The consuming public referred to copying as “Xeroxing” so uniformly, that the mark lost its power. Consumers no longer identified “Xerox” as the source of the copying machine; the term was used ubiquitously to describe copy machines of all brands.

Potential recreational cannabis retailers should seek out trademark guidance specific to their company’s needs early, in order to select a mark that has not been taken and is eligible for trademark protection, so that they can start building their brands as soon as they are licensed to do so by the state.

If you are in the cannabis industry and are looking to prepare for the effects of Proposition 64, we are happy to help you navigate the new waters.  Please give us a call at (650) 271-9395 or email us at info@blgtrademarks.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article. 

 

 

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The Importance of Website Privacy Policies in California

As companies increasingly include an online presence, or are only located online, a common question is: do I really need a privacy policy? Unless you are operating a non-interactive website, such as a blog that has no way for users to enter any information, the answer in California is nearly always “definitely.” Who needs a… Read More

As companies increasingly include an online presence, or are only located online, a common question is: do I really need a privacy policy? Unless you are operating a non-interactive website, such as a blog that has no way for users to enter any information, the answer in California is nearly always “definitely.”

Who needs a privacy policy

Under the California Online Privacy Protection Act of 2003, any operator of a commercial website, mobile application, or online service that collects “personally identifiable information” from its users is required to post a privacy policy on its site and comply with that policy. “Personally identifiable information” means any individually identifiable information about a user, and includes data such as a user’s name, address, email-address, telephone number, social security number, and any other identifiers that permit the user to be contacted physically or online. This means that if a site is collecting payment information from users it absolutely needs to have a privacy policy, but even if a site is only collecting email addresses to add users to an email list, this still requires a privacy policy.

Privacy policy requirements

In order for a privacy policy to be compliant with the law, it must:

  • Identify the categories of personally identifiable information that the website collects;
  • Identify the third-party persons or entities with whom the operator may share the collected personally identifiable information;
  • Describe how users can review and request changes to their personally identifiable information;
  • Describe how users are notified of changes to the operator’s privacy policy for the website;
  • Identify the effective date of the privacy policy;
  • Disclose how the operator responds to web browser “do not track” signals; and
  • Be conspicuously posted on the operator’s website.

Moreover, if a site or online service is directed to children under age 13 or collects information about children under age 13, the Children’s Online Privacy Protection Rule imposes additional notice and consent requirements.

Consequences of not having a privacy policy

A website that does not have a privacy policy that collects personally identifiable information from users is in violation of the law, and therefore could be prosecuted by the government. Additionally, the California Attorney General’s Office recently released a new online form that allows website users to report sites that do not have privacy policies or whose policies do not comply with the legal requirements, which should increase the likelihood that violators will be penalized.

Not only does the privacy policy need to comply with the legal requirements, but the website owner must comply with the procedures and disclosures listed in its policy and update the policy if its procedures change. A site operator’s failure to comply with the policy could bring rise to a lawsuit by a user, and users can also report these types of violations to the Attorney General’s Office.

Conclusion

A well-drafted privacy policy not only ensures that the online company is complying with the law, but it also protects users and site owners by providing a greater level of understanding regarding how users’ information may be shared and updated. Additionally, all online companies should strongly consider posting Terms of Use on their site to make sure that they are adequately informing users about their policies and protecting themselves from potential lawsuits or intellectual property infringement.

Bend Law Group can assist online companies, including mobile application developers, by drafting privacy policies and terms of use that accurately describe the company’s practices and comply with the legal requirements. If you would like to talk more about your online legal needs or have any questions, please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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