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The Top 7 Ways The New Tax Law Could Affect Your Startup

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By: Doug Bend This article first appeared on Forbes. On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 into law. The Act was the biggest change in tax laws in more than 30 years and brought about many changes for individuals and companies. Overall, we believe that the changes will benefit new… Read More

By: Doug Bend

This article first appeared on Forbes.

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 into law. The Act was the biggest change in tax laws in more than 30 years and brought about many changes for individuals and companies. Overall, we believe that the changes will benefit new businesses by lowering tax rates, accelerating the depreciation of equipment and eliminating the corporate alternative minimum tax. Here are the top seven ways the new tax law could affect your startup:

    1. Lower Taxes for C-Corporations: Most startups that are looking to raise third-party capital to grow are C-corporations. Under the new tax law, the corporate tax rate will drop from 35% to 21% starting this year (See Section 13001 of the Act). Clearly, income-producing corporations will retain more profits. For startups, which generally do not generate profits in the early years of the business, this change will likely be minimal but still beneficial.
    2. Lower Taxes for Certain S-Corporations and LLCs: Startups that are S-Corporations or LLCs might qualify for the 20% deduction on the income attributable to that entity as long as the business or service isn’t listed on the exclusions. Excluded businesses and services include consulting, health, law, athletics, financial services, brokerage services industries or businesses where the principal asset is the reputation of the employees. Excluded business can still take the 20% deduction if their taxable income is less than the threshold amount — $157,500 for single filers and $315,000 for joint filers. The deduction is fully phased out when income exceeds $207,500 for single filers and $415,000 for joint filers for 2018 tax years. In addition, the 20% deduction is phased out if you have W-2 income above $157,500 or $315,000 for joint filers. Thus, excluded businesses owners cannot increase their wages to decrease the S-Corporation income to circumvent the threshold amounts. Nor can you have wage income from other sources that exceed the threshold and still avail yourself of the deduction.
    3. Accelerated Depreciation of Equipment:Previously, startups had to depreciate the cost of equipment over the asset’s useful life. Under the new tax law, 1 million in equipment can be fully deducted in the year it is purchased. This means you generally can expense twice the amount in 2018 through 2022 than what you did in 2017. If you have substantial fixed asset cost and current tax liabilities, this benefit provides significant tax savings. After 2022, the increased expensing phases out.
    4. Elimination of Entertainment and Transportation Expense Deductions:Entertainment expenses, such are sporting events, are no longer deductible. Although business meals remain 50% deductible, employer-provided eating facilities are now subject to the limitation. Expenses for employer-provided transportation benefits, such as mass transit passes or providing transportation (related to commuting to/from your residence to work) are disallowed. You should note that the bicycling commuting reimbursements exclusion is suspended under Section 11047 of the Act.
    5. Elimination of Corporate AMT: The alternative minimum tax was eliminated from corporate taxation. (The individual component was drastically raised.) Previously, many unwary entrepreneurs were subjected to the AMT by exercising incentive stock options (ISO) resulting in unrealized gains. Unrealized ISO gains and state income taxes among other items are “preference items” or additions to taxable income under the AMT system. Going forward, the act raises the exemption amount by almost 30%, which will allow more entrepreneurs to escape the AMT trap.
    6. Repatriation of Overseas Profits:Repatriated profits will be taxed at 8% for non-cash assets and 15.5% for cash. This is a deemed repatriation so you are taxed regardless of whether you actually repatriate the funds. In addition, most companies will need to record income tax expense for profits, which were permanently deferred historically.
    7. Legal Entity Choice: Despite all these changes, it’s just as important to recognize what will likely stay the same. Most startups that plan to raise third-party capital are likely to continue to be Delaware C-Corporations as venture capitalists haven’t indicated that they’ll no longer prefer to invest in Delaware C-Corporations. While the Tax Cuts and Jobs Act of 2017 will increase the tax liability for some individuals, overall the law will benefit most startups.

This article was co-authored by Doug Bend and Andrew McCormac. Andrew is a consulting CFO at Early Growth Financial Services.  Early Growth Financial Services provides accounting, CFO, tax and valuation services to startups. Doug is the founder of Bend Law Group, PC, a law firm focused on advising small businesses and startups. 

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

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Amazon Brand Registry: Add Trademarks To The Cart

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By Vivek Vaidya The retail industry has been revolutionized by online marketplaces. Amazon leads the charge, with programs like Amazon Prime making it easier to purchase products online than going to a brick-and-mortar stores. The rise of Amazon has also caused an increase in counterfeiting, trademark infringement, and the unauthorized resale of products on the… Read More

By Vivek Vaidya

The retail industry has been revolutionized by online marketplaces. Amazon leads the charge, with programs like Amazon Prime making it easier to purchase products online than going to a brick-and-mortar stores.

The rise of Amazon has also caused an increase in counterfeiting, trademark infringement, and the unauthorized resale of products on the platform. Third parties are selling products using the goodwill of others, resulting in lost sales and licensing revenue to the true owner of the brand. Previously, the only option for parties who believed their products were the victims of counterfeiting was to prove the infringement to Amazon. There was no burden on the seller to prove that they were not violating the law. There has also been a growing concern around fraudulent complaints by parties who are not the true owner of a brand.

In an effort to streamline the thousands of complaints filed each day, Amazon has launched the Amazon Brand Registry. The Amazon Brand Registry allows brand owners, manufacturers, distributors, and resellers to control their content and marketing materials, including their titles, product descriptions, and product photographs. Most importantly, successful registration with the Registry establishes a brand owner’s valid ownership of a trademark with Amazon and provides an expediated process for causing Amazon to remove unauthorized sale of products bearing its trademarks. It also serves as a deterrent and a defense against fraudulent complaints.

The threshold requirement for joining the Amazon Brand Registry is trademark registration with the United States Patent and Trademark Office (USPTO). Not only can the store name be registered as trademark with the USPTO, but so can the individual products that are being sold, along with any logos and tag lines that are used. Copyrights registered with the U.S. Copyright Office can also be included, allowing copyright owners to quickly effect the removal of infringing photographs, videos, and other content.

If you sell your goods on Amazon, registering your trademarks with the USPTO and then with the Amazon Brand Registry is extremely important in the new retail landscape, and will provide great return on your investment. The process can be complicated, but we’re here to help with the logistics of protecting your intellectual property on Amazon and beyond. Get in touch with us at info@bendlawoffice.com or (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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The Top Seven Things For Which A Business Owner Can Be Held Personally Liable

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By: Doug Bend & David Nied This article first appeared on Forbes. In general, the owner of a legal entity cannot be held personally liable for the liabilities of their business. That being said, business owners should be wary of the following seven items that they can still be held personally liable for: 1. Bank… Read More

By: Doug Bend & David Nied

This article first appeared on Forbes.

In general, the owner of a legal entity cannot be held personally liable for the liabilities of their business. That being said, business owners should be wary of the following seven items that they can still be held personally liable for:

1. Bank Loans

Most bank loans for new business owners require a personal guarantee. If a business owner provides that personal guarantee and the company is unable to meet the loan obligations, the bank can hold that owner personally responsible for the loan.

2. Security Filings

When raising a round of capital, it is important to make sure that any required security filings are made in each state in which there is an investor.

If the proper security filings are not made and the company does not do well, the investor can have their investment rescinded and the owner of the company can be held personally responsible for the investment amount.

3. Contracts

Business owners should make sure that they sign all contracts on behalf of their legal entity and not themselves as an individual. In the first paragraph of each contract, it should be clear that the agreement is being made on behalf of the company.

Similarly, in the signature line, the owner should sign the agreement on behalf of the company and not themselves as an individual.

4. Government Taxes

The government can sometimes come after the business owner for any unpaid taxes. In particular, when a corporation fails to withhold proper payroll taxes, the person responsible for withholding those taxes — in many cases, the owner of the business — can be held personally liable for the unpaid taxes.

5. Wages

At least in California, owners of a business can be held personally responsible for any unpaid employee wages plus late payment penalties. This includes liability for failing to pay minimum wage, failing to pay overtime, failing to provide mandatory meal and rest breaks and other wage violations.

While officers and directors may have a claim for indemnification for such personal liability, that safety net does not apply to the owner of the business.

6. Entity Maintenance

A court is more likely to pierce the corporate veil and allow an aggrieved party to go after the personal assets of an owner if the legal entity is not being properly maintained, such as having annual shareholders and board of directors meetings.

Even though courts weigh many factors to assess alter-ego liability, failing to maintain current, accurate and complete books and records that document required meetings and events is a surefire way to get a judge to look askance at your plea for limited liability.

7. Co-Mingling Funds

In addition, a court may pierce a company’s corporate veil if the business owner is co-mingling personal and business funds. Do not be tempted to use your corporate credit card for personal, non-business related expenses — it may open the door for a creditor to march into your personal bank account.

If properly maintained, a legal entity can provide a business owner with a great deal of legal liability protection. By being wary of the above pitfalls, a business owner is more likely to prevent their personal assets from being put in jeopardy by the activities of their business.

This article was co-authored by David Nied of Ad Astra Law Group, LLP and a member of Forbes Legal Council.

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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Can Shareholders Waive Directors’ Fiduciary Duties?

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In California, directors and officers have fiduciary duties, or legal obligations, that they must adhere to when making decisions for the corporation and the shareholders. If they do not fulfill their fiduciary duties, the directors and officers can be sued. Therefore, in order to minimize their risk, directors and officers may try to convince shareholders… Read More

In California, directors and officers have fiduciary duties, or legal obligations, that they must adhere to when making decisions for the corporation and the shareholders. If they do not fulfill their fiduciary duties, the directors and officers can be sued. Therefore, in order to minimize their risk, directors and officers may try to convince shareholders to release them of these duties. Such efforts are illegal under California law.

Background on Fiduciary Duties

Fiduciary duties imposed on directors and officers of corporations generally fall into one of two categories: duty of loyalty and duty of care. The duty of loyalty requires directors and officers to always act in the corporation’s best interest and forbids them from engaging in “self dealing,” or taking advantage of their position in the corporation to benefit their own interests. The duty of care obligates directors and officers to carry out their duties as a normal prudent person would do under the circumstances, including making sure that they are completely informed before making decisions.

If a director or officer makes decisions for the shareholders or the corporation in a manner that does not meet these obligations, then the shareholders can bring a lawsuit against the director or officer for breach of a fiduciary duty. Additionally, in small, non-public corporations, majority shareholders can generally control the corporation by electing themselves as directors and officers, thereby “freezing out” minority shareholders. Therefore, directors and officers of small or close corporations are generally held to a higher standard for fiduciary duties.

Waiver of Fiduciary Duties is Void

California statutory law and common law expressly prohibit the waiver of fiduciary duties for directors and officers. In particular, California Corporations Code section 204(a) states that a corporation’s Articles of Incorporation may not “eliminate or limit the liability of directors” for acts or omissions that violate the directors’ fiduciary duties to the corporation and shareholders. Furthermore, section 1668 of the California Civil Code provides that any contracts (such as a shareholders agreement) that “exempt any one from responsibility for his own fraud, or willful injury to the person or property of another” are against public policy. Based on these statutes and prior court cases, the California Court of Appeals in Neubauer v. Goldfarb held in 2003 that “waiver of corporate directors’ and majority shareholders’ fiduciary duties to minority shareholders in private close corporations is against public policy and a contract provision in a buy-sell agreement purporting to effect such a waiver is void.” As a result, directors and officers cannot limit or avoid their fiduciary duties through the company’s incorporation documents or another contract.

Minimizing Risks for Directors and Officers

Although directors and officers cannot obtain a waiver from shareholders of their fiduciary duties, there are a number of ways to minimize the risk of a shareholder lawsuit:

1. Fulfill duty of loyalty

Directors and officers should make sure that all decisions are made in the best interests of the corporation and all the shareholders, not just one or a small number of shareholders. Robust, detailed written board and/or shareholder resolutions or minutes documenting the reasons for a decision are recommended so they can be provided to the shareholders and also as evidence in the event of a lawsuit.

2. Fulfill duty of care

Directors and officers should obtain and review all information necessary for making a decision and, when helpful, either include this information in board resolutions or refer to it. Again, the more detailed the board and shareholder resolutions or minutes, the better the historical and legal record that is created. All shareholders, even minority shareholders, have the right to request information from and about the corporation with reasonable cause. Therefore, while directors may not want to include confidential company information in a resolution that is being freely circulated, otherwise it is prudent to add whatever supporting information was used for a decision to a resolution since it is open to shareholders anyway.

3. Sign indemnification agreements between the company and the directors

In the event that a director acts in good faith and is still sued, the company is then agreeing to pay for the lawsuit.

4. Provide E&O (“Errors and Omissions”) insurance for directors

The financial viability of this option generally depends on the size of the company and can be discussed with a business insurance broker.

In conclusion, although shareholders cannot waive their right to sue directors and officers for breach of fiduciary duties, directors and officers can protect themselves from such a lawsuit by making all decisions in the best interests of the corporation, being properly informed before making any decisions, and documenting all decisions and reasoning in writing thoroughly.

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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Preparing an Employment Agreement

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By Doug Bend When a small business or startup considers offering an employment position to a candidate, it’s common practice to create an employment agreement, or offer letter, which stipulates the general terms of the relationship. Before presenting such an agreement to a candidate, make sure you consider a couple of key provisions: The position… Read More

By Doug Bend

When a small business or startup considers offering an employment position to a candidate, it’s common practice to create an employment agreement, or offer letter, which stipulates the general terms of the relationship. Before presenting such an agreement to a candidate, make sure you consider a couple of key provisions:

  • The position and title, including whether the offer is for full time employment, and the expected days and hours the candidate should fulfill
  • Whether or not the position is considered exempt or non-exempt, as defined by the Fair Labor Standards Act
  • The rate of pay and if the offer includes any equity compensation
  • The term of employment; the law presumes the relationship is “at will” (See Cal. Labor Code 2922) unless specifically changed within the agreement
  • The statement of benefits being offered, if any.

To help highlight the “at-will” nature of the relationship, many employers will bold or place the at-will provision in all caps. Speaking generally, if the employer provides a clear at-will provision within an employment agreement or offer letter, it hinders the ability of the employee to later claim there was an inferred agreement that the employee could only be terminated for cause (See Guz v. Bechtel Nat. Inc., 24 Cal.4th 317 (2000)).

Under CA law, certain information must be given to employees at the time of hiring. For non-exempt employees, the employer must give specific information about pay rates and paid sick leaves (See Cal. Labor Code Section 2810.5). Any changes to this information must be provided in writing to employees within seven (7) days of implementing the changes. For employees whose compensation includes commission, the employer must provide a written commission agreement stating the method for computing and paying the commission (See Cal. Labor Code Section 2751).

Finally, it should be noted that for a CA employer, non-compete agreements are generally unlawful. However, a prudent employer can create some indirect non-compete provisions, such as including proper non-disclosure and confidentiality clauses within the employment agreement or offer letter. Furthermore, employers can also include non-solicitation language that would prohibit an employee from recruiting co-workers after the employee leaves.

The information provided above is far from an exhaustive list. Employers should work with an attorney to ensure they are properly following state and federal rules to avoid costly mistakes down the line. If you’re interested in speaking to an attorney at Bend Law Group, please reach out at info@bendlawoffice.com, or give us a ring 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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Is GOOGLE Too Generic To Be A Trademark? Well, Let’s “Google it!”

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By: Vivek Vaidya and Nidhi Kaushal Can I get some Kleenex please! Do you have any Aspirin? How about a Q-Tip? Can you Xerox this for me? We often use popular brand names in our daily life as a stand-in for certain products or services. While it may be a company’s dream to turn its trademark… Read More

By: Vivek Vaidya and Nidhi Kaushal

Can I get some Kleenex please! Do you have any Aspirin? How about a Q-Tip? Can you Xerox this for me?

We often use popular brand names in our daily life as a stand-in for certain products or services. While it may be a company’s dream to turn its trademark into a household name, it could also could result in the death of a brand.

A trademark provides protection to the names, slogans, and logos that distinguish a company’s goods and services from others. However, trademarks that become “generic” lose their distinctiveness, and in turn lose their trademark protection. A trademark becomes generic when the general public start identifying similar products or services through that single name. For instance, Kleenex has become a generic term for tissues, and Xerox has become generic for photocopying devices. When the product or service with which the trademark is associated acquires a substantial market dominance or mind share of the public, it can become victim to “genericide.”

Google faced a situation where two individuals, David Elliot and Chris Gillespie, filed a request for cancellation of the GOOGLE trademark on the grounds that it is generic. They claimed that the word GOOGLE has become synonymous with “search the Internet,” and Google should lose its trademark protection.

In May 2017, the case was heard by United States Court of Appeals for the Ninth Circuit. The court ruled that the plaintiffs were unable to show that there is no other way to describe “internet search engines” without calling them GOOGLE. The court reasoned that “not a single competitor calls its search engine a GOOGLE and because members of the consuming public recognize and refer to internet searches engines using other terms, the plaintiffs have failed to show that there is no available substitute for the word google as a generic term”. However, the court of appeals recognized the possibility that over the time a valid trademark becomes the victim of genericization when the name has become an exclusive descriptor that makes it difficult for the competitors to compete unless they use that name.

The case was submitted to the Supreme Court for review. However, in October 2017, the Court declined to hear the plaintiffs’ petition.

Companies spend large amounts of resources to protect and maintain their trademarks. This victory is surely a celebration for GOOGLE and other companies that could fall into the “genericide” trap. However, this issue is on-going, and this case likely marks the beginning of many challenges to the trademark rights of widely used global technology companies.

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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Five Key Questions To Ask When Creating Law Firm Equity Agreements

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This article first appeared on Forbes. When drafting an equity agreement, partners need to be prepared for many different issues and eventualities. That’s why it is necessary to carefully consider the terms of the agreement, from the allocation of profits and losses to the systems in place when it comes to removing a partner. We… Read More

This article first appeared on Forbes.

When drafting an equity agreement, partners need to be prepared for many different issues and eventualities. That’s why it is necessary to carefully consider the terms of the agreement, from the allocation of profits and losses to the systems in place when it comes to removing a partner.

We have helped set up several law firms, and these are the five key questions that we find partners should consider:

1. How will the profits and losses of the firm be allocated?

Many law firms equally split the profits and losses. An advantage to this approach is that the partners equally enjoy the ups and downs of the firm. For example, if the firm wins a big contingency case, all of the partners benefit.
Other firms use an “eat what you kill” system where each partner gets their net profits, but is also responsible for their losses. A pro to this approach is it may lead to less friction over time between the partners who want to work 70 hours a week and those who want to spend more time with their families, traveling or on the golf course. An eat-what-you-kill item might also create a framework that leads to less resentment if a partner decides to take off more time with a newborn child, to help a sick family member, or if they have expensive spending habits.

2. How will decisions be made?

Partners also need to decide what decisions will require a majority vote of the partners, a supermajority vote (anywhere from 67-90%) of the partners or the unanimous consent of the partners.
For example, if a majority of partners want to promote an associate attorney to be a new partner, is that sufficient?
It is important to be very clear which items require which voting threshold so there is no dispute over whether an item requires a supermajority or unanimous vote, as opposed to merely a majority vote.

3. How will equity be valued when a partner leaves?

Some law firms value a departing partner’s ownership using a formula in the partnership agreement, such as 1.0-1.5 times the prior year’s gross revenue. Other firms have a business appraiser value the ownership interest of a partner who leaves the firm.
It is important to not only plan for how the fair market value of the equity interest will be calculated, but also how the purchase price will be funded to make sure the payments do not overburden the remaining partners.

4. How can a partner be removed?

Some law firms require a majority vote of the remaining partners to remove a partner whereas other firms have a higher bar for removing a partner.

5. What powers will the managing partner have?

Some law firms like to set checks and balances on the powers of the managing partner. For example, any expenditure above $X requires the approval of a majority of the partners.

There is no one-size-fits-all answer to these questions. The key is partners having a clear equity agreement in place that provides a roadmap when these and other issues inevitably occur.

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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