27
Feb. '20
Is it better to structure your business as a small business corporation (“S corporation” or “S corp”) or an LLC? What are the potential costs and benefits of electing to be taxed as an S corp? And what is an S corp anyway? If you’ve wondered about any of these questions, read on because this article provides a general overview of S corps. Let’s start with what an S corp is (and isn’t). An S corp is not a type of business entity, but a special tax election made available under Subchapter S of the U.S. Internal Revenue Code. So, unlike an LLC, LLP, corporation, or even a cooperative, an S corp is not created by filing a document with a secretary of state or similar agency to create a state-level entity. Instead, both LLCs and corporations - provided they meet certain eligibility requirements (discussed below) - can make an election to be taxed under Subchapter S by filing Form 2553. There is no fee for filing Form 2553, but there are important consequences…
28
Jan. '20
Today is Data Privacy Day, an international holiday recognizing and promoting the importance of privacy and security for our personal and other sensitive information. Last Data Privacy Day, I wrote about Colorado’s privacy law and its requirements related to security and data breach notification. To learn more about the Colorado privacy law, see the previous articles titled Colorado Data Privacy Law (2018 Update) and Colorado Data Breach Notification (2018 Update). This year the business world is abuzz with news about a different data privacy law – the California Consumer Privacy Act (CCPA). Although enacted in 2018, the law did not go into effect until the first of this month. As a result, businesses only now are having to figure out how to comply with this new law. The CCPA is an important legal development deserving of the attention it has received. It has been described, for example, as ushering in a "new era of consumer privacy…
8
Nov. '19
A limited liability company (LLC) is supposed to protect your personal assets from the liabilities of your business. That’s why it’s called a limited liability company. But, for various reasons, some people have suggested that a single-member LLC (SMLLC) does not actually provide asset protection for its owner (member). This article discusses the issue of whether a SMLLC protects the personal assets of its member. Here's the short answer: Colorado courts understand that a principal reason for creating an LLC is to obtain liability protection and, accordingly, a SMLLC can protect personal assets from liability. But the longer answer is a bit more complex than that. The first thing to understand is that simply forming a separate limited liability entity – of any kind and with any number of owners or managers – is not by itself enough to guarantee the protection of the personal assets of its owners. A court may lawfully "pierce the veil" of any entity; that is, any entity may be legally ignored…
24
Oct. '19
When filing Articles of Organization with the Colorado Secretary of State to form a limited liability company (LLC), in the midst of providing various addresses, you are asked whether you would like to form your LLC as 'member managed' or 'manager managed.' This organizational choice is much more complex than it appears at first and deserves careful consideration. In my experience, when a single individual or even a few people form an LLC without the assistance of experienced counsel, their LLC is typically created as a member-managed LLC. I imagine the thought process is something like this: “If the members are going to be making making the management decisions anyway, why create a separate class of managers? Isn’t that a needless complication?” This logic does make sense for some businesses. But, generally, it is adventageous for both single- and multi-member LLCs to be organized as manager-managed companies. Although there are also some…
9
Sept. '19
Should purpose-driven or mission-oriented entrepreneurs in Colorado launch their startups as, or convert their existing businesses into, public benefit corporations ('PBCs')? PBCs have been grabbing lots of attention lately. The Business Roundtable (an association whose members are CEOs of the largest U.S. corporations) recently announced their collective commitment to pursuing not only stockowner wealth, but also value for all stakeholders – from their employees and customers, to their communities and the environment, more generally. This has generated quite the buzz not only in the business news, but it is also creating front-page and other mainstream headlines. And it is both significant and emblematic of the times that the largest corporations in the world are proudly and publicly pronouncing that they are changing their ways, from a pure profit focus, to pursue widespread social and environmental benefits. Yet even before this pronouncement, PBCs were fast becoming a hot topic…
3
Aug. '19
Purpose-driven enterprises and public benefit corporations (PBCs) have emerged in the last decade as part of a growing alternative to business as usual. With new options, savvy entrepreneurs are now forming and operating successful businesses as a force for good. Social entrepreneurship, environmental sustainability and stakeholder (or conscious) capitalism are paving a way forward, not just in the short term but for the long term. Although the first PBC law was not passed until 2010, corporations historically were formed for a specific purpose and were expected to create a public benefit. As a result, PBCs are in some ways returning corporations to their traditional function. Thirty five (35) states including Colorado now have statutes that permit the formation of PBCs – with more and more states jumping onboard each year. Thousands of businesses around the globe now designate themselves as PBCs. Well-known examples include: Ben & Jerry’s, Cabot, Kickstarter, King Arthur Flour, Method, Patagonia, and Seventh Generation. But a business does not need to be as large…
1
July '19
Last Monday, in a 6-3 decision, the Supreme Court issued its opinion in Iancu v. Brunetti, holding that "the Lanham Act's prohibition on registration of 'immoral or scandalous' trademarks violates the First Amendment." As a result, there is no longer a bar on registering marks with the United States Patent and Trademark Office ("USPTO") that consist of or comprise offensive, obscene, profane, vulgar, or otherwise scandalous words or images. In making this determination, the Court reexamined the logic of its decision in Matal v. Tam, where the Court had invalidated the provision of the Lanham Act barring registration of disparaging marks. In Tam, the Court found that the bar on disparaging marks engaged in viewpoint discrimination and therefore violated the First Amendment of the U.S. Constitution. After all, marks that were disparaging of other persons could not be registered with the USPTO, while those that praised or were neutral towards others were, indeed, registrable. As a result, the provision unconstitutionally favored certain viewpoints and disfavored others. In Brunetti, the Court extended…
7
Jun '19
Startups and small businesses are often cautious of taking on additional employees. This may leave potential employers wondering whether they can simply reach an agreement with individual workers who will be classified as independent contractors instead of employees. However, in Colorado as elsewhere, things aren’t quite so simple. In Colorado, there is a presumption that workers are employees, but state and federal laws classify individuals as either an employee or an independent contractor based on a variety of factors that are not always the same. Regardless of the relevant factors, the classification will always depend on the so-called “economic realities” of the situation, as opposed to the strict language of an agreement. (But don’t stop reading now thinking that these agreements don’t matter – see below!) The Tenth Circuit and Colorado courts have repeatedly been willing to disregard purported independent-contractor agreements when the facts of the situation suggest an employment relationship. In…
25
Apr '19
You've designed a website for your business. Or, maybe you've developed a mobile application (app) to help you connect with your customers. If so, you may be wondering whether you should have a privacy policy. If you're interested in learning more about whether you need a privacy policy for your website or mobile app, below are the top five (5) reasons to develop and implement a solid privacy policy. 1. Required by Law: For many businesses it is legally required that they conspicuously post a privacy policy on their website or display one in their mobile app. While this is not true for all businesses, when it is, this is pretty clearly the top reason to have a privacy policy. Failure to comply with data privacy laws can lead to fines and other penalties. So who is legally required to have a privacy policy? Currently, there is no general federal requirement - and Colorado does not specifically require - that consumers be provided with a privacy policy. However, several states do require privacy policies and a business does not have to be located in one of those states to be subject to those laws. Perhaps the most important of these privacy laws is also the oldest: the California Online Privacy Protection Act…
3
Apr '19
At the end of March, the Fifth Division of the Colorado Court of Appeals upheld the dissolution of four limited liability companies (LLCs). The only members of the LLCs were a mother and son, and their relationship had deteriorated to the point that they each had sought judicial assistance to help resolve their business disputes. Throughout its various stages, the litigation has taken more than six years and had already reached the Court of Appeals in September of 2014 when the court clarified the standard for judicial dissolution. It was the first time a Colorado appellate court had considered the matter. Colorado Revised Statute (C.R.S.) § 7-80-810(2) governs the judicial dissolution of an LLC and it provides that an LLC may be dissolved when it is “not reasonably practicable to carry on the business of the limited liability company in conformity with the operating agreement of said company.” As interpreted by the appellate court, this section requires that “a party seeking a judicial dissolution show[] that the managers and members of the company are unable to pursue the purposes for which the company was formed in a reasonable, sensible, and feasible manner.” Judicial dissolution is…
22
Mar '19
With the rise of the Internet has come a proliferation of Internet Agreements. Nearly every website you visit has one, making these agreements as ubiquitous as the Internet itself. Online retail and other Internet-based businesses have been growing steadily in recent years. But, these days even brick-and-mortar businesses must have an online presence. As a result, whatever you sell, you’ll need at least a website and perhaps some social media accounts. When a business offers something valuable to the public, like a website, it is appropriate for that business to specify the terms on which that site is made available. As a result, businesses large and small will want to create terms of use, or terms of service, to govern their relationships with their customers. Data privacy and cookie policies are also increasingly important for businesses that collect information about their customers online. In order to protect businesses and the things they provide, Internet agreements need to be binding and enforceable. If an agreement is unenforceable, it offers at best only the illusion of protection. So what should you do to create an enforceable…
28
Feb '19
Trademarks and the brands they protect are important business assets, but trademark rights are not always well understood by startups and other small businesses. This is somewhat paradoxical since trademarks are uniquely business-based creations - they cannot exist apart from their use in commerce. They are also a relatively cheap way to increase your business's value. Trademarks serve the primary purpose of protecting consumers from confusion. In other words, trademarks function in business "to distinguish goods as the products of a particular manufacturer or trader and to prevent another from passing off its goods as those of the manufacturer or trader identified by the trademark." This is why trademark rights generally do not exist until the mark is lawfully used in commerce. As the U.S. District Court of Colorado stated just last December, "neither conception of the mark, nor advertising alone establishes trademark rights." However, an exception to this general rule is that a trademark not in actual use may be registered with the U.S. Patent and Trademark Office (USPTO) when there is a definite intent to use the mark in commerce. This is in contrast to copyrights, which arise…
13
Feb '19
Valentine's Day is just around the corner, so this seems as good a time as any to discuss relationships. But I'm not talking about romantic relationships - although there may be a bit of that. I'm talking about business relationships - specifically the principal-agent relationship. Principal-agent relationships arise in a variety of business situations. A principal-agent relationship exists whenever a person (including a business) authorizes another to speak or act on their behalf. The person who does the authorizing is called a principal, and the person thereby authorized is called an agent. Through this authorization and the power it creates, an agent is capable of creating responsibilities and obligations for their principal. Agents – whether other owners, officers, representatives, or employees – allow businesses to get things done on a day-to-day basis. Businesses, therefore, give these agents some actual (explicit or implicit) authority to speak or act for the business itself. Most business owners understand that agents, as a result of their actual authority, can bind the business and create obligations and liabilities. For example, a store…
28
Jan '19
Today is Data Privacy Day, a day promoting the importance of - as the name suggests - data privacy. In a world of online and digital everything, consumers increasingly have to rely on businesses to protect their most sensitive information. As consumers we deserve to be protected, but satisfying these escalating demands is often a challenge for business owners. In honor of Data Privacy Day, I thought I’d pick up where I left off in my previous post. There, I discussed Colorado’s Data Privacy Act and, specifically, its requirements regarding the security and disposal of sensitive personal information collected by businesses on Colorado residents. This entry looks at the updated requirements that the law imposes regarding data breach response and notification. If you read no further than this sentence, any business owner should be aware that the law requires prompt investigation and notice within thirty (30) days. More on this below, but first a couple points of clarification: Discussing "data breaches" might make you think of something akin to cyberwarfare, but breaches can occur in a range of much more ordinary situations. For example, a breach may occur when an employee clicks on a seemingly…
9
Jan '19
The first entry of this new year looks back at a significant legal development of the last. As a part of a larger trend in 2018, Colorado updated its Consumer Protection Act (C.R.S. § 6-1-713) in order to strengthen protections for consumer data privacy. The law imposes new and significant requirements on businesses, both large and small. The Denver Post called Colorado's data privacy law "among the most demanding in the country." Colorado's data privacy law applies to any person who "maintains, owns, or licenses personal identifying information in the course of the person's business, vocation, or occupation" on Colorado residents, whether the information is in paper or digital form. Under the Act, a 'person' is defined broadly to include not only natural persons, but also any "legal or commercial entity." It is not important whether you are an owner of a business entity or simply a sole proprietor; what matters is the collection and maintenance of personal identifying information (PII) on Colorado residents. So what is PII? Under Colorado's law, PII includes four categories of information: 1. Government-Issued or other Official Identification Numbers - which includes social security numbers…
29
Dec '18
The title for this entry comes directly from the language of the Colorado Limited Liability Company Act (CLLCA). Through this language the CLLCA requires, to the greatest extent consistent with the law, that the terms of an operating agreements control over the provisions of the Act. For this reason, LLCs are generally considered "creatures of contract" - unlike corporations, which are primarily "creatures of statute." The Colorado Supreme Court has affirmed the importance that the CLLCA places on freedom of contract, stating that the Act allows members "great flexibility in creating rights and duties... because [it] permits the operating agreement to override [its] provisions in all but a few instances." This freedom in drafting is a great opportunity for savvy business owners to construct the arrangement that best suits them and their business. But it is also a potential trap for the uninformed or unaware. As a result, members of a Colorado LLC should consider carefully what they will include in an operating agreement and how rights and duties will be defined therein. Omissions are important as well, because in those cases the provisions of the CLLCA will govern by default. There is no one…
27
Dec '18
Many business entities provide owners with liability protection for personal assets. As a result, owners of these entities is not personally liable for business debts, obligations or acts. However, this personal liability protection may be legally disregarded in certain circumstances according to a theory of veil piercing. This initial blog entry examines the current state of veil-piercing law in Colorado in order to summarize those points most important for small business owners. Although veil-piercing theory initially developed under corporate law, the same principles have been brought to bear on other limited liability entities (LLEs). For example, in 2016, the Colorado Supreme Court, citing the language of the LLC statute, held that "the case law governing corporate veil-piercing applies to disregarding the LLC form as well." As a result of this and similar cases, the following points apply to any sort of LLE - not just corporations. The first point is that veil piercing is supposed to be the rare exception, and not the rule. The Colorado Supreme Court just last year reiterated the Court's long held view that the "separate status" of an LLE "normally insulates... [its owners] from personal liability for the debts of the corporation" and "only extraordinary…
