September 2013 Archives

The choice of an entity is often the first important legal decision that an entrepreneur must make. In the last few years, there have been more choices making it important to review the pros and cons of choices.

On what basis does a firm make this important decision? Certain key factors help to form a guide in answering this question.

An organization with several owners can be formed as a Limited Liability Company ("LLC"),  General Partnership, or a Corporation. Limited partnerships and Limited Liability Partnerships will not be discussed in this article.

1. Limited Liability Company

The LLC is a relatively new entity. It was created to combine some of the advantages of a general partnership and a corporation while eliminating some of the disadvantages of both. Owners of an LLC, called "members", have limited liability similar to shareholders of a corporation.

However, in structure, the LLC is more like a partnership.

The LLC can be managed by the members or by a manager. Usually there isn't a board of directors or officers. Corporate formalities such as meetings and minutes are not required. Profits and losses are passed through to the owners on their personal tax returns and are not separately taxed to the entity.

LLC members do not have to be individuals and voting power and share of profits and losses do not have to be identical; for example, an owner can receive X% of the profits and own Y% of the LLC and have Z% of the voting rights.

It's obvious to see why LLC's are so popular.

2. General Partnership

Similar to the sole proprietorship in the ease of formation, the only requirement to form a general partnership is that two or more people engage in a business activity for profit (Uniform Partnership Act). Expenses and profits do not need to be shared equally. Although there are no formal requirements, it is highly recommended that a written partnership agreement be executed among the partners. Like a sole proprietorship, the general partnership is not taxable as an "entity".

There are disadvantages to a general partnership. The partners of a general partnership have unlimited personal liability for not only their own torts and contracts, but for those of the other partners too. The death or withdrawal of one of the partners causes a dissolution of the general partnership. Caution should be exercised to avoid having the partnership be viewed by IRS as a corporation and then taxed as such.

3. Corporation

A corporation that is owned by a limited number of people is known as a "closely held corporation". Like a partnership, most, if not all, of the shareholders are involved in the management of the business. However, unlike a partnership, all the shareholders, or owners of the corporation, have limited liability for the acts and omissions of the other owners.

Additionally, avoiding personal liability for business debts and court judgments is another advantage of a corporation. Without personal guarantees a creditor can only collect from the assets of the business, not against the personal assets of the owners.

Because a corporation is a separate legal entity from its specific shareholders, the business continues regardless of who owns the shares. Corporations offer the opportunity to bring in investors who can own shares in the company without having to worry about personal liability. Tax deductions may be taken for benefits provided to its employees and to the owners.

Corporations often have a more favorable tax rate structure to allow the owners to save earnings at a lower rate.

There are two types of for profit corporations, the "C" corporation and the "S" corporation. These refer to IRS statutes that dictate different tax treatment for the two types of entities.

A "C" corporation is required to pay corporate taxes on profits and the shareholders pay taxes on their compensation and/or dividends.

For this reason many small organizations elect to be "S" corporations.

An "S" corporation does not pay taxes on the profits; profits and losses are passed through to the owners. However, the owners of an "S" corporation cannot be corporations, partnerships or LLC's.

Some of the disadvantages of forming a corporation are the costs and formalities involved. The costs to incorporate vary by location, but typically run several hundred dollars. Corporations are required to hold annual board and shareholder meetings and minutes of director and shareholder actions must be maintained.

Finally, a single individual business owner can have a sole proprietorship, corporation (C or S) or limited liability company.

4. Sole Proprietorship

This is the easiest, least costly and least regulated form of organization for the individual owner. The only legal necessity for forming this business is to commence operations. It is recommended to file a fictitious name registration in all states in which the business will operate and check zoning and licensing laws for the location of the business. Additionally, all marketing materials should be trademarked and/or copyrighted.

As a result of the simplicity and low costs involved in a sole proprietorship, many individually owned businesses choose this option. However, there are some negative aspects to consider. The most important reason to choose one of the other options is that the individual is fully liable for any and all claims by customers, employees, vendors or others.

Conclusion:

In conclusion, there are many factors to consider when choosing the form of entity for your business. The joint advice of your accountant or tax advisor and attorney should be considered before making a selection.

So, what business entity do you want  to form?

THIS ARTICLE IS NOT INTENDED TO PROVIDE LEGAL ADVICE. IF YOU WOULD LIKE TO DISCUSS HOW THIS INFORMATION RELATES TO YOUR SPECIFIC SITUATION, PLEASE Contact Spadea, Lanard & Lignana

Franchise systems, like businesses in general, no doubt recognize that today's ever-increasingly competitive marketplace means taking those extra steps to ensure brand recognition.

For retail businesses, this translates into creating familiar impressions which pass the drive-by-look test. In other words, will the typical consumer driving or walking down the street see a storefront and recognize it as an indicator of the source of goods and services provided by that establishment?

Undoubtedly, the brand managers and marketing gurus reading this post are now saying...DUH!

But my point is not that brand recognition matters--my point is that the means employed to capture that consumer recognition should be well crafted, meticulously developed, consistently applied, and zealously protected.

For trademark lawyers and others familiar with these ideas, this likely brings to mind the U.S. Supreme Court's decision in Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763 (1992), where the Court recognized the nature of "trade dress" and its consequent capability of being protected as a source indicator.

The history and debate of trade dress disputes since theTwo Pesos case is a topic which would take far longer than this post is intended to address.

But suffice it to say that obtaining protection for trade dress is ordinarily much easier said than done.

To that point, however, enter the company which has played (at least) some role in the decision-making process of virtually every semi-informed user of technology in the modern era...APPLE.

Just as it has been successful in launching new product after new product--and following more than two years of explanation and opposition--Apple has successfully obtained protection of the design and layout of its retail stores under U.S. Trademark Registration No. 4277914.

The mark protects, among other things, the "clear glass storefront surrounded by a paneled facade consisting of large, rectangular horizontal panels over the top of the glass front, and two narrower panels stacked on either side of the storefront."

On the interior, the mark covers "rectangular recessed lighting units [which] traverse the length of the store's ceiling . . . cantilevered shelves below recessed display spaces along the side walls, and rectangular tables arranged in a line in the middle of the store parallel to the walls and extending from the storefront to the back of the store." The mark also describes the familiar "Genius Bar" and its "oblong table with stools located at the back of the store, set below video screens flush mounted on the back wall."

Apple's success was based on its ability to create a look, feel, and appearance in its retail stores which have a distinctive character in the collective mind of consumers.

In legal terms, the trade dress has "acquired distinctiveness" and is, therefore, worthy of trademark protection.

In practical terms, Apple's successful battle to obtain registration of its trade dress provides a model for crafting, developing, and applying design and layout elements which are unique and aimed at capturing consistent consumer recognition.

Danone's Dumex baby formula division is the latest MNC to get caught in Beijing's ever-widening anti-corruption net. Last week was Bayer, and before that Sanofi.

Danone'sThe Euros are certainly attracting all the wrong sorts of attention in China these days, but it's just a matter of time before the Americans start showing up in the headlines.

We've discussed how to reduce risk through smarter relationship-building and why it's important to audit your China operation - but for some of you that ship has already sailed.

The Art of the ChinApology & The 5 ChinApology Rules

1. Style over substance.  You're not confessing to specific charges -- merely apologizing for hurting the feelings of the Chinese people.   Humble -- but not guilty of anything specific or actionable.
2. Early is good, late is worse than not at all.  Pride is barbaric -- let's get this shamefest started right.  The quicker you do it, the faster you can move on to next steps.
3. It's defensive.  You are trying to extinguish a fuse -- not put out a burning a building.    A ChinApology doesn't repair damage, but it does prevent things from getting worse.
4. Content Lite.   Be contrite in general terms.  Make your confession  more about emotion and  shame than actual criminality or specific charges.  (If you've reached this point, then your guilt has probably already a foregone conclusion.)
5. No Zingers.  This is no time for revelations about who is really at fault or defensive justifications.  Be brief, be sincere, be done with it.

Above all, the ChinApology should be DULL.  No weeping, no passion, no anger and nothing memorable.  You don't want anything that the internet people can latch on to and pass around.

Interested parties can submit comments and requests to participate

FTC (Press Release) The Federal Trade Commission will host a workshop on December 4, 2013 in Washington, DC to examine the practice of blending advertisements with news, entertainment, and other content in digital media, referred to as "native advertising" or "sponsored content." 

Increasingly, advertisements that more closely resemble the content in which they are embedded are replacing banner advertisements - graphical images that typically are rectangular in shape - on publishers' websites and mobile applications.  The workshop will bring together publishing and advertising industry representatives, consumer advocates, academics, and government regulators to explore changes in how paid messages are presented to consumers and consumers' recognition and understanding of these messages.

The workshop builds on previous Commission initiatives to help ensure that consumers can identify advertisements as advertising wherever they appear.  This includes recent updates to the Search Engine Advertising guidance, the Dot Com Disclosures guidance, and the Endorsements and Testimonials Guides, as well as decades of  law enforcement actions against infomercial producers and operators of fake news websites marketing products.

The FTC invites the public to submit original research, recommendations for topics of discussion, and requests to participate as panelists.  The Commission also invites the submission of examples and mock-ups that can be used for illustration and discussion at the workshop.  Topics the workshop may cover include: 

• What is the origin and purpose of the wall between regular content and advertising, and what challenges do publishers face in maintaining that wall in digital media, including in the mobile environment?
• In what ways are paid messages integrated into, or presented as, regular content and in what contexts does this integration occur?  How does it differ when paid messages are displayed within mobile apps and on smart phones and other mobile devices?

• What business models support and facilitate the monetization and display of native or integrated advertisements?  What entities control how these advertisements are presented to consumers?

• How can ads effectively be differentiated from regular content, such as through the use of labels and visual cues?  How can methods used to differentiate content as advertising be retained when paid messages are aggregated (for example, in search results) or re-transmitted through social media?

• What does research show about how consumers notice and understand paid messages that are integrated into, or presented as, news, entertainment, or regular content?  What does research show about whether the ways that consumers seek out, receive, and view content online influences their capacity to notice and understand these messages as paid content?

Electronic submissions can be made online. Paper submissions should reference Native Advertising Workshop both in the text and on the envelope, and should be mailed or delivered to:  Federal Trade Commission, Office of the Secretary, Room H-113 (Annex X), 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.  The FTC requests that any paper submissions be sent by courier or overnight service, if possible, because postal mail in the Washington area and at the Commission is subject to delay due to heightened security precautions.  Requests to participate should include a statement detailing any relevant expertise in digital advertising and should be submitted by October 29, 2013 via email to[email protected].  Panelists selected to participate will be notified by November 6, 2013.

People have mannerisms. They wring their hands, fidget, and look away when answering, sweat, and do all sorts of other things. If the witness tends to do things that are extreme, they may need to be the subject of training. If the mannerisms are not extreme, I tend to leave them alone.

After all, the witness is human, not an automaton. Sometimes the mannerisms may be taken by a jury or arbitrator as an indication of a tendency to evade or to be less than truthful.

In your final summation it is useful to address the issue of credibility -- how does one tell whether to believe a witness? When someone wrings his hands or looks down into his lap when speaking, he may be doing that because he is a liar, or he may be doing that because his is simply nervous and apprehensive about being a witness in a public forum or hearing.

The person who looks at the ceiling and waits to answer may be concocting perjury or simply concerned that what he is about to say is correct. You can't tell which it is from the fact that he does that.

So that may not be a reliable indicator of truthfulness.

The person who looks you straight in the eye and speaks to you as though you were social acquaintances may be doing so because he is telling the truth or because he is simply brazen in his mendacity.

That is, therefore, also not a reliable indicator of truthfulness.

It is the same for practically every personal tic.

But there is one very reliable extrinsic corroborator of truthfulness.

Do the records and documents that were created at the time the events occurred, when there was not yet any dispute, when there was no motive to impress any judge or jury, agree with the witness' testimony or contradict it? That is the best test of witness reliability.

Is he telling you now what he was telling his associates when all this was happening. Do the contemporaneous company memoranda confirm what the witness has said? If he one story then and is telling a contrary story now, one of them is probably false.

The more reliable statement of facts is the one made when no judge or jury was looking. That part of your summation takes ten seconds to make and is worth its weight in gold.

No matter what you do, things simply do not always work out as you hope.

Litigation is a very inexact process in which emotions and biases and expectations do not always combine in harmonious, symphonic works of artistic grandeur. It is not as bad as trying to predict the weather -- that is pure chaos theory.

But there are many dependent variables in litigation, and risk expands exponentially with the number of dependent variables.

The dependence upon third party witnesses is one very critical element to case evaluation.

You can't have access to third party witnesses the way you have access to your own client's employees. If the third party witnesses are your client's customers, there is serious concern about lost business as an overlay to the concern to optimize the quality of evidence.

I have seen a subpoena for records end serious, long-term business relationships because it was ineptly handled. If the third party witnesses are competitors of your client, another layer of risk is added. And the story gets worse as it gets longer.

This tutorial is about preparing witnesses to whom you have essentially congenial access. It focuses upon a small, albeit important aspect of dispute resolution. It does not pretend to account for the overall risks of civil confrontation. That is another tutorial entirely.

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

(This is Part 6 of 6 on How to Win Franchise Trials. Here is Part 1)

Noise reduction consists of purging the witness' speech patterns of habits of expression that are irrelevant and potentially harmful. It is important to re-emphasize here that you are not coaching him to speak untruthfully, but to speak truthfully in the most effectively communicative manner.

Most of us are not conscious of how others hear us when we say things. We think we are doing just fine when misimpressions are sometimes occurring.

One of the worst things that people do is self justify. The answer to 'Did you do that?' is not 'I would never do such a thing.' The answer is a yes or a no.

Many who hear self-justification and not direct testimony come away with the impression that the witness has just tried to duck the question for the purpose of concealment.

Teach the witness to listen to the question and to answer the question that is being asked and not some other imagined question.

The questioner is not asking him to give a speech about his rectitude and integrity. He is asking if something happened; was the witness involved; how was the witness involved; and what was the purpose of doing whatever it was that was done. These will be asked in separate questions and need to be responded to directly.

The witness needs to know that he will not be entrapped by this response pattern. If you are calling the witness and are on direct examination, he will be asked these questions in a manner that will give him the opportunity to say what needs to be said.

If he is being called by the opposition and roughly examined, you will be there to resurrect his opportunity to say the proper things immediately after the opponents have concluded their questioning. He can feel comfortable that he will not be left hanging from some limb.

Long-winded statements of company policy, mission statements (the single most horrid language usage in the universe), and rectitude do as much damage to credibility as false testimony.

When you aren't sticking directly to the point and answering questions forthrightly, the perception is that you are being evasive for purposes of concealment and false testimony. If the answers from the witness are direct and forthright, the impression left with judge, jury or arbitrator will be that you are being truthful.

This includes direct answers about the good and the bad. You shouldn't be there in the first place if the bad outweighs the good. You should have settled and taken your medicine in private.

There is a tendency to speak ill of the opposition. If the opponents' acts are blameworthy, a straightforward statement of what they have done ought to suffice and leave the desired impression of what miscreants the opposition truly are.

Name-calling and undue rancor leave a bad impression. Let their conduct speak to the issue of what they deserve, not your opprobrium and epithets.

Hopefully, they will not be so gracious when it is their turn to speak, and they will by contrast show that you are being direct and that they are not.

Many lawyers make the mistake of thinking that accusations, often repeated, are a substitute for evidence. It is not and will elicit proper objections and rulings from the bench that confirm your view of the negative value of name calling as a 'filler' for evidentiary voids.

You should teach the witness his proper role and show him how attempts to confuse his role with yours can get him into big trouble. His role is to provide truthful information and to be a gentleperson.

Yours is to be the advocate.

It is your function to be concerned about where your opponent is going with a line of questioning. If the witness deems that to be his function, he is not concentrating on simply giving accurate answers. If he gets into that mode, he will not be convincing.

Constantly coach him to simply answer the question that is being asked and leave the advocacy to you.

Role-playing in this and in every other phase of witness preparation is an indispensable tool.

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

(Here is Part 4  This is Part 5 of 6 on How to Win Franchise Trials.  Here is  Final Part)

Here is an email I recently received.  I live in Maryland and not Ontario, Canada.

Chem-Dry, the world's largest and highest rated carpet and upholstery cleaning franchise system with 3,500 units in 35 countries, has recently opened new territories and will be exhibiting and recruiting new franchisees at the show.

The show is being held at THE INTERNATIONAL CENTRE in Mississauga, Ontario on September 7^th and 8^th. ChemDry has been ranked the #1 carpet cleaning franchise by Entrepreneur magazine for 25 consecutive years.

With our proprietary hot carbonating extraction cleaning process and ongoing marketing and operational support, ChemDry is a franchisor that helps you grow.

We offer in-house financing with as little as $9,995 down and total investment starting at $41,000.We also deliver top-line results.

Check out our average franchise sales numbers:

Usually, I would simply look up the franchisor's FDD and compare this earning's claim with the Item 19 claim.  

But, this is a much more difficult case.  I don't know much about the Ontario Franchise Disclosure law - except Webster tells me it that it is for lawyers and not franchise investors.

So, I looked up the Item 19 for Chem-Dry in the US, How Much Can I Make.

First, the Item 19 is not based on the franchise owner's reported profit and loss statements.

"HRI does not currently require all Chem-Dry business franchise owners to provide periodic revenue and other financial reports concerning their franchises.

In February, 2013, HRI conducted a system-wide survey requesting that all franchise owners provide certain financial and other information relating to the operation of their Chem-Dry business franchises during 2012.

As of December 31,2012. HRI had 1,081 franchise owners who operated 2,039 Chem-Dry business franchises.

Of those, 211 franchise owners (the "Responding Franchise Owners"), who collectively own 475 Chem-Dry business franchises, and who have owned their businesses at least 2 years, provided complete 2012 financial information in response to the survey and operated those franchises throughout all of 2012."

Second, and it gets more tangled, here is the chart from the survey, click on it to expand it.

The average revenue number reported from the US survey as representative to Ontario prospects is the same: $111,184!

It is it all all plausible that the 211 franchisees who completed the Chem-Dry survey in 2012 forms a reasonable basis to tell a prospect in Ontario what he or she might make?

Does Your Franchise Sales Process Need a Tune-Up?  Visit the Our Franchise Sales Forum & Ask the Experts.

You simply must prepare the witness about the story told in the written documents. There are two ways to approach this. 

One is to simply talk to him about the events that are at the core of the dispute. It should be as much a conversation as you can make it. Save the tough questioning for another round.

The other is to have first given him a set of the relevant documents to study to refresh his recollection, and then have the initial conversation about the events.

I think most people will appreciate having been given the documents first rather than having been allowed to misspeak and then perhaps be embarrassed when the documented history does not agree. If embarrassment raises its ugly head, it will either be a positive learning experience or you will have to go back and rebuild part of the relationship with him.

Keep reminding him that there is no agenda to tell the 'story' in a particular direction. At this point the object is to get him to appreciate what really happened and sort out any incorrect recollections he may have had. In this manner you are consolidating the truth in his mind and eliminating unreliable recollections.

It may be that some documentation does not mean what it seems to mean, and this round will help you sort that out also.

People do not always say things in an unambiguous manner.

Sometimes it is useful for the witness to know what others have said about the events if their statements seem to conflict with his. If there is genuine conflict, it needs to get sorted out. If not, telling him what others had to say may not be productive. It would be helpful in this phase to know whether he and others who were involved have had conversations amongst themselves about the events, and what those conversations were. It is now a distillation process for the witness and for the documentation.

It is important to discuss the completeness of the documents.

• Are all the files there?
• Is anything missing?
• Have documents been removed from any files?

If so, what happened to them?

• File searchers and those involved in the operative events have been known to remove and destroy files.
• In-house lawyers, seeking to impress their only client with their loyalty will do that also.

Witnesses will be asked about records retention/destruction when they are deposed.

Find out the truth before you are on a public record and under oath.

Once the distillation process is complete, and the witness and you are both confident that the essential truth is clear to both of you, and you are still comfortable with your case, it is time for round two -- noise reduction.

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

(Here is Part 3. This is Part 4 of 6 on How to Win Franchise Trials.  Here is Part 5)