Business Transactions

When You Move to a Different State, Should Your Business Move with You? Part Two.

In Part One of this two-part blog posting, I discussed whether you should change the state under which your business is organized when you move from one state to another. In this Part Two, I discuss how you can make such a business move if you decide to do so. The process varies by state. Some states streamline the process; other states require more effort.

Suppose you are a Maryland resident who operates an internet-based company organized as a Maryland LLC. You move to New York and decide to change your Maryland LLC into a New York LLC. Here are the steps involved:

Step One. Form a new New York LLC by filing Articles of Organization in New York. If the name of your company is not available in New York, you will need to choose a new name.

Step Two. Merge the existing Maryland LLC into the new New York LLC by filing Articles of Merger in New York under Section 1003 of the New York Limited Liability Company Law. The Articles of Merger should designate that the New York LLC is to be the surviving entity.

Step Three. File Articles of Merger with Maryland under Section 4A-701 of the Maryland Limited Liability Company Act. Indicating in your Articles of Merger that the New York LLC will be the surviving entity is sufficient for the Maryland LLC to be dissolved upon completion of the merger. You do not need to file Articles of Dissolution in Maryland.

When You Move to a Different State, Should Your Business Move with You? Part One.

There are many corporations and LLCs with only one or two owners. When the owners move their residences to another state (even if it is a neighboring state), should the business also move? For example, if you organized your company as a New Jersey LLC while you were a resident of New Jersey, should you change your company to a Pennsylvania LLC when you move to Pennsylvania?

The answer depends on your specific circumstances. By not packing up your LLC or corporation and moving it with you to your new state of residence, you may double your business organizational expenses without producing any corresponding business benefit:

Leaving your business behind means you must maintain a resident agent in your former state of residence. If you use a home or office address as the resident agent address and that home or office address will no longer be available to you after your move, you will need to pay for a resident agent service. Resident agent services start at $100 to $200 per year.

Even if you leave your business organized under the laws of your former state of residence, you may still be required to register your business in your new state if your business is deemed “to be transacting business” in your new state. In this case, you would be required to register your business as a foreign LLC or foreign corporation. See my blog posting “In Which States Are You Transacting Business?”

In Part Two of this blog series, I’ll discuss the process of moving your company from one state to another.

Are Fan Site Operators Cybersquatters?

A reader of my blog posting, The Line Between Legal Domaining and Illegal CyberSquatting, asked a follow-up question:

If you were to purchase the domain of a famous athlete say Tim Tebow and you purchased TimTebow.com, could you develop a fan site and try to sell jerseys and other merchandise from Tim and his university or would that be some sort of infringement? Also, if Tim came to you and wanted the rights to his name, would you be required to turn over the site per the Bernard Berrian case? I am confused about what constitutes cybersquatting and where exactly that line is drawn.

Here’s my response . . .

You can use the personal name of a celebrity or other famous person as a domain name if you are using the domain name and website in a non-commercial manner. Non-commercial websites include legitimate fan sites, gripe sites, and criticism sites. Selling merchandise likely pushes the fan site from a legitimate, non-commercial site protected by the First Amendment to a commercial site making a commercial use of the celebrity’s name. If a celebrity disputes your use of a domain name on a fan site from which you sell merchandise – especially merchandise with the celebrity’s name on it – the celebrity would likely win and you would have to turn the domain name over to him.

More Information on Domain Names with Celebrity Names

What you can and can not do with domain names will be covered extensively in my forthcoming book, The Cyber Citizen’s Guide Through the Legal Jungle. In the meantime you can find a few more Fan Site Do’s and Don’ts over at my Guide Through the Legal Jungle Blog.

What Is a Private Placement Offering?

When you sell securities in your company, you make the sale as either a private placement offering or as a public offering. Being classified as private rather than public means your offering has an easier time complying with applicable federal and state securities laws.

The IPOs (i.e., initial public offerings) you read about in the newspapers are public offerings. However, your sale of securities need not be as large as one of the IPO’s discussed in the Wall Street Journal to qualify as a public offering. Most venture capital financings qualify as private offerings. A private offering might also be one in which a start-up entrepreneur obtains financings through friends, families, and angel investors.

Categorizing an offering as private versus public is often a subjective determination dependent on the number and type of investors, the amount of the money being raised, and other factors. To reduce the uncertainty of knowing whether your offering qualifies as a private offering, the SEC offers the safe harbor of Regulation D which defines three categories of offerings that qualify as private.

Will Non-Competes Remain Enforceable in Massachusetts?

Non-Competes are not enforceable in California. Will Massachusetts soon join that club? Massachusetts Joint Committee on Labor and Workforce Development will hold a hearing on October 7, 2009 to discuss a bill that would limit the scope of non-competes.

Original Version of Non-Compete Bill

The Massachusetts bill started out very simply. In its original form, it prohibited non-competes by amending Chapter 149 of the General Laws of Massachusetts with the addition of the following language:

Any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person's ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended, shall be void and unenforceable with respect to that restriction.

Current Version Adds Complications

State representatives have backed off of eliminating non-competes in their entirety and now seek to limit their scope. The result is a much more complicated bill. Here are some of the provisions that struck me as most interesting as I skimmed through the bill:

• Effective Date. If passed, the law would apply to non-competes entered into after January 1, 2010
  
• Minimum Salary Required. Non-competes would not be enforceable against employees earning less than $75,000
  
• Notice Required. If a new employee is required to sign a non-compete as a condition of employment, the employer must give the employee a copy of the non-compete agreement at least seven business days before employment begins.
  
• Limit on Duration. Non-compete restrictions can last no longer than one year after cessation of employment. The exception is a garden leave clause that allows the non-compete restrictions to last up to two years. The garden leave clause requires the employer to pay the former employee at least $50,000 during each of the years the former employee is not competing with the employer.
  
• Collection of Legal Fees. If an employer sues an employee to enforce a non-compete agreement and the court ultimately finds that the non-compete is inconsistent with the law, the employer will have to pay the employee’s legal fees.
  
• No Impact on Covenants Not to Solicit. If passed, the new law would not apply to or alter covenants not to solicit employees or customers of the employer or to restrictive covenants made in connection with the sale of a business or the assets of a business

For More Information and Commentary

Massachusetts’ state representative Will Brownsberger, who co-introduced the bill, describes the history of the bill and provides a link to the current version of the bill on his blog.

Boston.com offers an article by Scott Skirsner entitled Dear Captains of Industry: Where Is the Data to Support Your Position on Non-Competes?  Skirsner advocates the demise of non-competes in Massachusetts and provides links to sources supporting the argument that non-competes hurt the state economy and make it less competitive.

Business Entity Filings and Consulting the Source: When A Phone Call Is Not Enough

Business entity filings such as Articles of Organization and Change in Registered Agent are governed by the state’s business statutes and are typically filed with the state’s secretary of state office. Most secretary of state offices allow you to call for clarification of their business entity filing procedures.

While I would rely on written information provided on the state’s official websites, phone call inquiries yield mixed results if your question is more complicated than “What’s the filing fee?” or “What’s the address for overnight delivery?”. Let me recount one of my recent experiences in this realm.

A Personal Mini-Rant about a Phone Inquiry

I needed to convert a limited liability company from being an LLC in State One to being an LLC in State Two. After reviewing the LLC statutes of both State One and State Two, I concluded that the process required forming a new domestic LLC in State Two and then merging the old State One LLC into the new State Two LLC (with the State Two LLC being the surviving entity). I then called the secretary of state’s business entity information line to verify that there wasn’t an easier way to make the change (e.g., some states offer a streamlined method for conversion).

Yikes! I spent ten very frustrating minutes on the phone with the first customer service rep who swore up and down (i) that the state offered no conversion or merger procedures for LLCs and (ii) that my only option was to file for the LLC to be authorized to do business in State Two as a foreign LLC. That option would not have achieved the cost-saving and administrative paperwork reductions I wanted for the client. Finally, I was transferred to a supervisor who confirmed my previous conclusions that the conversion could be done via merger.

Lesson of the Day

If I knew a little less about business law or hadn’t had the state statute right in front of me during the call, maybe I would have accepted what the first customer service representative said as accurate. The take-away lesson is when you’re given verbal information from a staff person at a state or federal agency, try to find or obtain written verification of the information before relying on it.

Choosing A Business Entity Form For Maximum Respect

There are many important factors to consider when selecting the best business entity form for your company. The need for respect isn’t one of them.

I Don’t Get No Respect

I have heard the view that professional corporations are considered bottom shelf in New York. I have also heard the fear that sole proprietorships are not taken seriously. I don't understand the rationale of looking down on a business due to whether it’s a corporation, LLC, professional corporation, sole proprietorship, or some other form.

A Well-Run Company Will Earn the Respect of Those Who Matter

Here's a news flash. People who don't take your company seriously just because you’re organized as a sole proprietorship will not take you anymore seriously just because you become a single-member LLC. And I question the value of anyone’s respect who bases giving respect on which letters – whether they be Inc., LLC, PC, or d/b/a - follow your company name.

The ideal entity form is not the same for every company. The choice should be driven by the need for limited liability, tax treatment, ownership structure, financing options and other hard-core business considerations.

Respect for one’s business should be based on whether you run a professional operation. If you want your business to be well respected, provide your customers with value, follow through on professional commitments, pay your bills on time, keep your records impeccably, and act with integrity.

I'm Quoted in Entrepreneur Magazine

The March 2009 Entrepreneur Magazine quotes me in a feature on start-ups. The feature carries the tagline “Time to launch a business and get out from under the man”. I contributed to the section entitled “Dodge these 3 startup dead zones” advising entrepreneurs on how to avoid the most common start-up mistakes.

My advice was to choose the right business partners by making an honest assessment of what you want from the business partnership, discussing expectations candidly with your prospective partners, and putting your agreement in writing.

I covered more on the topic of successful business partnerships in a StartUp Bizcast interview with Steve Mullen which you can listen to here.

Website Audits for Internet Companies

In my last posting, I talked about a Time Magazine article in which Josh Quittner discussed the new internet boom in which founders of low-cost internet start-ups can get rich slowly with nothing more than a good idea, a laptop, and hard work.

As the business transactions attorney that I am, I of course could not resist highlighting legal issues to which even a low-cost internet start-up should pay attention. I previously discussed the necessity of (i) an agreement among the co-founders, (ii) a web host development agreement, and (iii) securities law compliance. In this posting, I’ll finish my discussion of website audits.

Website Audits

You’ll want to verify that nothing offered through your website is going to get you in trouble. A website audit might include a review of the following issues:

• Website Terms of Service. Your Website Terms of Service or Website Terms and Conditions can form a binding contract with visitors to your website if properly formatted. If your website takes subscribers or licenses information, your TOS might take the form of an end user license agreement (EULA).
  
• General Privacy Policy. There are currently no federal requirements to post a privacy policy as long as your site does not take personal information from children under thirteen. However, some states are becoming more aggressive in demanding privacy policies and procedures of websites. Hence, it may be prudent to post a privacy policy if you will be collecting, using, and/or selling personal information about your online visitors.
  
• COPPA. Sites targeted to children under thirteen must comply with the Children’s Online Privacy Protection Act. Failure to comply has generated fines from the Federal Trade Commission of up to $1 Million.
  
• Copyright. Analysis of any copyright or other legal issues raised by images, written materials, and other content provided by third parties.
  
• User-Generated Content. If your website invites visitors to submit content, you will want to take steps to minimize the risks of user generated content (UGC) including taking advantage of the safe harbors offered by the Digital Millennium Copyright Act.
  
• Trademark. Analysis of whether your domain name raises any legal concerns (e.g., trademark infringement) and whether it can or should be registered as a trademark.
  

The Internet Booms for LILO Start-Ups; Some Legal Work Still Highly Recommended

Getting Rich Slowly in the New Internet Start-Up Boom

We’ve all heard that the current economic climate has motivated venture capitalist to scale down their investments in internet start-ups. In all this gloom, internet entrepreneur hopefuls can find encouragement in a recent Time Magazine article by Josh Quittner, "The New Internet Start-Up Boom: Get Rich Slow".

Quittner refers to our era as The New Internet Start-Up Boom in which savvy internet entrepreneurs with a great idea can get rich slowly. Quittner talks about internet start-up companies that cost little or nothing to start but can eventually yield substantial profits. He refers to these internet companies as LILOs which stands for a little in and a lot out.

The article cites the examples of MotorMouths.com, a car review site started with less than $10,000 that may grow into a $250,000 revenue company within 18 months of opening operations. The article also includes the case study of AirBnB.com, a website that matches visitors with accommodations in private homes. AirBnB.com currently produces enough revenue to support its three founders.

Even Low-Cost Internet Start-ups Shouldn’t Skimp on Certain Legal Issues

Since this is a legal blog about business transactions, I must highlight some legal issues which even a LILO internet start-up should not ignore:

• Agreement Among Co-Founders and Business Partners. I’m frequently consulted by people who find themselves in business relationships that no longer function. The situation is at its worst when the partners have not documented their relationship in a written agreement that hopefully includes steps for an amicable parting. I talked about how business people can protect themselves and their businesses from relationships that go south in an interview on “When Business Partnerships Go Bad” with Steve Mullen of Start-Up BizCast.
  
• Web Host Development Agreement. Don’t hire a web developer without a proper web development agreement. Important contractual provisions include intellectual property ownership rights, development schedule, and the developer’s maintenance obligations. See an example of the problems that can develop if you forego the written web development contract.
  
• Securities Law Compliance. If you take money from someone who will share in future company profits but will not actively participate in the operation of your company, you have sold a security and you must comply with state and federal securities laws. It doesn’t matter if the investment is $500 or $5,000,000. Non-compliance triggers potential criminal and civil penalties that you don’t want to encounter. For more information on securities compliance, see my postings about Financing a Business.
  
• Website Audit. You’ll want to verify that nothing offered through your website is going to get you in trouble. I’ll talk more about website audits in my next posting.