Internal Investigators: 7 Key Traits

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Sometimes, things just go sideways.

Despite the best intentions of your organization’s Board, Officers, staff, and key volunteers, one misstep can threaten the entire mission. Whether there are allegations of financial malfeasance, inappropriate conduct, insufficient entity formalities, or some other variant, the Board of Directors must take quick action to decide if an internal investigation is warranted.

Once you know you need independent inquiry, who should you call to help you?

At the very least, your internal investigator must be unbiased. Ideally, an investigation is conducted by outside counsel or a special committee. And, your choice of investigators is an important as what they uncover.

In order to be productive and get meaningful results, your investigator should:

  1. Understand the culture of your organization.
  2. Commit to interviewing the correct parties, including individuals who were involved with the organization at the time period under investigation.
  3. Be well versed in how to conduct an investigation and how to evaluate credibility.
    –(Remember, this is NOT a case of “he said/she said, so we’ll never know. Part of the investigator’s job is to make credibility assessments).
    –Your investigator should know how to rely on asking open ended questions.
    –Your investigator should have a delicate approach to asking questions that telegraph the subject or intention of the investigation, and should know when to ask them.
  4.  Be adept at conducting interviews with emotional witnesses.
  5. NEVER use the services of an investigator unless they are licensed or subject to a licensing exemption. In Colorado, employees, attorneys, and CPAs for the entity may conduct an investigation under an exemption. Other exemptions do exist. But, for the most part, your wise and level-headed HOA President is not an appropriate person to conduct the investigation without an independent relationship to the organization.
  6. Always work with an investigator who understands the importance of defining the scope and purpose of the investigation with the board at the outset. In particular, you should understand what standards of proof will apply to the findings and recommendations. Miscommunications on scope will not only waste time and energy, but may result in a contaminated investigation. Once interviews have been conducted, it is difficult to revisit witnesses and receive answers that are free from outside influence or revisionist reflection.
  7. Always work with an investigator who has the expertise to identify and recommend ways that your organization can strengthen its policies, procedures, and formal documentation. The most productive investigations will help you minimize risks in the future.

Once your investigator has completed the investigation, the Board of Directors should use the findings and recommendations to come to a good faith, well informed decision about how to respond. Only independent Directors, those who are not implicated in the underlying issue, should make the decision. As always, Directors have a duty to act in the best interests of the organization. Hiring a competent investigator will not only help the organization reach a reasoned decision, but will protect the Board from individual liability.

If your business or nonprofit organization needs assistance with an internal investigation, contact Caroline Kert, Esq. at 303-763-1615 or carolinekert@danieltgoodwin.com.

HELP! Does Our Art Organization’s Board Need to Do an Internal Investigation?

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By: Caroline R. Kert, Esq.

It is a volunteer Board member’s worst nightmare: after dedicating hours and hours of volunteer time supporting your favorite art organization, a scary issue raises its head. If you don’t deal with the concerns, you or your organization might be sued. Is the current Board to blame? What can you do to protect yourself and your organization? It may be time to hire a third party to do an internal investigation.

Arts organizations and nonprofits are unique creatures. The corporate structure is often the same as the largest for-profit companies, but many are headed by volunteers and operate on shoe string budgets. What the key employees or volunteers, Officers, and Directors sometimes lack in corporate governance experience, they make up in passion and belief in the organization’s mission.

Governance missteps can snowball into crucial issues and can leave the Board of Directors confused about what to do next. Even worse, bad PR surrounding the situation may have long term ramifications leading to the loss of committed volunteers, experienced employees, and donors. The types of issues I have helped organizations navigate cover the gambit:

  • A Board Member suggesting that the organization “cook the books”
  • A Board Member running personal expenses through the organization
  • A Board Member comingling corporate assets with those of other organization
  • An organization failing to properly pay employees under wage and hour laws
  • A Board Member accused of physically assaulting a participant at an official event
  • Volunteers serving alcohol to minors at an official event
  • Lead volunteer sexually harassing teammates

When confronted with these types of issues organizations must focus on three simple goals: reducing current liabilities, avoiding costly litigation, and minimizing the collateral damage.

Once a potential issue comes to the attention of the current Board of Directors it should ask, “If we assume the allegations are true, what are the ramifications?” Have local, state, or federal laws been violated?  Can the organization be held liable for an act or failure to act?  Have current or past board members or officers breached their fiduciary duties?  Does the swift resolution of this issue impact your very ability to survive?

If the answer to any of these questions is “Yes,” the Board has a duty to investigate and make a reasonable business decision regarding its response. If the issue is merely a staff dispute or a question of day to day operations, it may be in the Board’s best interest to allow its Executive Director or other leaders manage the problem.

Boards of all organizations have a fiduciary duty to apply good faith, care and loyalty to their actions. Under Colorado’s business judgment rule, officers and directors will not be held accountable for actions “taken in good faith and in the exercise of honest judgment in furtherance of a lawful and legitimate corporate purpose.” So, swift action that demonstrates the Board’s good faith inquiry into the circumstances will go a long way toward protecting the current Board and the organization. In order to fall under this business judgment rule, the action must be:

  • Made by independent/disinterested board members
  • Made in good faith
  • Informed

Hiring in an independent attorney to complete an investigation and present findings to the Board will help fulfill these criteria. If you or your organization need assistance with a current compliance issue or complaint, contact Caroline Kert at 303-763-1600 or carolinekert@danieltgoodwin.com.

Bookmark our page to read more on this topic, including important criteria to consider when selecting your investigator.

Your Website: Tips to Stay Out of Legal Trouble – Part 2 (Domain Name/Trademark)

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An Internet domain name can be vital to branding and marketing, so it’s important for business owners to be familiar with some of the legal rules related to domain names, including the intersection of domain name rights with trademark rights.  This post also reviews actions you can take to dispute domain names that may infringe upon your trademark rights.

A domain name is the primary “address” of a web site, and nearly all website owners want to have a domain name that is identifiable and easy to remember.

If my company is called “Betty’s Plumbing, Inc.” and I have a trademark for “Betty’s Plumbing”, it would be most logical for my website to also be “www.bettysplumbing.com”.  This would be the best way for current and potential customers to find me online.

Domain Names vs. Trademarks

A trademark is a word, name or symbol used in commerce to indicate the source of the goods or services and to distinguish them from the goods or services of others.

Trademarks and domain names are not synonymous, but the two concepts often meet when there is an issue of whether use of the domain name is a trademark violation.

The United States Patent and Trademark Office (USPTO) has made clear: “Registration of a domain name with a domain name registrar does not give you any trademark rights.”  The USPTO also states that simply using a trademark as part of a domain name does not necessary serve the function of “indicating the source” of goods or services.  In other words, using someone else trademark in your domain name is not automatically infringement.  However, additional uses of the trademark by your business beyond your domain name could lead to trouble!

The biggest takeaway is that the issue is not black and white.  Generally, we recommend that before you spend money on acquiring a certain domain name, you do some research to make sure your desired domain name does not contain a trademark belonging to someone else who has not given you permission to use it.  Trademark violations occur when there is “confusion in the marketplace” – when a consumer could confuse the business represented by the domain name with another business represented by a trademark contained in the domain name.

Further domain name registrars such as GoDaddy and Google Domains do not perform any trademark ownership verification before registering a new domain name for you so it is your responsibility to consider intellectual property matters!  If you need any assistance with this, please contact our Intellectual Property team.

Domain Name Disputes

Domain name disputes often involve companies battling over the ownership of domain names from “cybersquatters.” Some cybersquatters register domain names with the intention of selling them at high prices to the companies who own the trademarks. Others exploit domain names by taking advantage of the online traffic that popular brands attract and misdirecting consumers to the cybersquatters’ own websites for such business as selling counterfeit goods, or at worst, websites loaded with viruses, malware, and other malicious content.

The Anti-Cybersquatting Consumer Protection Act (ACPA)

You can file a federal lawsuit to challenge a domain name under the ACPA, a law enacted in 1999.  ACPA allows you to challenge domain names that are similar to your business name and other trademarks.  ACPA makes it “illegal to register, “traffic in” or use a domain name that is identical or confusingly similar to a distinctive or famous.  If a trademark owner successfully wins a claim under the ACPA, the Court will grant an order that requires the domain be transferred back to the trademark owner.  In certain cases, the Court can also award monetary damages.

Uniform Domain-Name Dispute-Resolution Policy (UDRP)

Another (and likely cheaper) way to challenge a domain name is through the Uniform Domain-Name Dispute-Resolution Policy (UDRP), a process created by the Internet Corporation for Assigned Names and Numbers (ICANN), the non-profit corporation that manages and controls domain name registrations. UDRP provides a relatively quick legal mechanism to resolve a domain name dispute by providing a streamlined procedure to transfer or cancel ownership of domain names.

Beyond offering a quicker dispute resolution process beyond federal court litigation, UDRP proceeds are also nice because it does not matter whether the trademark owner and domain name holder live in different countries.  Filing a lawsuit in U.S. federal court generally comes with jurisdictional issues that are tricky if the domain name holder lives in another country.

If your business needs help with a trademark or domain name issue, please contact us today!

 

Your Website: Tips to Stay Out of Legal Trouble – Part 1 (Copyright)

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A good website for your business can be an invaluable marketing tool.  However, if you’re not careful, you could get into trouble for using images, photos, videos and other content in violation of copyright law.

Rights Granted under Copyright

Under the U.S. Copyright Act, the owner of a creative work is granted certain rights, including the right to prevent others from reproducing or copying their work, publicly displaying their work, or distributing their work.

Posting copyrighted material, say, a photograph, on your website arguably violates all these rights!  Moreover, your Internet service provider (ISP) can also be found liable for copyright infringement, even if they played no part in designing or maintaining your website.

All small business owners must therefore be extremely careful about what goes on their website!

Even big companies with sophisticated marketing campaigns get into trouble.  In May 2017, world-renowned luxury brand Tiffany & Co. was sued by photojournalist Peter Gould for using his photograph in an ad campaign for a line of jewelry designed by Elsa Peretti.  The photo at issue was a shot of Ms. Peretti back in the day.  The case was quickly settled and dismissed in July 2017, presumably because Tiffany’s agreed to write a nice fat check to Gould.

Gould v Tiffany Image

Tiffany certainly had the deep pockets to quickly deal with the lawsuit and settle, but your small business may not have these kinds of resources.

Get Permission

As a general rule, we tell our clients to assume any content they may want to use for their website, brochure, promotional video or other project is protected by either copyright or trademark law unless they can confirm otherwise.  A work is not in the public domain simply because you found it up on the Internet already (a common misconception) or because it lacks a copyright notice (another misconception).  Just because you are a local small business with not a lot of revenue and not a great understanding of copyright law does not mean you can claim “fair use” for the content either.  There are no safe harbors in the Copyright Act if you just made a mistake or misunderstood.

Finally, be aware:  If you do see an image or video is affixed with a copyright notice (or “copyright management information“) and choose to remove the info and use it anyway, this makes you liable for additional statutory damages under copyright laws.

Statutory damages range from a few hundred dollars to $25,000 per violation, meaning a mistaken infringement on your website can cost you a lot.

Investigate Infringement Claims Promptly

If someone complains about an unauthorized use on your website, remove the offending material at once and begin to investigate the claim immediately.   If necessary, consult with an attorney on how to handle the investigation and how to respond to the claimant appropriately.

You may find after your research that your use is perfectly legal.  However, you should remove the material while you investigate in order to limit your possible damages should the claimant file a lawsuit.  Continuing to use the infringing material after receiving notice will increase the chances of you being found liable and increase the amount of damages you may have to pay.

Removal of infringing material is also an element of the Digital Millennium Copyright Act (DMCA), a 1998 law establishing that an ISP can avoid liability by following certain rules, including speedy removal of infringing material.  Thus, if you don’t stay on top of copyright infringement complaints about your website, your ISP may get dragged into your mess as well.

IRS Penalties & Small Business

IRS Penalties

There are many kinds of tax penalties the IRS can assess against a small business, and the facts and circumstances behind when they may be applied are very different.  What they all have in common, however, is they can significantly increase your tax bill!

This post will provide a quick overview[1] of some of the tax penalties you may encounter if you are a small business owner.  This post also provides information on how to abate or waive tax penalties the IRS may have imposed.

Background

The IRS uses tax penalties to “encourage voluntary compliance” with the federal tax system.  However, the tax code and rules are admittedly complex.  Some taxpayers are unable to comply despite their best attempts to do so.  Many small business owners have so much on their plates, they make mistakes.

The good news is the tax code authorizes penalty relief for taxpayers who may have made a mistake.  The bad news is the IRS tends to do a very poor job of administering these tax relief programs in a fair or consistent manner, especially if the taxpayer is not being assisted by a tax professional such as a CPA or attorney.

Understandably, the IRS would rather not waive penalties – it means less money for them!  The IRS is also chronically understaffed, and does not choose to devote much of its limited resources to those certain departments that work on taxpayer penalty abatement requests.

As such, successfully obtaining relief from tax penalties usually requires the assistance of a tax professional who is familiar with the IRS’s various internal offices and administrative procedures.  If you would like to speak with us about your tax penalty problem after reviewing the information below, please do not hesitate to contact us.

Delinquency Penalties

There are 4 kinds of delinquency penalties that frequently hit small businesses:

  1. Failure to File (I.R.C. § 6651(a)(1))

This penalty is assessed when you file your tax return late.[2]  If you properly request for an extension on filing due dates, it can alleviate this penalty.  However, some kinds of returns, such as the quarterly Form 941 employer tax return, cannot be extended.

  1. Failure to Pay Tax Shown on Return (I.R.C. § 6651(a)(2))

This penalty is assessed when you don’t pay the entire amount of your taxes showing as due on your returns on time.[3]  If you file your return and make the payment late, you will be hit with both penalties.

Remember, even if you correctly request an extension on a tax return, you do not get an extension to pay your taxes, only an extension to file!

  1. Failure to Pay Tax Not Shown on Return (I.R.C. § 6651(a)(3))

This penalty is assessed if you owe additional amounts after an audit or adjustment on your return, and you do not pay the new amounts within 21 days.  If you owe more than $100,000 after the audit or adjustment, you have only 10 days to pay the bill![4]

  1. Failure to File Informational Returns (I.R.C. § 6721)

This penalty is assessed against a small business that did not file its annual W-2 or 1099 forms.  There are 2 tiers of penalties here:

  • Negligence Standard

The first is similar to the “Failure to File” penalty above.  It is a negligence penalty, meaning you simply forgot or made a mistake.  This is calculated at $100 per return up to a maximum of $1,500,000.  Thus, the more employees or contractors you have working for you, the higher this penalty can be.

  • Willfulness Standard

The second is a willful “intentional disregard” standard, calculated at $250 per return or 10% of the aggregate amount of the items reported on the W-2/1099 forms.   This goes beyond forgetting or making a mistake – you purposefully refused to file the returns or tried to hide information from the IRS.

So, if your total payroll was $500,000 that year, your penalty would be $50,000 – a sum that might be equal to the cost of another employee!  Paying this level of penalty would be unsustainable for many businesses.

In my experience, when the IRS notices a business did not file its W-2/1099 forms, it assumes the “intentional disregard” standard and slaps you with the higher penalty.  Once it has done so, the burden will be on you to prove you did not fail to file the returns willfully.  Usually, simply sending in the missing returns after receiving notice the government is missing them is not enough.  You must submit a statement explaining your late filings were due to a mistake or unplanned accident.

Unfortunately, nothing in the IRS notices or letters informing you of the missing returns or your new Section 6721 penalties will inform you about the lower “negligence” penalty level!  If you have been impacted by this kind of penalty, please contact our tax resolution team at once.

Accuracy-Related Penalties (I.R.C. § 6662)

This penalty comes up after an audit or other adjustment on the tax you reported on your returns.  The policy behind this particular tax penalty system is to make sure taxpayers are taking reasonable and well-researched positions in support of the numbers they list on their returns.  In layman’s terms, if you take a position that is so far out there and completely unreasonable, you will be at risk for this penalty.

The IRS will hit you with a 20% accuracy-related penalty if your incorrect position was due to negligence, a disregard of rules and regulations, or a substantial undervaluation misstatement.

The IRS will hit you with a steeper 40% accuracy-related penalty if your incorrect position was due to gross valuation misstatements or undisclosed transactions or information.

Reasonable Cause

All the tax penalties discussed above can be abated or removed if you can show your delinquency was due to “reasonable cause”.  You must show you exercised “ordinary business care and prudence” in preparing your return,  determining what you owe, and when/how to pay it, but nevertheless, were unable to prepare an accurate return, file it on time, or pay on time with suffering undue hardship, due to circumstances beyond your control.

The internal IRS offices require taxpayers to meet a very high burden under the reasonable cause standard before they will waive penalties.  Undoubtedly, the IRS has heard every excuse under the sun!  You will have to demonstrate your “ordinary business care and prudence” in managing and operating your business, and then carefully document your special set of “circumstances beyond your control.”

Major illness, death, strikes/riots, and natural disasters are surefire “circumstances beyond your control” that will allow for penalty abatement.  Sometimes, a business’s severe economic distress can also justify penalty abatement, but only if this is argued very carefully before the IRS.  For example, perhaps your biggest customer filed for bankruptcy and did not pay you for tens of thousands of dollars of product or service.  If you can carefully draw the line between losing that anticipated income and missing your tax payment deadlines, this may justify abating tax penalties.  (In my experience however, a lot of employees at the IRS will assert financial distress never justifies paying your taxes late, even though this argument is provided by the Treasury Regulations and discussed by many tax court cases!)

Importantly, if you try to blame your tax noncompliance on a bookkeeper, accountant, bad office manager, or any third party who you brought on to help with your taxes, this will never be reasonable cause.  The IRS holds the taxpayer ultimately responsible for compliance, and this is a nondelegable duty.

Unfortunately, convincing the IRS to waive your penalties is generally an uphill battle.  More often than not, you will be summarily denied and will have to file an administrative appeal to get the IRS to actually look at your case carefully.  There are also some tricks and special programs that may help you, but the IRS does not readily provide this information to taxpayers.  If you need any help with a penalty abatement or even understanding if you may qualify for one, contact DTG Law today.

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[1] Please be aware that the tax code is complicated, and this is by no means a comprehensive summary of all the issues and technicalities behind tax penalties!

[2] The FTF penalty is assessed at a rate of 5% of the tax due on the late tax return up to 25%.

[3] The FTP penalty is assessed at 0.5% per month update to 25% of the amount of tax that was not paid by the due date.

[4] This penalty is assessed at 0.5% per month update to 25% of the amount of tax that was not paid by the due date.

Our Tips for a Successful Career in the Arts

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Don’t let your dad who wanted you to major in business administration tell you otherwise – In today’s economy, making a living as an artist is probably more viable than it has ever been before.

Many individuals (including your dad) are under the impression that the only way to succeed in the arts is to become a superstar.  Media representations tend to present the arts as an all-or-nothing proposition, with the spotlight only given to the celebrity successes.

However, a viable career in the arts can encompass a broad range of options for those of us who aren’t necessarily nobodies, but whose lives aren’t fodder for PerezHilton.com either.  The arts are not a competition, and you don’t need to be a superstar to make a living doing what you love!

Here are some key points, some legal but many non-legal, we try to relay to our artist and creative entrepreneur clients:

  1. Identify and Maximize Various Revenue Streams

It can’t be denied that those working in creative professions often lack traditional benefits and job security.  There is nothing in this post that offers solutions towards finding a tradition 9-to-5-with-health-insurance job in the arts.  Instead, those who are able to pursue multiple sources of income and become comfortable (or even thrive) with a lifestyle with no promises of a paycheck can find career sustainability.

Experimenting with a variety of moneymaking options allows artists to discover which methods are the most lucrative.  Here in Colorado, we unfortunately do not have a long-established art collector scene like on the coasts.  However, traditional gallery art sales and online art sales may be complemented by speaking gigs, public art commissions, publishing, teaching, commission projects, crowdfunding and grants.

In other words, we believe it is a good investment for artists just beginning to establish their careers (but also for those looking to give a boost to current careers) to participate a little in a lot.  If one revenue stream (for example, gallery sales) is not doing so well, you ideally should have multiple other sources of income to fall back on.  The downside is that your schedule may be very full.  The potential upside after several years of pursuing all options is that you’ve found something that really works for your medium, personality, lifestyle and business model, and you have found financial security.

  1. Be Weird

Being “weird” could be a bad idea at a lot of jobs, but it is definitely an asset in the creative professions.  To sell art or become known as an artist, it helps to grab your audiences’ attention by creating works that are distinctly different from what is already out there.

Moreover, artists who devote time beyond their actual artwork to create a unique brand around themselves will likely have more opportunities to engage in various projects and receive more invitations to work, speak, sell and teach (all towards, see above, diversifying income streams!).  Individuals who succeed in branding themselves aren’t necessarily the most talented and brilliant artists out there, but they do produce more bankable work.  Navigating the fine line of being your authentic self yet making an impression on those around you can be tricky, but finding that balance can yield profitable results.

  1. Be Professional

Passion, talent and weirdness aren’t the only qualifications for becoming a successful professional artist.  A creative individual pursuing a career in the arts should also be able to successfully navigate the business side of their own enterprise.

For example, grants can be a good source of income for an artist or arts organization.  There are even some arts grants where, if you’ve received it once and demonstrated you were able to meet the objectives of the grant program, you can receive the same grant several years in a row.

However, groups that award such grants want to ensure their money is going to be used appropriately.  They require clear and straightforward descriptions of how the grant funds will be used, and they also need assurances that the funds will be properly accounted for once received.  This kind of due diligence is legally required for most of the foundations, endowments, 501(c)(3)s, and other organizations who are in the business of making arts grants.

If you never know the balance of your bank account or choose a casual attitude towards the financial aspects of your business, this is trouble!  It is critical to establish, and continually maintain, a high level of professionalism in your arts business.  Certain actions that can go a long way include:

  • Setting yourself up as a legal business entity with a separate business tax ID (an EIN);
  • Having separate business bank accounts;
  • Staying on top of deadlines and document requests from grant organizations, vendors, and other collaborators or colleagues;
  • Recognizing and protecting your intellectual assets (copyrights and trademarks);
  • Having a good professional services contract when you are hired for projects, shows, etc.;
  • Maintaining an active and professional online presence (social media and your website); and
  • Sustaining a solid network of mentors, colleagues, and professional advisors such as accountants and attorneys who are on your team as you navigate your career in the arts.

 

Entity Formation Basics: The Cooperative

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Strategic business planning should involve thoughtful consideration of what form of business entity to use – whether a C corporation, S corporation, limited liability company (LLC), partnership, non-profit, or some other type of business entity.

This post is about one useful form of business entity that is frequently overlooked by business advisors and attorneys – the cooperative!

A cooperative or “co-op” is a type of legal entity that is distinguishable from standard, for-profit corporations, LLCs, and partnerships.  Co-ops offer a flexible business model that can be used by any group of people who are interested in creating a democratic decision-making company that benefits all members.  In other words, co-ops strive to be patron- or member-oriented, rather than investor-oriented like traditional corporations or LLCs.

At their core, co-ops are formed by a group of people who either work or shop there (a brewery co-op or a food co-op), use its services (a credit union or health insurance co-op), or product goods and items for it (a food producers co-op).  Co-op members are not to be held liable for any debt, obligation or liability of the co-op.

The International Cooperative Alliance, a global membership association of co-ops and co-op support organizations, has established Seven Cooperative Principles including Democratic Member Control and Concern for Community, among others.

The “common purpose” of individuals wishing to form a co-op can include a number of things, including employee-ownership, group marketing, or group purchasing.  Some of the most nationally well-known co-ops include Ace Hardware and REI, as well as dozens of successful agricultural co-ops such as Land-O-Lakes, Sunkist, and Ocean Spray.

Today, artist and freelancer co-ops are becoming more common due to the rise of the “sharing economy” and the realization of individual artists, photographers, software developers and other freelancers there can be great benefits to pooling resources, infrastructure or ideas.

Colorado Cooperatives

Colorado cooperative law has developed cumulatively over more than five decades.

Today, a standard co-op should be formed under Article 56 of Title 7 of the Colorado Revised Statutes.  Article 58 contains the “Colorado Uniform Limited Cooperative Association Act”, recently enacted in 2011.  Also, Article 33.5 of Title 38 is a special Colorado code section for housing co-ops.

Interestingly, Colorado law explicitly prohibits the ability to use the word “cooperative” or any abbreviation or derivation of as part of your business name, trade name, trademark or brand unless you are actually formed as a co-op under these statutes, so be careful if you are loosely using the term “co-op” or “cooperative” in your business!

Under Colorado law, co-op members and those on a co-op’s Board of Directors are protected from personal liability from the activities of the company, similar to corporations and LLCs.  Co-ops are also allowed to limit membership only to persons engaged in a particular business, persons who will use the goods or services of the co-op, and other membership conditions stated in the co-op’s Articles of Incorporation or Bylaws.  Because they are so member-oriented, Colorado law requires a co-op to keep detailed membership lists with contact info.

Limited Cooperatives

Under the newer Limited Cooperative Association Act, a co-op can have investor members who do not participate as much in the common purposes of the company.  This kind of co-op would have “patron members” who fully own and participate in the co-op and “investor members” who participate in the co-op on a more limited, financial basis.

Because the Article 58 was designed with maximum flexibility in mind, a co-op’s Bylaws and Membership Agreements can set forth all kinds of rules and arrangements for the patron members and investor members as far as how the company is run, how patron member votes versus investor member votes are counted towards certain decisions, and how allocation and distributions are made to these different kinds of members.

Cooperatives and Securities Laws

Both Articles 56 and 58 state that any unit or evidence of a membership interest in a co-op is exempt from the Colorado Securities Act or our state’s “Blue Sky” laws.  This means a co-op can offer and sell its membership interests without needing to registered as a broker-dealer, unlike the ownership in a corporation or an LLC.  This takes a lot of legal headache and expense away from co-ops who are looking to have dozens or even hundreds of members.

Nevertheless, if your co-op needs to raise a lot of capital and wants to do so by securing many membership fees or contributions, we strongly recommend this is done through a Regulation D private placement offering under the federal Securities and Exchange Commission’s (SEC) rules.

Worker Cooperatives

Worker co-ops (i.e., employee-owned companies) are gaining traction like never before as the socially-conscious business movement and sharing economy continue to gather momentum.

The common purpose of the worker co-op is each member’s livelihood – their job and income – as it relates to the success and sustainability of the company as a whole.  In a worker co-op, the employees democratically control the management and operations of the company, with each employee-owner having an equal vote.

Generally, this means that all employees, no matter their salary, job title, or years of employment, are entitled to one vote per person on all matters brought before the membership of the company.  However, this does not mean all employees have to be involved in every company decision.  A worker co-op should still have a Board of Directors, and can also have other officers (for example, a President or a CEO) to set policies, manage day-to-day operations of the company, and determine when important decisions should be put to the members.  Of course, the members vote for who is on the Board and can also vote for who the President or CEO is to be.

Taxation of Cooperatives

Co-ops have unique income tax structures governed by Subchapter T of the Internal Revenue Code.  This tax structure is similar to partnership taxation, but with some different terminology.  Profits of a co-op are called “net margins”.   The members of a co-op are deemed “patrons”.

Under Subchapter T, net margins are not taxed a the co-op level, but are instead allocated to the patrons on an annual basis similar to a partnership distribution.  Unlike a partnership distribution however, co-op allocations are based on a patrons use of the co-op rather than their investment.  For example, in an agricultural co-op, if Farmer A uses 3,000 acres of the co-op’s land and Farmer B uses 10,000 acres, Farmer B had more “patronage” of the co-op and should expect a larger allocation.

Subchapter T states at least 20% of the allocation to a co-op’s patrons must be in cash.  The remaining 80% can also be distributed in cash, or in can be retained on the books of the co-op as “patronage equity”, to be redeemed sometime in the future.  Consequently, patronage equity allows a member of a worker co-op to build personal assets and net worth by having an equity account that can be redeemed when he or she retires or leaves the company.

Each patron should receive a Form 1099-PATR from the co-op every year reporting the allocation (both cash and non-cash).  Then, each patron is responsible for paying his or her own income taxes based on the reported allocation.

If you would like to form a co-op or have a question related to an existing co-op, contact our offices today!

 

 

 

 

 

 

Colorado Legislative Watch: Encouraging Employee Ownership of Small Businesses

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UPDATE (4/21/2017):  House Bill 17-1214 passed both the House and the Senate and is on its way to Governor Hickenlooper’s desk for signature!

On February 27, 2017, House Bill 17-1214 was introduced in the Colorado House of Representatives.  The goals of the Bill are to educate state policy makers on the benefits of employee ownership and to create a revolving loan fund through the Office of Economic Development to assist existing small business with converting to employee ownership.

Nearly half of Colorado’s workforce is employed by small businesses, but this workforce is approaching a potential economic crisis:  About 66% of small businesses in the U.S. are owned by “Baby Boomers” who are going to be retiring in ever-increasing numbers over the next decade.  However, many of these Boomer business owners have no succession plan for their businesses upon retirement, and market analysts are predicting there aren’t going to be enough buyers for all these small companies hitting the market.  Thus, not having a concrete succession plan increases the risk that these companies will simply be liquidated – assets sold, accounts closed, and employees laid off.

A number of recent studies on employee ownership show that employee-owned companies are statistically better for the economy than traditional ownership models.  For example, employee-owned companies have lower rates of layoffs and lower rates of failure after 5 years of business.  Employee-owned companies also have better annual sales figures, and employees in an employee-owned company earn 5-12% more than their counterparts at other businesses.  These benefits are rooted in the fact that in a democratically-controlled, employee-owned company, the goals and motivations between management and the workforce are aligned.

So, the goal of H.B. 17-1214 is to convince and assist these retiring Boomer business owners “sell” their companies to their employees!

Fundamentally, employee-ownership could be a meaningful way to address the growing income- and earnings-inequality that is plaguing our country.  If H.B. 17-1214 passes, it will be an exciting development in Colorado and perhaps, a model for the rest of the country on the economic benefits employee ownership!

 

 

10 Legal Documents Every Startup Should Have

Legal Documents
  1. Bylaws / Operating Agreement

 A company’s Bylaws (in the case of a corporation) or Operating Agreement (in the case of an LLC) provide the legal backbone for how it operates.  If your company does not have bylaws in place, state statutes will control how the company is run.  However, these default rules might not be the best fit for your company, so it is much better to strategically think through how you would like your company to be run.

For example, if there is a major disagreement among the owners that “deadlocks” the company from being able to do anything, generally one of the only remedies under state statutes is that an owner can file a lawsuit asking the court to wind up and dissolve the company.   This is usually a lose-lose for everyone, especially if the company was doing well prior to the deadlock.  The owners could avoid this scenario by having certain dispute resolution provisions in the bylaws, or by having a limited, advisory-only member of the company who effectively acts as a tie-breaker, the process for which would be set forth in the bylaws.

  1. Insurance

After establishing a well-thought out corporate structure and executing governance documents, every company should make sure that they have good insurance coverage.  This may not come cheap, but it’s an important investment for any business to make.

Beyond a general commercial liability policy, insurance can cover anything from cyber liability to director/officer liability to life insurance for key founders.  Also, if you are selling any kind of product to the public, consulting with an attorney who specializes in products liability is advised, as they will be able to assist you in mapping out this additional exposure to risk and preparing any contracts or disclaimers to include with the sale of your product.

  1. Shareholders’ Agreement

This agreement, which also may be called a “Founders’ Agreement” or “Buy-Sell Agreement”, can help you govern the relationship between the owners of your company.  You and your business partners may be on the best of terms now, but running a company might put a strain on your relationship sooner than you think.  Interpersonal conflict between founders is one of the most common and predictable reasons for why companies fail.  Thus, a shareholders’ agreement goes a long way to protect your investment in the new business.

This type of agreement should contain vital information such as who can be a shareholder or serve on the board of directors, what happens in the case of a shareholder’s death or impairment, or what happens when a shareholder files for bankruptcy, resigns, retires or is fired.  It should also outline how much shares of stock are worth and who will be required to purchase the shares of the owner who is leaving.

  1. Non-Disclosure Agreement (NDA)

NDAs protect the confidential information of your business.  They are used when one or both parties in a relationship wish to disclose confidential information, but want to ensure that the person or organization who receives it does not disclose it to anyone without consent.  For example, if you are looking for a manufacturer to produce your company’s new widget on a mass scale, you should probably have each potential manufacturer you interview sign an NDA so that they can’t turn around and start making your widget anyways.

Keep in mind, NDAs are worthless unless they are actually signed by the party against whom you wish to enforce it.  No matter what verbal promises were made before or after information was disclosed, it is advised you get your NDA in writing and signed by both parties before any confidential information is shared.  This way, both parties clearly know their duties and privileges as they are receiving business information from the other.

  1. Intellectual Property Agreement

This document is mandatory if you wish to acquire, sell or license intellectual property (e.g. copyrights, trademarks, patents).

If you are giving or receiving all the rights to a certain piece of intellectual property, that is called an “assignment”.  If you are giving or receiving only a few rights related to the intellectual property (for example, the right to print and distribute someone’s copyrighted book), that is a “license.”

Whether you are just starting out or a well-established business, intellectual property or “IP” is often a significant piece of your business’s value.  An IP agreement protects this value.

A good IP agreement should be comprehensive, covering the financial compensation, date of the assignment/license, the rights and obligations of the Assignor and Assignee and timelines for payment, representations and warranties, indemnities, and more.

  1. Privacy Policy

A privacy policy is essential for online businesses because data privacy issues are being subject to more legal scrutiny than ever before.  Your privacy policy should outline how your business collects information on customers, what that information is used for, and how it is stored and managed.  It should also explain the rights and control of a customer’s personal information.

Currently, data privacy laws are a patchwork of various state laws and federal regulations.  Some industries, such as education and finance, are also subject to special rules.  Some states, such as California, have enacted laws for any business that targets customers in that state.  If you have concerns about whether you are following the law in this complex area, consulting with an attorney is strongly advised.

  1. Terms & Conditions

This item is essential if you conduct any business online.  Your website’s terms and conditions regulate the online transactions where you sell your products or services to clients.

Well drafted website “Terms and Conditions of Use” will deal with issues such as returns and refunds, consumer guarantees, deliveries, disclaimers and competitors.  They will also have the effect of limiting liability for any information and material that may be on your site in relation to third party information or content that is included on your site.

Additionally, it should lay down the rules for people visiting the website as well as explaining that any intellectual property on the website is protected.  Your website’s terms and conditions should be easy to read and accessible before a transaction takes place.

  1. Founders’ Assignment of Intellectual Property

Each and every person who works in any manner for the company, including the founders, should execute an agreement assigning their creations to the company.  A founder’s IP contributions could be anything from patents, software, logos and marketing materials, customer data, and more.

Especially during the startup phase of a company, almost all of the value of the venture will be tied up in the IP, so if the company cannot prove it actually has legal title to these assets, the company is essentially worthless.

  1. Employee Contracts or Offer Letters

 Having a easy to understand contract or offer and acceptance letter with employees is essential for setting forth expectations and ensuring the employee is tied into the team.  Topics that could be covered in an employee contract or offer letter include who the employee reports to, who will own the employee’s work product, basic expectations, required commitments, share vesting and all other “rules” the employee must abide by. This prevents misunderstandings and thus can go a long way to protect the company from HR-related disputes.

  1. Liability Release Forms

 Startup companies tend to have a variety of fun work events that may involve risk.  For example, maybe your company has an annual dodgeball tournament against an important vendor or maybe you want to organize a company “hiking day” for bonding and team-building.  If so, you should have all employees sign a liability release form so that your company doesn’t become liable for an unexpected accident.

Trademarks: A Primer for Colorado Business Owners

Trademark Primer

A “trademark” is any word, name, slogan, symbol, or combination thereof, including packaging, configuration of goods or other trade dress, which is adopted and used to identify goods or services, and to distinguish them from goods or services offered by others.

The primary goal of trademark law is not to establish an exclusive property right in the mark, but rather, to protect consumers from confusion in the marketplace.  Thus, your trademark rights are violated if someone else is using your mark (or a mark confusingly similar to yours) in a way that is likely to cause confusion to existing or potential customers.

Technically, “trademark” is the term to use for tangible goods and products and “service mark” or “servicemark” is for non-tangible services, but nearly everyone, even trademark attorneys, use “trademark” for both categories.

“Common Law” Trademark Rights

Many people believe you can only have a trademark if you file for a registration, but this is not true!

Trademark rights can be established under common law simply by being the first use a mark for a business endeavor.  Your common law trademark rights extend as far as the geographic area in which you use your mark.

For example, if Roger started a plumbing business called Roger’s Parts & Plumbing in 2002 and has continuously used the name “Roger’s Parts & Plumbing” in the Denver metro area ever since, he will have likely established a legal right to “Roger’s Parts & Plumbing” under common law in the Front Range.

If, in 2017, Judy tries to start a plumbing business in Denver called “Roger’s Parts & Plumbing”, Roger could use his trademark rights to legally stop Judy from doing so.  Consumers would be confused about which “Roger’s” business is which.  Plus, the new “Roger’s Parts & Plumbing” could unfairly take advantage of the goodwill and reputation Roger has established over more than 10 years of business.  These are the very problems trademark law was designed to address.

However, if Judy starts a plumbing business called “Roger’s Parts & Plumbing” in Durango, Colorado instead of Denver, nearly 350 miles away from where Roger operates, Roger might have trouble proving that his common law rights extend that far.  Similarly, if someone starts a punk band in Denver called “Rogerzz Plumbing”, Roger would have to prove his trademark rights extend beyond the plumbing industry in order to stop the punk band from using that name to promote music and live shows.

Federal Trademark Registration

Registering your trademark, even if you have established strong common law rights to the mark, is always advised.  This allows you to provide notice to the world that you are using the mark, and affords you certain statutory rights and protections as well.

The U.S. has a two-tiered system of trademark protection:  federal and state.  A federal registration issued by the U.S. Patent & Trademark Office (USPTO) give the registrant rights through the entire United States.  A state registration will grant rights within that state’s boundaries only.

Generally, in order to file for a registration with the USTPO, the trademark’s owner first must use or plan to use the mark in “interstate commerce.”  This means the mark is used on a product or service that crosses state lines or that affects commerce crossing such lines (for example, an Internet business that caters to interstate or international customers).

At first glance, registering a mark with the USPTO appears to be a relatively simple process. It requires a completed application, a specimen, and a statutory filing fee.

However, doing some research before spending the cash on the filing fee, which can range from $250 to $375 or more depending on the type of application submitted and how many class of goods or services you want to list for your mark, is strongly recommended.  This is because all applications will be examined by a USTPO Trademark Examiner for registrability under the Lanham Act (15 U.S.C. § 1051 et seq.).

Some things CANNOT be trademarked under the Lanham Act.  You are not allowed to claim the generic name of a product or a service itself as your trademark.  Roger cannot trademark “Plumbing” or “Plumber” for his plumbing business.

You cannot register “clearly descriptive” marks, which are those made of dictionary words which describe some important characteristic of your product or service (e.g., “Delicious Apples” if you have an apple orchard business).  You also cannot register “deceptively misdescriptive” marks (e.g., “Leather Shoes” for shoes that aren’t actually made of leather).

However, “suggestive” marks only give some vague idea about the products and services covered by the trademark, and are registrable.  Sometimes the boundary between unregistrable clearly descriptive marks and registrable suggestive marks isn’t very clear. This can result in long disputes between applicants and the USPTO.

There are many other rules for what is allowed for registration under this Act, and if your application is rejected, you do not get a refund of your application fees.  As such, consulting with a trademark attorney is advised before you begin the federal registration process.

If the Trademark Examiner determines your mark can be registered, it is then published in the USPTO Gazette, and if it is not challenged within 30 days of publishing, it will be registered. The total process can take 1 year at a minimum.  After registration, you can use the symbol ® after your mark to show it has been federally registered.

Colorado Trademark Registration

Trademark registration under Colorado law[1] is easier, faster and cheaper than federal trademark registration.  It is used to protect a trademark within the state.

A Colorado trademark registration allows for a standard character mark (expressed in ordinary English letters, Roman and Arabic numbers, or punctuation, without any stylization) and a special form trademark (logos, pictures, design elements, color or style of lettering).[2]

To file a Colorado trademark registration, you submit a Statement of Registration of Trademark electronically at the Colorado Secretary of State’s website with an attachment of your mark and the goods/services category your mark will be used in.  The current filing fee is $30.

Unlike the USPTO, there is no examiner who is going to look at your application to make sure you have completed it correctly and that the mark is appropriate for registration under state law.  Instead, when you file your application, you certify that in your good faith belief, you have the right to use the trademark in connection with the goods or services listed your application, and

your use does not infringe the rights of any other person in that trademark.

Colorado trademark registrations are effective for 5 years and may be renewed before expiration in successive 5-year terms.[3]  (Prior to May 29, 2007 however, Colorado trademarks were effective and renewed for 10 years.[4])

Obtaining a Colorado trademark registration does not authorize the use of the federal registration symbol ®.[5]  However you can use “TM” or “SM” (for a service mark) after your mark.

If you are interested in speaking with one of our attorneys about registering your trademark or stopping someone else from using your mark, give us a call.

[1] Section 7-70-101, et seq., C.R.S.

[2] Section 7-70-102(2)(f), (g), C.R.S.

[3] Sections 7-70-104(1)-(2), C.R.S.

[4] Section 7-70-109, C.R.S.

[5] Section 7-70-103(4), C.R.S.