Do I own the code my contractor has written for me?

No, unless the contractor has assigned it to you.

Merely paying someone to write a program for you does not give you the copyright in that program. At best, it may give you a license to use the code. The scope of that license, however, may not be what you think.

Software coding doesn’t meet work for hire requirements.

Many stock independent contractors include language that the work done for a company or individual is being done as a work for hire. A work for hire grants the person paying the contractor copyright in the finished product. This sounds perfect for programmers, website developers, application developers, and more.

Except works for hire have to fall under one of 9 categories. Section 101 of the Copyright Act lists these categories as follows:

  1. Contributions to collective works;
  2. Parts of motion pictures or other audiovisual works;
  3. Translations;
  4. Supplementary works;
  5. Compilations;
  6. Instructional texts;
  7. Tests;
  8. Answer materials for tests; and
  9. Atlases.

Software code does not clearly fit within any of these 9 categories of works for which something may be made as a work for hire.

How can you own the copyright to the code created by your independent contractors?

The fix is simple. Your independent contractor should be required to sign a contract as part of his or her work for you. Part of this contract should be an intellectual property assignment clause.

The intellectual property assignment should include separate assignment sections for Copyrights and for Patents. The copyright section should include language:

  1. Assigning the rights of the contractor to the company;
  2. Stating that works that can be considered works made for hire are considered to be so;
  3. Stating that any works that cannot be considered to be works made for hire are assigned to the company; and
  4. Providing a scope of what work being done by the contractor falls under the assignment (in other words, not everything he codes during his contract work, for you and for others, falls under the assignment).

Verbal agreements to grant copyrights don’t work.

The only way a copyright can be transferred is through a written assignment that is signed by the person who owns the copyright and is transferring it to someone else. This is in Section 204 of the Copyright Act. (You get an added bonus if the signature is notarized.)

Any verbal agreements to transfer copyright create, at best, a license to use.

Get it in writing!

This is the key. Get it in writing, and get it signed by the contractor.

Contact us if you have an independent contractor doing work for you, but you are not sure if you own the right to what that contractor is creating.

 

 

Should I trademark my business name?

Yes, if your business name can be trademarked.

Trademark provides a powerful tool to protect the name and reputation of your business. It can harm you if another company or person begins using your name in connection with a product or service they sell.  This harm can come in two ways.

  1. Their use of your name may overshadow your name, leaving potential customers to seek out this competitor for business rather than you.
  2. Their product or service may be of poor quality causing the reputation behind your name to be harmed.

Trademarks are about both identity and reputation

Most people think of the first one—identity. They do not want their identity to be stolen by someone else. If they have a “Rocket Dog” hotdog stand, then they want folks coming to them when they want a “Rocket Dog”—not the hotdog vendor down the street who has begun using the name “Rocket Dog” too.

Reputation, however, is just as important. If the guy down the street using “Rocket Dog” as well has a really, really bad hotdog, then the reputation of “Rocket Dogs” will be harmed. If folks gt sick on his “Rocket Dogs,” then they won’t want your “Rocket Dogs.”

Owning a federally registered trademark allows you to stop someone else from using that trademark. In the example above, you could sue to stop your competitor from using the “Rocket Dog” mark, thus protecting your identity and your product’s reputation.

Not everything can be trademarked

Protecting your identity and reputation with a trademark sounds great, but not everything can become a federally registered trademark.

For example, someone can’t trademark the word car and then sue anyone who calls their car, well, a car. Car is too generic for trademark protection.

The four categories of trademark distinctiveness

U.S. law breaks trademarks into four categories of distinctiveness in order to determine whether they can be registered as a federal trademark.  These categories, in order of least likely to be registered to most likely, are as follows:

  1. Generic
  2. Descriptive
  3. Suggestive
  4. Fanciful or Abritrary

Generic marks describe the general category of the underlying product or service. Car obviously falls under the generic category. Generic trademarks cannot be registered.

Descriptive marks directly describe an underlying quality or characteristic of the underlying product or service.  Holiday Inn is an example of a descriptive mark. The words in the mark are descriptive of the underlying services provided—hotel rooms. Descriptive marks may be registered, but the person seeking the trademark has to show that something called “secondary meaning” has attached to the trademark. Secondary meaning is when someone thinks of the trademark owner when they think of the mark, rather than something else. In Holiday Inn’s case, do you think of an inn you go to on holidays when someone says Holiday Inn, or do you think of the chain of hotel called Holiday Inn? (I think of the chain myself.)

Suggestive marks may be registered without showing secondary meaning. Suggestive marks suggest the underlying service or product being sold, but it requires an imaginative step to be made by the consumer. Whereas Holiday Inn directly references inns, something such as BluRay or Coppertone suggests the product without directly references it. BluRay uses a blue laser (or ray) on its discs, whereas Coppertone helps you tan in the sun without being hurt, thus turning a copper tone.

Fanciful or arbitrary marks are the most distinct and easiest to register. A fanciful or arbitrary mark bears now relation to the underlying product or service provided.  Some examples include Exxon for gas, Apple for computers, and Comet for housecleaners.

To learn more about trademark law, here is a great overview of trademark law.

How do I know which category my trademark falls under?

You should consult with a trademark attorney. We register trademarks for our clients and would be happy to discuss your trademark questions with you.

The simple fact is that, while many business names can be trademarked, many more cannot. For example, my dry cleaners is called Professional Cleaners. There is an argument that this name would fall under the generic category. However, even if the name was not generic, it is at most descriptive. This would require my dry cleaners to show that when people think of “professional cleaners” they think of them, not something else. This is a difficult thing to do and probably not cost effective.

Do I have any rights to my business name if I can’t register it as a federal trademark?

Yes, every trademark has rights even if it is not a federally registered trademark. Someone cannot just take your business name without your permission and start using it for themselves. This is a violation of trademark law, and it is also unfair competition.

Stealing someone else’s name is a form of cheating—lying—that not only hurts you, but it hurts consumers. U.S. law does not allow this, and if something like this has happened to you then you should contact an attorney to discuss your litigation options.  (We litigate trademark cases and would be happy to discuss yours with you.)

Where should I incorporate?

There are two states you should always consider when incorporating:

  1. Delaware, and
  2. The state where your business will be located.

Many startup lawyers will tell you that you should incorporate in Delaware. End of story.

I do not believe it is that simple. Delaware is a fantastic choice, but it comes with drawbacks. Similarly, the state in which your business is located may also be a great choice. Let’s look at both options in more detail.

Advantages of Delaware

  1. Pro-business body of corporate law.
  2. Disputes within the business go before judges who are specialists in business law rather than juries.
  3. Investors may require you either incorporate or re-incorporate in Delaware anyhow.
  4. Incorporating in Delaware may signal you are serious about your business and attracting investors.
  5. Delaware has low incorporation fees.

There are other reasons why you should incorporate in Delaware. Ryan Roberts over at Startup Lawyer lists the top 5 reasons in his mind why you should incorporate in Delaware.  Brad Feld, a venture capitalist of some renown, discusses why you should incorporate in Delaware on his blog.

Disadvantages of Delaware

  1. Registered agents—If your business is not based in Delaware then you will have to hire a registered agent service. This will be anywhere from $50 to $300 a year depending on the level of service you want and need.
  2. Delaware franchise taxes—You will have to pay these. Some states do not have franchise taxes, but Delaware does. If you structure your company properly then these taxes should not be too high, but they are still another cost of choosing Deleware. Ryan Roberts discusses Delaware franchise taxes on his Startup Lawyer blog here.
  3. Added administrative burden—You may have to register your company in your home state as a foreign company anyhow, and this will create two annual filing requirements. This creates an added administrative burden which may not be easily borne by a startup company trying to stay lean.

Why choose your local state?

  1. Registered agents—Your registered agent can be someone at your company’s headquarters, rather than a registered agent service.
  2. Possibly no franchise taxes—Many states do not have franchise taxes. Some may have franchise taxes, but this can be overcome by placing no par value on stock. This is one less bill to worry about.
  3. You may have to register as a foreign corporation in your local state anyhow.
  4. No good venture capital fund will choose not to fund a company because of where it is incorporated. The VCs can always require re-incorporation in Delaware as part of the funding deal

Grellas Shah LLP has a FAQ on Startup Law that discusses the question of where to incorporate. It provides some good insight into the factors the founders of a startup need to consider.

Conclusion

What do I recommend to my clients? It depends on where they will be seeking funding, how soon they will be seeking funding, and the costs they can currently bear.

If a client has the money to manage the expenses of a Delaware corporation, and they will be seeking outside investment soon, then I recommend Delaware.

If a client is cash-strapped, then I recommend their home state. Since I practice in Georgia, I end up recommending Georgia in these situations.

A quick note on Georgia corporations

Georgia is a good state in which to incorporate. While there is a publication requirement for Corporations, the filings may be done online through the Secretary of State website. Further, Georgia corporate law is modern, if not quite as Board-friendly as Delaware law.

Should my startup be an LLC, S-Corp, or C-Corp?

You should form a corporation. Whether it begins as an S-Corp or a C-Corp depends on whether you will immediately seek investors, or whether you plan to operate for a few years and seek the S-Corp tax advantages.

Limited Liability Companies (LLCs) are popular among many accounts and lawyers. They are, however, very unpopular among investors. Some investors simply cannot invest in LLCs. Others just do not want to deal with the hassle.

A quick breakdown of the features of each follows:

C-Corporations

  1. Limits liability to the assets owned by the Corporation.
  2. Allows multiple classes of shares to be issued. (Preferred and Common.)
  3. Preferred by investors.
  4. Unlimited shareholders. (Although SEC reporting requirements will kick in at some point.)
  5. Double taxation. (Although this is not a big problem if your company is not making money initially.)

S-Corporations

  1. Limits liability to the assets owned by the Corporation.
  2. Allows only one type of share to be issued. (Common stock.)
  3. Cannot have more than 100 shareholders.
  4. Shareholders must be U.S. citizens or legal residents.
  5. Shareholders cannot be other companies.
  6. Can be converted into a C-Corporation quickly. (S-Corporation is a tax election, not a legal formation choice.)
  7. Pass-through taxation of profits and losses.  (This is why accountants love S-Corporations.)

Limited Liability Companies (LLCs)

  1. Limits liability to the assets owned by the Company.
  2. Allows ownership to be designed in any way the members of the Company desire.
  3. Can have unlimited members (owners).
  4. Pass-through taxation of profits and losses. (This is one reason why accountants love LLCs.)
  5. Simple management—no annual meeting requirements and other formalities required for Corporations.
  6. Incredibly flexible, but this also means each LLC has the potential to be dramatically different from one another.
  7. Investors do not like LLCs.

Conclusion

Whether you choose a C-Corporation, S-Corporation, or a Limited Liability Company will depend on your short-term and long-term strategic goals. While I prefer C-Corporations, each client’s situation is different. You should consult with your legal team and tax team (AKA, lawyer and CPA) to determine which legal entity fits you best.

You can also read about what other lawyers think about which legal entity is the best for new companies.

Joe Wallin at StartupLawBlog prefers C-Corporations for startup companies. (Companies typically seeking early investing.)

Ryan Roberts over at Startup Lawyer also prefers C-Corporations for startup companies.

Yoichiro (“Yokum”) Taku over at Startup Company Lawyer outlines the benefits and disadvantages of each type of legal entity, but also notes that he avoids LLCs and generally works with C-Corporations when it comes to startups. (He works with many tech startups.)