Jacksonville 904 June/July 2016 : Page 37
better SAFE than SORRY BUILDING THE BASICS OF BUSINESS ASSET PROTECTION by Jocelyn Tolbert A pediatric dentist opened her practice in 2000 on the east coast of Florida and devel-oped a clever name and logo that would appeal to children: “Safari of Smiles.” The dentist never registered the name or logo as trademarks with the United States Patent and Trademark Oﬃce (USPTO) or the State of Florida. But she did develop a practice that specialized in special needs children and attracted clients from throughout the Southeastern United States. In 2011, the dentist discovered that another dental practitioner on the west coast of Florida, was using the same name and a very similar logo to advertise on the Internet. June 2016 : 37
Better Safe Than Sorry
BUILDING THE BASICS OF BUSINESS ASSET PROTECTION<br /> <br /> A pediatric dentist opened her practice in 2000 on the east coast of Florida and developed a clever name and logo that would appeal to children: “Safari of Smiles.” The dentist never registered the name or logo as trademarks with the United States Patent and Trademark Office (USPTO) or the State of Florida. But she did develop a practice that specialized in special needs children and attracted clients from throughout the Southeastern United States. In 2011, the dentist discovered that another dental practitioner on the west coast of Florida, was using the same name and a very similar logo to advertise on the Internet.<br /> <br /> The story continues, as recounted by attorney Crystal Broughan of Marks Gray. The pediatric dentist came to us for advice on how to stop the other dental practitioner from using her logo and the name 'Safari of Smiles.' We discovered that the dental practitioner had filed a trademark application with the USPTO for the name in December 2005 and obtained a certificate of registration in July 2007. The USPTO records showed that a Statement of Use claiming to first use the mark Safari of Smiles, was filed on May 1, 2006. <br /> <br /> The pediatric dentist had documented evidence that she first started using the name 'Safari of Smiles' and the logo in 2000. She had priority in the marketplace. So we filed two trademark applications with the USPTO, one for the word mark, 'Safari of Smiles,' and one for the logo on August 12, 2011. We then filed a Petition for Cancellation of the trademark registration obtained only four years earlier.<br /> <br /> The dental practitioner hired a Washington, D.C. lawyer to fight for his registration but our client’s documented use of the trademark from 2000 clearly established her priority of use in the market. By February 6, 2012, his lawyer had filed a Voluntary Cancellation of the Registration. The USPTO then allowed the pediatric dentist’s logo and name 'Safari of Smiles' to register and issued Certificates of Registration.<br /> <br /> There were clear lessons for both dentists in this story. The pediatric dentist should have registered her trademarks with the State of Florida from the very beginning. Later as she developed her practice and started attracting patients from outside Florida, she should have filed a trademark application with the USPTO.<br /> <br /> The dental practitioner should have conducted a complete trademark search before he started using 'Safari of Smiles.' He would have discovered Dr. A’s website and use of the name.<br /> <br /> Both doctors incurred significant expenses that could have been prevented.<br /> <br /> Stories like these, as told by Broughan, are not uncommon. Starting a company is more than printing some business cards and putting up a sign. There’s a lot that goes into doing it right, including something that many would-be business owners hope they’ll never need: protecting themselves and their new ventures from lawsuits.<br /> <br /> “Asset protection is the method we use to insulate individuals from any potential liability,” says Jill Bechtold, an attorney and shareholder at Marks Gray. “It’s always done early in its best form. If you’re trying to protect yourself after a litigation, there’s going to be a lot of scrutiny. Your best practice is to protect yourself early and thoroughly.”<br /> <br /> If no asset protection plan is in place, the company’s owner can be held liable for lawsuits and claims against the business—for example, if someone falls on company property or an employee is hurt on the job. With a good plan in place, the company’s shareholders’ and owners’ livelihoods will be insulated from attack.<br /> <br /> starting RIGHT<br /> <br /> A company’s legal formation is one of the most important decisions you’ll make in the early stages of starting a business. It affects how a company’s management is structured, how much it will pay in taxes and how much personal liability the owners will have for the actions of the business.<br /> <br /> A sole proprietorship has just one owner, and this formation may look attractive because it’s relatively simple—setting it up takes a bare minimum of legal work. But under the law, that owner has unlimited personal liability for business debts and claims. This is also true under a few other structures, like general partnerships, in which every partner can be held liable. If your business is doing dangerous work, like repairing power lines or training skydivers—and even if it’s not!—you don’t want to be personally responsible for any mishaps.<br /> <br /> “Most businesses nowadays are going to be in an LLC format or an incorporated format. Most people don’t do partnerships anymore. One of the most preferred is an ’S’ corporation,” Bechtold says.<br /> <br /> Under an “S” corp, or subchartered corporation, shareholders have limited personal liability for the corporation’s debts and claims. A limited liability company, or LLC, also allows for limited personal liability. Anyone making claims against a business set up in this format will have difficulty holding the shareholders responsible. “If the company is being sued, only the company is liable,” Bechtold explains. Your house, your car, your personal bank account—they can’t be touched.<br /> <br /> Choosing the legal formation may be trickier than you think, however. “Involve your tax adviser from the start,” says Curt Castetter, a tax partner with the LBA Group. “We had [a client] a few years ago. They structured it all up with the attorney and it ended up costing the client money to pay self-employment tax on all the income. If it was structured a little differently, we could have avoided that. We ended up changing after a year or so, but if everyone had been on the same page to start with, it probably would have been caught.”<br /> <br /> No legal business structure provides absolute protection for its owners. Every company decision must be made with asset protection in mind—as if you didn’t have enough to worry about. For instance, say a company needs to buy a vehicle. It may seem easier—and perhaps cheaper—to purchase and insure it personally. But Bechtold says that’s not a good idea.<br /> <br /> “To protect the individual we’re going to buy the car in the company’s name. We’re going to make sure the company pays its annual dues to the state and then we’re going to buy insurance on top of that,” Bechtold explains. “Any time you’re putting assets in the individual’s name, yet you’re intending to use it for business purposes, there’s more chance the individual can be exposed in a case. You get the same outcome: you get to use the car, but you’re not setting yourself up for individual liability in case the car is in an accident.”<br /> <br /> Mixing of a business’ assets and finances with the owner’s in this way can open the company to what’s called “piercing the corporate veil.” This is a legal term for proving that an owner is liable by showing that he and the company were not separate and distinct. If the corporate veil is pierced, the owner might become liable for debts the company can’t pay.<br /> <br /> If a company must purchase assets, it may be wise to set up a Special Purpose Entity (SPE). Their “special purpose” is to own, hold and maintain assets that are essential to an operating business. An SPE can have legal title to real estate, intellectual property, equipment and more. Then, it may lease or license its assets to the core business. In this way, the assets needed to run the company won’t be jeopardized by judgements against the core business. Be careful, though.<br /> <br /> “You keep your building in a separate entity so if your operating entity gets sued, your building is safe. But depending on how the building entity was structured, you can get dinged with a double tax,” Castetter says. “[In Florida,] if you’re renting a commercial building, you pay sales tax on it. Just view the sales tax you’re paying as insurance.” <br /> <br /> All kidding aside, asset protection planning, while it can protect you, isn’t a substitute for insurance. In fact, insurance should be thought of as another layer of asset protection—it can help you and your business survive paying legal fees or settlements.<br /> <br /> “Insurance is a very vital part of this. You never know what’s going to happen,” says Bechtold. “It’s another layer. If you don’t have proper insurance then the company can be on the hook.”<br /> <br /> making CHANGES<br /> <br /> That’s all well and good, you might say, but what if my business is already set up and isn’t adequately protected?<br /> <br /> “Step one is to pull together any corporate documents you already have existing, register with [Florida Department of State Division of Corporations website] sunbiz.org, filing whichever documents you need to file with the state,” suggests Bechtold. “You need to work with an attorney who can help set you up, look at your bylaws, check your insurance policies. Do you have the right insurance, do you have enough? Use an expert who knows. Step two, you can identify what you’re missing and make sure you’re following all the rules to see that your company will be protected.” <br /> <br /> “The rules” refers to those implemented by the Florida Department of Business and Professional Regulation (myfloridalicense.com). This organization regulates and licenses companies and professionals of all types, from asbestos removal contractors to geologists, from restaurants to hotels. Whatever your business, ensuring it’s operating within proper guidelines and under the correct licensure can protect it from administrative complaints brought on behalf of the agency. Make sure you’ve protected all your intellectual property, such as the business name and trademarks, too—or you could end up like the aforementioned dentists.<br /> <br /> “If you didn’t register correctly and get the proper license, they can shut your business down. Contact the Department of Business Regulations or the Florida division of Consumer Services. They can provide you with some guidelines,” says Bechtold. “You can lose [your intellectual property] if it’s not properly set up in the business structure. There are specific steps you have to take when it comes to intellectual property. There’s the state, where you can get statewide protection under state rules, and then there’s the federal—what’s called the USPTO—and that offers you national and sometimes international protection.”<br /> <br /> If there’s already a suit being brought against your inadequately protected company, Bechtold says you may be out of luck. After the litigation has begun, moving assets is a red flag and can trigger more scrutiny.<br /> <br /> “Generally, there’s nothing you can do to protect yourself from judgement on a debt. You can’t move your stuff to get out of that judgement,” Bechtold says. “If there’s been something brought, your best bet is to notify everyone you can. Notify your insurance company if you have insurance. Most insurants are required to notify their company is there’s a potential claim or there is a risk they’ll deny coverage.” <br /> <br /> We’ve all heard that the best defense is a good offense. Asset protection is no different. “We set up businesses to protect the people,” Bechtold says. “Protect the individuals, and then the company.”<br />
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