FTC’s New Rules and Website Creation

About eight months ago, I wrote a post regarding the FTC’s proposed rule changes regarding endorsements and testimonials.  Those rules, with some slight changes, will become a reality on December 1, 2009.  If you are interested, the FTC has put together its 81 page Guides Concerning the Use of Endorsements and Testimonials in Advertising, in which the FTC highlights its thoughts and reasoning regarding the comments and its eventual decisions regarding the changes.

Depending on who you read, the rule changes are minor or they are the end of the world.  I generally agree with Robert J. Ambrogi in his post which asks the question The FTC Blog Rules: Overbroad or Overblown?  He concludes that some of the reactions to the rules have been exaggerated in scope, but that those who regularly endorse products or services should exercise caution. 

The rules certainly change the playing field by bringing social media like blogging within the scope of the jurisdiction of the FTC.  But those rules are also good and are generally designed to protect consumers from snake oil salesmen and deceptive advertising.  We need to remember that the FTC has discretion in its enforcement of the law just like a traffic cop who can consider mitigating circumstances before issuing a speeding ticket.  Likewise, abuses are always possible.  As concerned citizens, we need to recognize that the FTC is walking a tight-rope while balancing competing concerns.  On the one side is the danger of prosecuting innocents, on the other side is allowing harm to consumers by failing to stop the bad guys.

I will be the guest for B. Hopkins on November 18, 2009 at 1pm MST on her internet radio show to talk about the FTC rules as they relate to website creation.  It should be a fun discussion and I invite you to join us.

A Little Preoccupied with Our Newborn Son – Elijah John

Just wanted to announce the birth of our fourth child, Elijah John Griess born on Saturday, October 17, 2009 at 11:23 AM, 6 lbs and 14 oz, 20 inches long.

Momma and baby are doing great and the siblings are loving their new little brother. We went home yesterday afternoon and have begun to figure out what the new normal looks like.

DRC Law Gets Recognition Regarding Recent ESI Ruling in Federal Court

Back on January 17, 2009, I posted a blog on a recent ruling my office obtained from the District Court for the District of Colorado in Smith v. Slifer Smith & Frampton/Vail Associates, et al., No. 06-cv-02206-JLK-MJW, D.C.Colo. As I discussed, Michael Reagor of our office obtained an adverse inference regarding missing electronically stored information in the case.

We have now posted the Order for anyone who might be interested at the DRC-Law website. The Order is also available for viewing on Google Docs.

In addition, the case has been discussed in various blogs including the Electronic Discovery Law blog and Practical Ediscovery.

As it is my firm, I’ll leave the comments and analysis to others. Suffice it to say, we are happy with the result.

Legal Assessments: Fundamental Value of a Separate Legal Business Structure – Part II

Last time I wrote on some of the basic reasons why having a separate business entity is important.  Specifically, it facilitates the business to becoming a distinct commodity apart from the individual or individuals who make up the business.  This post will help to identify how legal principles and structures can assist in establishing and facilitating the business’s separateness.

First, creating Articles of Organization or Incorporation establish the business structure.  When creating an LLC, the Articles of Organization notify the state that the entity has been formed.  Articles of Incorporation go a bit further and establish the fundamental structure of a corporation identifying the initial Board of Directors, the shares that are authorized and the like.  However, this is only a first step in creating a truly separate entity.

Second, beyond Articles are such documents as the Operating Agreement, the Bylaws, Buy-Sell Agreements, and Shareholder Agreements.  These legal documents are essentially contracts which can more specifically spell out the rights and responsibilities of the the various owners, the executive officers, and interested parties.  They can ensure that the business has a method for succession of ownership or authority, and an objective foundation on which to engage in business. Such documents are key to establishing who is responsible for different parts of a business’s operation, how the interested parties are to interact, how notice is given for major meetings and activities, and who has the authority to engage in activities on behalf of the business.  The documents not only provide the independent guidelines for how the business activities take place, they are designed to protect various interested parties from being taken advantage of and ensure a level of stability and accountability between the parties.  Solid formational documents provide a system and procedure for fair operation of the business, while also providing protection to the business when outside eyes examine the business.

Third, businesses should keep clear records of their activities whether it is Board minutes and resolutions, or the accounting of its revenue and expenses.  Letters reciting the business name and its actions and its business reasoning for such actions, can do a lot to not only provide an institutional memory, but also protect the individuals as they engage in business activities.  These documents demonstrate that the business is operating distinct from the individuals who make it up, give notice to the public of who is acting, and provide authority for the business to act.

Fourth, businesses can use various contracts and procedures within the business to establish the goals and purposes of the business.  A simple example is an employee handbook or a policy regarding public relations.  Businesses can use contracts with customers and suppliers to establish the scope of its engagement and how much it is going to give or receive in transactions.  Another example fundamental to establishing a business as a separate entity can be written procedures for how the business is to be accomplished to provide reliable service that is consistent with the business goals and purposes.

Finally, businesses that have a secure and clear identity apart from the individuals within, can build value into the company by presenting to the public, its partners, suppliers, and customers, a clear image of who it is, and what it does.  Such clarity helps to build strong relationships for continued and productive future interaction.  It also opens avenues for the creation of valuable trademarks, and an increased clear market presence.

When a company takes its distinct identity seriously, and uses legal tools available to it in a clear and effective manner, it creates opportunities for the company to add value to its operations.  These include making the most of the resources available to it and establishing a corporate identity that facilitates transactions and profit from the sale of its products or services.  It is able to protect itself and its assets by relying on the actions of the company apart from the individuals within.  In summary, it is able to present itself clearly and reliably to the persons that make up the business, the public, and to other companies so it can engage in business most efficiently.

Some very practical examples of how a distinct business entity can be advantageous are such things as building a credit history that can be used to obtain loans or a line of credit for operations and expansion.  Another is the creation of a business that has value regardless of whether the same people are working at the company facilitating investment and the continued operation of the business after key personal move on.  One can more easily sell for a premium ownership in a distinct business than in a business that is essentially tied to specific person or persons.  And another example is a distinct business protects the participants from tax and other liabilities because the documentation demonstrates the business apart from the persons engaged.

Future posts will more closely examine how some specific legal tools and principles can be used to help a business add value to its operations for its owners and participants.

Legal Assessments: Fundamental Value of a Separate Legal Business Structure – Part I

Almost anyone starting a business activity considers the formation of some sort of legal business structure such as a limited liability company, a corporation, or a limited partnership.  Generally, the most important reasons for doing so cited by business owners is the limited liability afforded to the owners for activities engaged in by the business entity.  Another factor in selecting a business structure is getting the best tax treatment for the activities in which the business will be engaged.  However, while these issues are key, the creation of a separate entity has advantages related to the simple fact that it is a separate entity.

Sole Proprietors and General Partnerships

Before addressing the value of a separate entity for conducting business, remember that anyone can conduct business without creating a separate entity.  A person selling goods or services as an individual is a sole proprietor, and two or more persons working together to sell goods or services is a general partnership.

The essence of such a business is that the person or people are the business.  Such persons are personally liable for their activities when doing business because their business activities are personal activities. 

Contrast a Business Entity

In contrast, a person who forms a legal entity for their business activities is wearing two different hats depending on what they are doing and how they represent themselves.  When going to the mountains for a vacation, they are personally responsible for their activities and can do things the way they personally prefer.  But when they conduct business as the entity, they must maintain the business persona and act as the business entity.

The advantage of acting as a separate entity is that one can build the business apart from personal issues.  Personal preferences or values still can, and should, impact the business activities, but the impact and implications of applying preferences and values is different.  For example, a personal preference to discriminate against a legally protected class of persons is unacceptable in business activities, whereas the same discrimination in private life is acceptable, even if there may be a social stigma attached.

Key to this distinction when creating a business entity is the way that the law views a business entity as a legally established and supported structure engaged in commercial activities with the public.  In other words, the law recognizes that the a business entity is a special social structure and that the relationships are different.

Some Advantages to Treating the Business Entity Separately

Besides tax status, one primary advantage to treating business entities as distinct is the ability to create systems and structures within the business that perpetuate the goals and values of the business.  The business can be worked on apart from changing personal lifestyles or activities.  Work can be broken down into discrete activities that can be systematized and formalized.  This allows principals to find people who can do the jobs necessary to keep the business going without over-committing themselves, being limited by their particular skills or talents, by their own time constraints, or having to always be be the producer.

In addition, treating a business separately from personal life helps to build a corporate culture.  Corporate culture can be instilled and reinforced by the policies and procedures of the company, its goals, products, or services.  One business can have a techy orientation, another can be environmentally oriented, and yet another can be kid friendly.   These cultures can exist apart from the particular orientations of the owners, principals, shareholders, members, or employees.

Finally, creation of a separate entity for business activities expands the founder’s influence to “change the world”, and creates a legacy.  No longer is the influence of the business person limited to their personal activities and capacities, they can create a business institution that independently operates to provide an income stream, provides jobs and livelihood for others, increases productivity and value for society, and influences society according to the values and goals established within the business entity.

The bottom line is that a business entity is an institution apart from those persons who form or operate the entity.  This gives the entity a “life of its own” that creates value.  When done well, it allows the entity to become a commodity that can be bought, sold, trademarked, and an independent source of revenue.

Legal Assessments: An Introduction from a Relational Perspective

Many businesses simply do not know where they are at legally.  Often, business owners believe that the legal aspects of their business are a thorn in their side that is to be avoided if possible, and dealt with only when absolutely necessary.  However, most business owners also realize that business takes place within the context of law. 

For example, a business’s existence as a limited liability company (LLC), corporation, or partnership, is governed by state legal requirements and responsibilities.  In addition, all interactions between businesses, suppliers, associates, affiliates, employees, contractors, and their clients are contractual arrangements whether or not the relationship is memorialized in a contract.  And finally, business assets such as real property, information, and products, are each regulated by legal frameworks.

With this in mind, a business’s success is dependent on its compliance and exploitation of the applicable legal frameworks.  This post, and the ones to follow, will attempt to explore some of these legal issues affecting businesses from a relational perspective.

The Relational Perspective

Law is about relationships.  Fundamentally, law is the rules and norms that are recognized by courts in prior experiences from other situations, or proscribed by governing bodies as policies.  Those rules and norms cover all types of interactions whether the interactions are intentional contractual arrangements or are the result of general interaction in society.  

Businesses’ commercial activities are also fundamentally about relationships.  These relationships include interaction with the public, with the governing authorities, with other businesses, with employees or contractors, and with clients or customers.  Each of these relationships raises issues about expectations, performance, and enforcement.

While law often is known for addressing the resolution of conflicts which develop when a relationship has a problem, those same rules and norms used to consider what the fair and just resolution should be, also provide a great deal of insight into how a business can engage in its various relationships to accomplish its goals and purposes.

Application

Sometimes businesses view the pro-active application of law as a way to avoid loosing money, or keep from going out of business.  While this is appropriate in many circumstances, and a part of the analysis, such concerns side-step addressing the underlying reasons a business might get into a such a situation, and furthermore, misses the opportunity provided by, and the value available from the application of, legal tools and principles.

Because law is about relationships, running afoul of the law has a lot to do with a real, or perceived, mismanagement of how a business engages in its relationships.  When such problems develop, the law is called upon to resolve the relational conflicts caused by that mismanagement.  This can result in remedies such as requiring compensation or other activities to try to fix the problem. 

But on the other side, because the law is about relationships, it can also be exploited to understand how a business can best manage its relationships and maximize the value of its activities and opportunities to increase its earning capacity.

In short, the pro-active application of law to a business can go beyond risk management to address how a business can best create value-added relationships, protect and preserve assets, and increase its productivity.

Forecast

There are many ways that a business can use legal principles and tools to add value to its operations.  In the next post, I will start to talk about some of the fundamental reasons why a legal business structure, used properly, can be a great tool for businesses—including reasons that go beyond limited liability for the owners and favorable tax treatment.

Independent Contracts Presentation Tomorrow

I am making a presentation at Creative Connections tomorrow, July 17, 2009, 9 AM to 10:30 AM at Colorado Community Church. Direction are available HERE. The meeting is free and open to interested persons. Below are the slides I will be using.