July 2014

For years, people who are starting corporations in the USA have been told to register in Delaware. That state has traditionally been known as one of (if not the) most business-friendly jurisdictions throughout the country, and there are several key reasons why.

Court of Chancery
The Court of Chancery was established in 1792, and over the last two and a half centuries has issued some of the most well-known decisions in corporate law of any judicial system in the United States. As a result of the breadth of knowledge and expertise held by the judges serving on the Court of Chancery, and the integral part that Delaware has played in the formation of corporate law in the U.S., not only has Delaware created an standardized body of case law that’s known to attorneys everywhere, but courts in other states will often look to Delaware decisions when facing new issues.

Corporate Flexibility
The corporate laws of Delaware have been established through both Court of Chancery cases and statutory regulations. The Delaware legislature has always been cognizant of the role that it plays in the formation of corporate law, and as such Delaware has taken a unique approach. In particular, Delaware corporate law serves more as a set of guidelines than requirements. For example, corporations that are formed in Delaware have great latitude to structure themselves internally through the use of committees and to limit the liability of directors and officers.

In addition to the latitude that the corporate statutes afford corporations, Delaware is also attractive because it allows a corporate entity to change its structure. Unlike in most states where once a corporation (or other entity, such as an LLC) is formed, the only way for that corporation to become an LLC, for instance, is by forming a new LLC and merging the two companies together. Delaware, however, permits a corporation to transform itself into an LLC (or other alternative entity) and vice versa.

Costs
Delaware is among the cheaper states to register a new corporation and, if your corporation will actually be doing business outside of Delaware, then it will not pay any income taxes to Delaware. The one area where Delaware is not unique, unfortunately, is that all corporations that are not doing business in DE must pay an annual franchise tax.
In conclusion, Delaware has rightfully earned its reputation as a business-friendly state and an attractive location for anyone thinking about forming a new corporation.

Fundraising

If you plan to raise money from outside investors, incorporating in Delaware is the common choice. Delaware has a well understood body of corporate law and familiarity is important when you are asking for money. If you incorporate your startup in Ohio or Colorado, venture capitalists may be weary due to their lack of knowledge regarding that state’s laws. You want to eliminate any obstacles a business entity or state of incorporation may cause in order to minimize the friction between investor and founder.

Starting a business can be one of the most rewarding, exciting, and stressful things you ever do. While forming a company with others can often makes a huge amount sense, as each person can bring unique skills and experience to the business, it is certainly not uncommon for issues or differences to arise down the track that founders simply do not foresee at the beginning of their relationship. Fortunately, both New York (NY) and Delaware (DE) law allow businesses to structure their organizational documents so that these issues can be adequately prepared for before they come up. Two of the big ones to keep in mind are:

Transfer of Ownership Interests

Whether you have a corporation, LLC or partnership, there may come a time when one of the founders decides to part ways with the company. When that happens, typically the existing owners will want tight control over who can purchase the ownership interests of the departing individual, and how this process is managed. Your corporate bylaws, LLC operating agreement, or partnership agreement can (and absolutely should) contain provisions that dictate how ownerships interests are transferred.

First, most LLCs (though corporations can also be structured this way) are set up so that all of the remaining Members would have to agree to any transfer of ownership interests. This can be modified so that only majority, or supermajority, consent is needed, but either way this puts some power in the hands of the remaining owners.

Second, you can include a right of first refusal in your bylaws, operating agreement or partnership agreement. A typical right of first refusal provision would require a departing owner to first offer his or her ownership interests to the existing shareholders, Members or partners. If none of the existing owners want to purchase the interests, then the departing owner may find a buyer on the open market. Once a buyer is found, that buyer’s offer would be communicated to the remaining owners who, once again, would be given a chance to purchase the interests at the same price. If the owners again reject the offer, then the departing owner can sell his interests to the third party.

Third, some companies have provisions regarding what happens to an owner’s interests in the event he or she gets divorced. Since most states would treat company ownership as a personal property interest, the founders may want to include language in the bylaws, operating agreement or partnership agreement that specifies that a divorcing member must sell, or that interests passing to the ex-spouse will be purely economic interests (with no voting or management rights), or any other provision that the founders agree upon.

Non-Performance or Under-Performance

In addition to including sections in your bylaws, operating agreement or partnership agreement that specify the procedure to be followed in the event a founder voluntarily wants to leave the company, one situation that is frequently left unaddressed in company documents is what to do in the event a founder fails to perform his or her duties. Without clearly specifying what each founder’s roles and responsibilities are, either in the formation documents or in a separate agreement, it is nearly impossible to involuntarily remove a founder from his or her position. This type of provision would typically specify what relevant the performance measure are involved, and include procedures for voting on performance by the remaining owners and for returning the removed owner’s capital contribution and any profits earned to that point. If you take the time to not only state what each person’s responsibilities are to the company, but also include provisions that permit the founders to reasonably remove a non-performing or under-performing owner, then you will ensure a smoother transition in the event you encounter this type of circumstance.

If you want to learn more about your rights as a co-founder, book an appointment with a General Standards attorney here.

In an effort to save money, an entrepreneur will take a short cut and copy another website’s Terms of Service or use a template off the web. How important can the terms actually be? You’ll rarely overhear someone exclaiming, “I always read the terms of service!” In fact, you’re much more likely to hear, “I’ll just copy these blocks of boilerplate onto my site. What’s the worst that could happen?!”
While admirable in a bootstrapping sense, this do-it-yourself approach can get you into hot water. Your Terms of Service is a legal document. If you don’t understand the clauses you are copying and pasting, you might find yourself expending a lot of time and – importantly – money down the road.
Let’s start out by understanding why a Terms of Service agreement (TOS for short, but also known as “Terms of Use” or “Terms and Conditions”) is important. This document is a binding legal contract that you form with the users of your website. Whether read or unread, the TOS governs what happens on your website. Among other things, it should govern what content you own on your site, your responsibility for data collected on your site, and all payments you receive for services or goods offered on your site. Your TOS will be a crucial document if you’re ever pulled into court if a user sues you. These are just a handful of the important reasons to have an appropriate and properly considered TOS in place.
Now that you understand the significance of the TOS, here are some reasons you should think twice about simply copying someone else’s TOS.

Reason Number One Not to Copy: This is Someone Else’s Copyrighted Work

Wholesale copying and pasting of another website’s TOS and passing it off as your own amounts to copyright infringement. Despite having similar sounding language and a general lack (but not absence) of creativity, TOS’s are protected materials under copyright law. Copying and pasting this same document and posting it on your website is legally similar as passing off another’s photograph as your own. You should have a lawyer draft a TOS specifically for your website, or look into an appropriate open-source licensed TOS.

Reason Number Two Not to Copy: Ensuring You Own Your Content

An essential part of your TOS addresses who owns the content on your website. Things like your company name and logo posted on your site, original content you generate and post on your site, like articles or photos, and even some user-generated content, constitutes your intellectual property. If you copy and paste this section from another website, they might have a different scheme of content ownership, and you may inadvertently give up your IP rights to your original content. Therefore, you want this section to be specific to your website and comprehensive in its explanation of your content and IP rights in that content.

Reason Number Three Not to Copy: Data Collection

Data collection refers to a section in your TOS that details what kind of data you collect about your users and what you do with that data. This section is so important for sites that collect large amounts of user data, this section is often folded into a separate privacy policy. In fact, many states (e.g., California) and foreign jurisdictions mandate the posting of privacy policies.
Data collection practices will vary greatly based on the type of website you are operating. The type of data a social network is going to collect is different from the data collected by a retail or commerce website. Anytime you collect personally identifying information, such as user’s contact information, credit card numbers, photographs, etc., you should have a clearly defined policy which sets out what you plan to do with this information and how you will be sharing it. This section needs to be tailored to your particular website and to the services it offers.

Reasons Number Four Not to Copy: Out of State Litigation

In every TOS, there is a section that addresses where disputes that arise under the TOS will be litigated. If you copy and past another website’s TOS, you may inadvertently be requiring yourself to litigate in California under California Law when you live in and conduct your business in New York. So, in copying someone else’s TOS you could be volunteering to be pulled into a court halfway across the country (or even in another country!) if sued by a user, which is a time consuming and expensive endeavor.
Reason Number Five Not to Copy: Receiving Payments for Services from Users
How you receive payments for your goods or services, when you receive those payments, what warranties you offer customers, etc., are important issues for any business. Websites aren’t any different. You need to let your users know the terms associated with payment for your products, so in the event of non-payment, refunds, or other types of disputes, you have evidence that the user agreed ahead of time to those terms, as set out in your TOS.

These are just a few areas impacted by a TOS. To ensure you have terms that adequately protect your interests, your best bet is to seek the advice of an attorney who can help tailor the agreement to your needs. To speak with an experienced attorney from General Standards, click here.