Franchising v. Licensing: An Entrepreneur’s Dilemma

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For those wishing to start a business and work for themselves, there are a number of perplexing decisions that have to be made right up front. One of the most important decisions that you will have to face is whether to license a product, service or idea from someone else, or enter into a franchise agreement. Of course, you can always create your own ideas, in which case you will want to secure them as intellectual property with patents, trademarks and copyrights. But today, we want to focus on the question of how to leverage someone else’s idea to make money.

Franchising is the way of the future

Many businesses work on a franchise model. This means that for an up-front fee and royalties, you have the opportunity to use the brand, supplier network, training, and resources of a larger company. The advantages to this approach are obvious, in that they allow you to get hands on training and specialized knowledge from someone who has already “done the hard work” of figuring out how to make a successful business run. You can learn from their mistakes, train with them, and even observe how their work is done in other stores.

Additionally, franchises typically require a certain amount of advertising from each of their franchisees. This means that by joining a growing network of other franchisees, you benefit from the marketing money that all of the franchisees are putting into the brand in a nation or region.

Of course, all of this assumes that the brand itself and the name have become well known and have a positive reputation. By spending money and constantly giving a percentage of your sales right off the top to this entity, you are giving up a fairly big bargaining chip as an entrepreneur right at the start. This means that you want to be sure that the franchise that you are tapping into has a great reputation and a name that is growing in the region of the country you’re in.

It also means that you are tied to this company. If they end up in a lawsuit because their products are allegedly infringing on others, you may be a part of that lawsuit too. If they have monetary problems, then the dissolution of the entire franchising network will certainly affect you. You want to make sure that there is a great deal of financial health in the “mothership” that you are tapping into.

Licensing products: a halfway approach

Instead of franchising, you also have the opportunity, in many cases, to license the product from someone else. This means paying them royalty on everything that you sell. This is similar to the franchising model but often doesn’t necessarily require that you enter into the same long-term binding agreements. You give them a royalty every time that you make a sale and that is it. You don’t get hands-on training, but you also aren’t typically required to do the kinds of marketing and other training sessions that can be required as part of franchise agreements. You aren’t affected if the franchise network breaks up because you can keep licensing the product or intellectual property from whomever owns it. You usually don’t get to sell it under the same brand because you are using their product in your business.

The advantages to licensing are less control from the outside. One of the biggest disadvantages is that they can typically stop licensing after a period of time, leaving you out in the cold. Of course, your requirements with the company are less onerous and you have more opportunities to branch out from there, should you desire.

Conclusion

Working with a business savvy attorney team is extremely important. These are just two of many approaches you have in building a business from the ground up. As an entrepreneur you may also want to consider what the same investment would do if you were to create your own product or service. Navigating the waters of licensing and franchising are extremely important and require careful analysis up front about how to best set up your business for success. If you have questions about licensing or franchising call one of our attorneys at Cornerstone Law Firm to set up a consultation today.

Making Your Band into a Brand: Does Your Band Need an LLC?

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While it’s not strictly necessary, an LLC can help your band. Whether you’re rocking out with your audience in a packed concert or recording a new song in a quiet studio, there are certain risks and responsibilities your band may encounter. An LLC can help to limit those risks and protect the interests of your band and its members.

What is an LLC?

A Limited Liability Company (LLC) is a company that can be essentially anything you want. Once established, the LLC can operate as a full legal entity separate from any members, owners, and employees. You can think of it like a person. In much the same way that you are a legal person when you’re born and given a social security number, an LLC becomes a legal “person” when it’s made.

What does this mean for your band?

As a legal entity, an LLC can do everything a person can do: make contracts, own intellectual property, sue and be sued. All of these can be helpful benefits for your band.

Contracts

With the ability to make contracts under its name, the LLC will be the party responsible for executing the contract. You may sign the contract under the authority of the LLC, but you will not be personally responsible. This means if you cannot pay or otherwise perform under the contract, the LLC is responsible instead of you. Others may sue the LLC for breach of contract. Even if they sue the LLC and take all of its property, they can’t come after your personal property. Only in very rare and egregious circumstances will they pierce through the LLC to reach you.

Intellectual Property

LLCs can also help to keep your intellectual property organized. You can set it up so that the LLC (and not the individual members) owns all the copyrights to your music. This will make it easier to share profits and reduce friction between band members over who owns the copyright and who receives the royalties.

Dissolving the LLC

If your band ever breaks up, you can dissolve the LLC. The law provides automatic and simple processes for the dissolution of an LLC and the distribution of any remaining assets. This can help you avoid conflicts between band members.

Other Benefits to LLCs

Clarifying Expectations

Like we said before, an LLC can be essentially anything you want it to be. You create it by filing articles of organization and creating a legal contract called an operating agreement. You can do whatever you want within this operating agreement. One benefit is that you can assign individual band members, managers, agents, and other people specified roles, responsibilities, and benefits. This can help to clarify expectations and let everyone know what to do. And, in the event that someone can’t or won’t live up to those expectations, the operating agreement can provide a remedy for you.

Fiduciary Duties

LLCs create what lawyers call “fiduciary duties.” Fiduciary duties exist between the members of the LLC, and between the members as a whole and their employees, managers, and officers. This means that everyone must act with:

  1. A duty of loyalty—They will not exploit the LLC and its members for personal benefit or for the benefit of a third party.
  2. A duty of care—They must do their best in good faith to advance the interests of the LLC as a whole.

Let’s say a manager becomes a member and starts to exploit the LLC for the record label’s interest. That person has breached their fiduciary duty and can be sued and expelled from the LLC. They must then return any assets they took and provide compensation for any damage they have done.

Better Credit Options

Because LLCs can form contracts, they can have credit scores. This can be helpful, especially if your own credit score is not so good. If you wanted to, say, lease equipment, you may not be able to do so under your own name. The LLC can have better credit than you or any of the other band members. Many businesses actually prefer to give financing to business entities rather than individuals.

Tax Benefits

Finally, there are tax benefits for LLCs. As a business, you can “write off” the costs of doing business, the depreciation of instruments and other equipment, and possibly even the costs of promoting and advertising yourself (though this may vary). You would not be able to do this as an individual when filing your taxes, unless you can honestly claim you’re fully self-employed as a member of the band.

Also, the LLC—just like a person—pays its own taxes. If the LLC makes money, it pays corporate taxes. You only pay whatever income comes through the LLC to you as part of your income taxes. This means you can “hold” money within the LLC and wait to distribute it to yourselves until the right time (like when taxes are lower).

Call Cornerstone Law Firm for help.

As you can see, there are lots of great benefits to forming an LLC for your band. If you’d like to set up an LLC, call Cornerstone Law Firm. Our attorneys have experience with drafting operating agreements and other organizational documents for lots of LLCs. We can help with yours too. Give us a call today to set up a consultation!

Liquor Licenses in Pennsylvania: A Uniquely Valuable License

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Ever since the introduction of prohibition in America, alcohol has been subject to unparalleled legal controls. The passage of the 18th Amendment to the United States Constitution reflected the growing national mood around alcohol—namely, that it needed to be guarded against as a danger in society.

Even with the repeal of prohibition by the 21st Amendment (the only constitutional amendment to ever be completely repealed), one important piece remains. The 21st Amendment’s “section 2” gave states unusual power to legislate or prohibit the “transportation or importation…of intoxicating liquors.”

Pennsylvania has taken full advantage of the powers granted by the 21st Amendment. It created state sanctioned (and apparently constitutional) monopolies on alcohol. Each county is given a limited number of “liquor licenses” controlled by Pennsylvania’s Liquor Control Board. These licenses are extremely valuable, as each one represents a limited opportunity to sell one of America’s most popular commercial products.

The Responsibilities of Liquor License Ownership

Along with this monopoly power comes remarkable responsibilities for the license holder, however. The duties include requirements to keep precise records, available upon demand by the Pennsylvania State Police, and to keep licenses separate in ownership from one another. Generally, a person may not own more than one license, and other rules restricting the transfer of licenses to people of “sound character” mean that a liquor license is a valuable commodity.

This also means that penalties against this license are a big deal. If the Liquor Control Board receives citations filed by the State Police or other enforcement agents, they retain power to penalize the license. Such penalties “go with” the license if it is sold or otherwise transferred. This means that the value of the license is diminished permanently by “bad acts” or negligence of the owner.

If you’ve been cited as a liquor license owner, it is important for you to contact a lawyer immediately to discuss your options. It is also important to ensure that you are abiding by formalities as required and ensuring your license stays “clean” and up to date.

There are also a number of strategies available to you if you’re having trouble paying costs or taxes, including escrowing the license for a period of time, or even putting the valuable liquor license up as collateral for a loan. Anything is better than losing or damaging the license.

Conclusion: Contact Cornerstone Law Firm

Liquor licenses are controlled very carefully in Pennsylvania by the Liquor Control Board. If your business owns a liquor license, it is important that you comply with the regulations and keep it clean from citations, back taxes, and other issues. Furthermore, when transferring liquor licenses, you have to be careful to comply with all appropriate rules and regulations. If your business owns or is buying a liquor license, contact Cornerstone Law Firm so that we can help you to comply with the law.

Cornerstone Attorney Successfully Wins Six-Figure Judgement for Berks County Contractor

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On Wednesday February 1, 2023, Attorney Joel Ready received a favorable verdict from a Berks County jury on behalf of one of our clients. The client was suing a homeowner who failed to pay a substantial bill for work done on their house. The case was a three day jury trial, heard in front of Judge Sprecher in the Berks County Court of Common Pleas. The trial involved multiple witnesses, experts and engineers.

The jury was out for about an hour and a half before returning a verdict of well over a hundred thousand dollars on behalf of Cornerstone’s client.

“We are very pleased to obtain a favorable verdict on behalf of our client,” says Joel Ready, the attorney who handled the case. “Collecting bills is an extremely important part of a successful business’ operations and we were glad to defeat the workmanship claims made by the homeowners in this case.”

For Berks County businesses, Cornerstone Law Firm continues to be a resource in collecting past due bills, helping to defeat spurious claims of bad workmanship, and more. If you have a construction case, as either a homeowner or a contractor, and wish to discuss a problem, or if you are a business owner and wish to talk about debt collection, call Cornerstone Law Firm today for a consultation.

3 Ways to Protect your Company’s Intellectual Property

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When you have employees sign agreements with your company, it’s important that you keep in mind how those agreements contribute to protect intellectual property. As a general rule, employers who employ someone to work at their company do not have any right to restrain those employees from taking with them their knowledge or skills gained at the company. If you have sensitive intellectual property that you don’t want exposed to a competitor, what should you put into your employee agreements when someone starts? Can you add something to their employee agreement after they’ve started if you realize you didn’t have it in writing already?

Here are 3 things that we recommend putting in your employee agreements:

1. Confidential information clause.

Many employee agreements include a confidential information clause. This section of the agreement restrains the employee from using confidential information in future employment. It’s important to note that Pennsylvania law restricts the scope of these clauses to information that is truly confidential. Although not in Pennsylvania, a story that illustrates this point comes from Chicago courts, where Jimmy John’s had all its employees sign confidential agreements in an attempt to keep them from competing at other sandwich shops in the future as employees. This was held to be a violation of the law, in that there was nothing confidential about making sandwiches.

Similarly, you can’t just say that your information is confidential: you have to have something that is worth protecting. This “thing” that you want to protect could be a trade secret, a confidential process or even something like a customer or employee list. Confidentiality clauses are great, but they only protect that which you are already protecting. This is why it is best to supplement your confidentiality clauses with protection on your server and computers, as well as an employee handbook that reminds employees of the types of information that they are not to share with outsiders. In some cases, courts will even allow you to enforce this once they leave and go to another company.

2. Work for hire clauses.

Employees who work for you and come up with an invention, even on company time, may still be able to claim that they have ownership of rights of the invention. That’s why it is important that employers have a clause in their contract that says that anything that is invented in the scope of their employment belongs to the employer. Once again, as above, this is not a catch-all clause. The property that is being referenced must be something that was actually invented, and not merely some new way of doing something that is already in existence. An employee who is increasing their skills or doing better at the job that they are assigned has not invented something just because they have a better a way of doing it within the company. However, if they’ve invented something brand new, something that no one else has ever thought of, something that’s new both inside and outside of the industry, a work for hire clause can ensure that the invention belongs to the company and can only be used by the company in the future.

Courts have traditionally upheld these restrictions, especially where patents are involved. Having a work for hire clause in the agreement allows the company to be owner of the patent, rather than the individual or team that worked on it. This is also why it is important to have standard employee agreements across your whole company. If several people collaborated on the idea, it is important that all of them have signed some form of this agreement.

3. Trade secrets.

What happens when you discover something that can’t really be patented but which is a secret in your industry? Maybe it’s a special technique that no one else has figured out, a special recipe that’s impossible to reverse engineer or duplicate, or a complicated piece of machinery that is only used at your company? Your company may be able to restrain others from using it by claiming the trade secret doctrine. Trade secrets are a complicated area of law and they are claimed far more commonly than they are able to be proven. Nonetheless, if your company really does own something that is a secret, protecting it becomes vitally important. That is why you want to have an agreement with your employees that identifies the trade secrets and makes it clear to the employee that the employee can’t use it outside of the scope of the company’s employment, including once they leave. Such agreements are enforceable but are strictly construed against the employer.

Can I require existing employees to sign new agreements?

This brings us to an important question. What if you’ve been working with certain employees and you become concerned that they may use your intellectual property or leave your company? If that’s the case, it is still possible to have those employees sign agreements, but courts have generally held that you have to offer the employees something new—something more than ongoing or continued employment—in order for them to be legally enforceable. Some employers will offer a bonus for those that sign the agreements and others have offered promotions and a raise. It is important that any such contract be supported by some additional consideration that the employee was not entitled to already.

Conclusion

Contact the business lawyers at Cornerstone Law Firm to support your business. If you own a business with intellectual property, it’s important that you have lawyers who understand the world of IP, including copyrights, trademarks, patents, trade secrets and more. At Cornerstone Law Firm our business attorneys have litigated these cases to the highest level and can explain the ins and outs of your situation to you. Contact us today for a consultation on your business needs and let us help you figure out how to protect yourself now and in the future.

Cheated Out of Commissions

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If you’re in sales, you know the unique challenge of living and dying by your sales number each month or quarter. Working hard to continue to impress your employer and avoid the “What have you done for me lately?” mentality is part of the rough-and-tumble world of sales. But what happens when your employer tries to cheat you out of the commissions you’re owed? In today’s blog post, we tackle some of your options if your employer is reneging on an agreement to pay you a commission.

There are primarily three ways that our attorneys see employees cheated out of commissions. First is when an employer changes the terms of commissions partway through a job. The second is a lot more like a scam, where an employer goes around promising new salespeople jobs that pay commissions and then fires them after a few months of collecting sales before they ever pay. The third is when an employer tries to use complicated formulas to hide how much money is being made from sales.

First: Do you have to accept a change of commission?

In a situation where an employer changes the terms of the commissions in the middle of a project, Pennsylvania law has generally recognized that they have to pay what has been previously agreed to. As a simple example, if your employer agrees that for every service job you sell, you get 10% of the price, they can’t change in the middle of a sale that is almost completed and say now you only get 5%. They can, however change the rate for future sales. The gray area starts where an employer changes terms in the middle of a time period which might affect open sales. In this example, suppose an employer raises a base salary, but cuts commissions to 5% starting immediately on all sales, including those not concluded. In this instance, the change may be lawful, but the employee may also have the right to insist on the old contract until those sales are finalized.

Employees have several options in this situation. The first is to politely push back, whether by internal email or in a conversation with your boss. We always prefer to get things in writing, but even an oral conversation would suffice if there is a way to document it after the fact. An employer generally has the right to change future commissions, but an employee is within his or her rights to decline the change on open jobs.

The employer who refuses to pay earned commissions can be sued personally.

In situations where an employer refuses to pay commissions, you have powerful remedies under the law. You can sue the employer as well as any owners or officers of the employer. You are entitled to reimbursement of attorneys’ fees and penalties on top of the wages owed.

In addition, you may be part of a class action that has rights with other employees who were similarly cheated. If your “draw” doesn’t rise to the level of minimum wage with the time you’ve put in and without your commissions, you may also have a claim under the Minimum Wage Act in Pennsylvania or the Fair Labor Standards Act (FLSA) under federal law. Both of these allow powerful remedies.

If the math is complicated, make sure you’re not getting cheated.

Employers are allowed to offer complicated schemes to determine payouts and commissions, and sometimes these are in everyone’s best interest. But if the formula is complicated, make sure you are double-checking the numbers. If your pay is dependent on how much the company is making, you’re entitled to check the books regularly to see that your pay is being correctly calculated. In counseling employers, we often advise them that simple is better, because even unintentional mistakes can lead to lawsuits, attorneys’ fees, investigations and more.

Conclusion

If you have questions about a commission or unpaid wages, we welcome you to call us at Cornerstone Law Firm and set up a consultation with one of our attorneys. Our attorneys help employees who have been cheated out of wages to be made whole and to ensure that employers don’t get away with giving them less than what they deserve. We also counsel employers and help them find fair ways to compensate employees that make everyone more successful. Call for your consultation today.

Who owns an LLC?

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Limited liability companies are one of the most important tools available to business owners to keep their assets safe. Forming an LLC under Pennsylvania law provides protection against creditors and provides clarity of ownership in case an employee or someone else tries to claim that they have some right to ownership of your company.

In Pennsylvania you do not have to list who the owner of an LLC is on the Department of State website. In most cases, the Department of State will not have any information at all, either public or private, about who the owner of the LLC is. Unfortunately, this sometimes brings about disputes between different people who claim to be owners of an LLC. So, who owns an LLC and how can you prove it?

The first and best evidence of ownership of an LLC is what is written in the operating agreement. An operating agreement is signed between the members of an LLC and lays out their ownership interest. In most cases, the ownership interest of an LLC cannot be changed without a unanimous vote of all owners. In rare cases, it can be done with a majority vote and a buyout where the operating agreement has specially provided for that option.

But what happens if you don’t have an operating agreement? What do you do if there is no written documentation at all of who the owners are? This can lead to some very messy situations, including where oral agreements between the alleged owners come into play. Courts will allow testimony to the ownership of an LLC that is oral, even if there is no signed or written document to back it up. Other evidence, such as history of transactions, proof of money invested, evidence regarding the time or effort invested (known as “sweat equity”) and evidence of statements made to third parties are all relevant in determining ownership.

Of course, the best way to prevent a dispute over ownership is to make sure that your operating agreement clearly outlines who the owners are and that you have clear rules laid out in advance on how someone can be purchased out of their ownership interest if there is a conflict. This allows a company to continue as a “going concern” and allows the owners to avoid conflict in advance. If your company doesn’t have this clear documentation, now is as good a time as any to reach out to a business law attorney and get this matter straightened out once and for all.

At Cornerstone Law Firm our attorneys help clients everyday to work out ownership disputes and to try to avoid them in advance, if possible. Our attorneys have litigated multi-million dollar disputes over LLC ownership, and have helped negotiate favorable resolutions out of court as well. If you own an LLC or if you’re part of a group of owners of an LLC, reach out to us to talk about your options in ensuring that your ownership interests are safe for the long term.

Does it have to be Notarized?

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We are often asked by clients whether it matters if a certain document is notarized. Under Pennsylvania law it is a very rare circumstance that a document must be notarized. The reason a notary stamps a document is to confirm that the signature is from who it purports to be from. This means that if Bob Smith says that they signed the document, the notary has checked the ID of Bob Smith and confirmed that it is indeed Bob Smith.

Beyond that, a notary stamp does not prove anything about a document. It does not prove whether the document is legally binding, whether it’s valid, whether there are defenses to it, or who is at fault for not upholding the contract that it is on.

Notary stamps are typically strongly recommended on wills because the person who signed it will not be alive when it is testified to. Notary stamps are important on Power of Attorney documents because of how important the powers are that the person is giving away. And, of course, banks and insurance companies often require documents to be notarized before they are mailed in to prove that it really is who is signing it, since they won’t meet the person.

Beyond these situations notary stamps really aren’t required. This is common question that we get. “I signed this document, but it’s not notarized. Does this mean I can get out of it?” The short answer is no, at least not because of the lack of a notary stamp. Now none of this means that getting something notarized is a bad idea, but simply that it does not in and of itself make a document any more binding than it already was.

If you are looking to dispute a document, notarized or otherwise, Cornerstone Law Firm can help. Contact us today for a consultation.

Eminent Domain: Theirs for the Taking?

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We might be cheering when traffic circles are installed to curb accident occurrences or when roads are widened to accommodate an increase in traffic. Over time, country fields can give way to schools and public parks as a result of growing populations. Done in the name of progress, these projects certainly provide a public benefit, but they can come with private detriment. It is commonly the case that private parties hold legal title to the land needed for these public improvements. For this reason, it is important for all landowners to understand their rights when their private property might be seized for a public purpose.

Eminent domain is the legal doctrine by which a governmental body is permitted to condemn private property for public use. Often called a “taking,” this ominous sounding legal power might seem unopposable, but it is no foregone conclusion that any proposed taking will be permitted as constitutional. The landowner has various grounds on which to challenge a taking because the exercise of this power must conform to legal requirements. It is for the government to show that its exercise of eminent domain does not violate the constitution or state law.

First, any taking of private land must be for public use. Pennsylvania’s Property Rights Protection Act amending Title 26 expressly limits the powers of state and local governments to condemn private property for use by private entities. Outside of the enumerated exceptions, the government must show that its intended purpose for the land serves a public benefit and is not being used for a private enterprise. Common examples of recognized public purposes are roadways and schools.

Second, the government must pay the private owner just compensation for the property. The private owner is not relegated to taking just any offer extended by the government. The fair market value of the property is the standard measure, but this measurement will change in the event that only a portion of the property is taken. When only a portion of the property is taken, just compensation will be the fair market value of the entire property less the value of the portion remaining (fair market value minus the portion not being taken).

In the ideal situation, the landowner and the government will reach an agreement regarding the sale price and proceed with the property transfer without court intervention. When the parties cannot agree on a price, or when the landowner does not wish to sell, a condemnation action will commence. Not all condemnation cases are resolved in favor of the government. Pennsylvania caselaw provides many examples of attempted takings which were not permitted by the courts, so it is important to understand your rights and how you can fight to protect your property.

If you have been notified that the government intends to seize your property, or if you are facing a condemnation action, the attorneys at Cornerstone Law can help. Contact us to schedule a consultation today.