Getting Started: Start-up Basics

for Creative Professionals

Program for Launching Artistic Entrepreneurs

(PLAE)

November 12, 2011

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About the Speaker Ronald L. Barabas, Esq., Corporate & Entertainment Attorney, Di Santo LLP

Ron’s practice is focused primarily on corporate and entertainment law. His entertainment law experience spans a variety of intellectual property, litigation and transactional matters related to film, music, radio, visual art, fashion, interactive development, publishing, and sports. Ron also has general corporate law experience with significant mergers and acquisitions expertise. In addition, Ron was engaged in the business of independent film production prior to pursuing his legal career.

Di Santo LLP is a full service law firm with offices in New York and Miami that specializes in all aspects of corporate and securities law, commercial litigation and regulatory investigations, entertainment and new media matters, intellectual property, and real estate transactions and finance. We have extensive experience in representing a variety of business entities, including real estate investment trusts (or REITs), investment banks, venture capital firms, real estate developers and small businesses. We have structured and negotiated a wide range of transactions from multi-million dollar securities offerings and private placements to complex mergers and acquisitions. We also counsel start-up businesses and entrepreneurs in entity formation and venture capital financing.

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Starting Your Own Business

• Advantages: independence; opportunity to

pursue your passion; tax benefits; earnings

potential.

• Disadvantages: no job or income security; no

unemployment insurance; total responsibility;

client non-payments; personal liability for

debts (which can be addressed); having to deal

with ongoing legal and tax issues.

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Initial Business Considerations

1. Market Opportunity: Define the market opportunity for your company.

2. Competitive Advantages: Identify competitive advantages that distinguish your product or service.

3. Valuation: Create a workable revenue model and supportable financial projections.

4. Management Team: Select management team candidates and advisors, preferably with experience in start-ups in your industry.

5. Funding: Determine project funding needs for 12-18 month period.

6. Objective: Define the exit strategy for the company and investors.

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Plan Ahead • First-time entrepreneur artists often get started

without fully considering and planning around the legal implications of their endeavor.

• Even if (or especially if) you’re going into business with someone close to you, it’s important to document expectations by agreement.

• An upfront investment in time and effort could save major costs and headaches in the future.

• While it is advisable to consult an attorney to help you plan within the unique circumstances of your new business, there are some other low-cost resources available to you that can help.

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Initial Legal Considerations

1. Choice of Entity: Determine which type of entity is

appropriate and file all initial founding documents as

necessary.

2. IP Protection: File patents, trademarks and/or

copyrights.

3. Operational Agreements: Execute protective

agreements needed to operate your business.

4. Employees and Independent Contractors: Assess needs.

5. Funding Options: Consider all funding options for

working capital needs.

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Choosing an Entity Type

• Why it’s important: limit personal liability

from business debts and lawsuits; added

credibility; prepare for the company’s future.

• Key considerations: limited liability; tax

treatment; costs involved; simplicity of entity

maintenance; flexibility on allocation of profits

and losses between multiple owners.

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Sole Proprietorship

Advantages

• No cost to form (excluding

business license or fictitious

name registration, if

applicable)

• Simple tax returns

• No unemployment taxes

• Flow-through taxation

Disadvantages

• Personal liability for

business debts and lawsuit

judgments

• Not a separate legal entity

• In certain circumstances,

clients may be concerned

that you will be considered

their employee for tax

purposes

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Corporation (C or S Corp.)

Advantages

• Limited personal liability

for business

debts/judgments

• Is a separate legal entity

• Provides some degree of

credibility and comfort to

clients regarding tax

treatment

• Audited less frequently than

sole proprietorships

Disadvantages

• Costs to form and maintain

• Must maintain corporate formalities in order to preserve limited liability

• Profits/losses can only be allocated in proportion to ownership

• C Corp: taxed as a separate entity; dividends or income distributions are taxed again

• S Corp: taxed like a sole proprietorship but shareholders must split profit based on % ownership

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Limited Liability Company

Advantages

• Limited personal liability for business debts/judgments

• No corporate formalities

• Is a separate legal entity

• Provides some degree of credibility and comfort to clients regarding tax treatment

• Flexibility for allocating profits/losses

Disadvantages

• Costs to form

• Self-employment taxes (like

sole proprietorship but

unlike corporation)

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Trade Name

• Should not be substantially similar to the name of another business in your field

• Conduct a name search in advance (Google; USPTO Trademark Database; Thomas Register; state corporation and business entity database)

• If operating as a sole proprietorship or partnership may need to register fictitious business name

• Be careful not to infringe upon a name that has been federally registered as a trademark or used in the marketplace

• Consider filing registration with state trademark office or USPTO

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Intellectual Property Issues

• All businesses need to protect their own and not infringe on others’ intellectual property

• Arts-related businesses in particular are more likely to draw revenue from the commercial exploitation of copyrighted material (e.g., writings, graphics, designs, music, software)

• If your business relies on intellectual property owned by another party, a license will likely be needed

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Types of Intellectual Property

• Patent: protects inventions that are new, useful

and nonobvious as judged by the USPTO

• Trademark: protects names, logos and other

marks used to identify a business or product

• Copyright: protects original works of

authorship that are fixed in a tangible medium

of expression

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Copyright

• Copyright protection vests when an original work is created, whether or not the work is registered (though registration is advisable)

• Categories include: literary works; musical works, including any accompanying words; dramatic works, including any accompanying music; pantomimes and choreographic works; pictorial, graphic, and sculptural works; motion pictures and other audiovisual works; sound recordings; and architectural works (See Section 102 of the US Copyright Law).

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The Importance of Copyright Ownership

• Only the copyright owner can (or can authorize

others to) reproduce, prepare derivatives of,

perform, display or otherwise commercially

exploit the copyrighted work.

• Who is the owner? When more than one person is

involved, copyright ownership should be

addressed before the work is created.

• Joint owners are entitled to license a work without

the other owners’ approval but must share profits.

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Generating Revenue from Copyrighted Works

• It’s up to you determine which rights you grant or acquire. – Transfer all rights: work-for-hire or assignment

(creator may be able to get a higher fee but loses all potential future income from the work).

– Transfer some rights and keep others (exclusive or non-exclusive licenses can be granted).

• Exclusive licenses (including work-for-hire and assignments) must be in writing to be valid.

• Although nonexclusive licenses can be oral, a written agreement is highly advisable.

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NDAs, Employment and other

Considerations

• Nondisclosure agreements are sometimes used with potential business partners, investors, contractors, employees and customers; they make clear that the party receiving trade secrets is bound not to disclose the information.

• How your company structures relationships with workers (employee vs. contractor) has important copyright, tax and various other ramifications.

• Other issues should be considered as necessary, including insurance and financing.

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Conclusion

• Entrepreneurs working in entertainment and the arts need to carefully consider basic legal issues like entity structure and intellectual property (IP) to protect themselves and meet their business goals.

• Confront legal issues right away to avoid future problems.

• While it is important to consult legal and tax professionals, a general working knowledge of IP law and contracts will be extremely useful in effectively managing your business.

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Some Helpful Resources

While there are many books, groups and other resources geared to specific disciplines that can help (e.g., All You Need to Know About the Music Business), below are some resources of more general applicability.

- Volunteer Lawyers for the Arts: non-profit that provides pro bono legal referrals, legal education and other services for low-income artists.

- New York Foundation for the Arts: free professional workshops, panels and other programs including their summer Artist As Entrepreneur Boot Camp.

• Books by the legal publisher Nolo, including Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants.

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For Questions:

Ronald L. Barabas, Esq.

Corporate and Entertainment Attorney

Di Santo LLP

• Email: rbarabas@disantolaw.com

• Phone: 212.766.2467 (Office) or 516.528.9961

(Cell)

• Fax: 866.428.3369

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