FAQs from Nolo's Law Library

Legal FAQ Table of Contents

Raising Money Through Equity Investments

Learn about the pros and cons of bringing investors into your business.

Unlike a lender -- who temporarily provides you with money to operate your business -- equity investors actually buy a piece of your business. For better or worse, they become your co-owners and share in the fortunes and misfortunes of your business.

Here’s a look at the pros and cons of raising money through equity investors and the different forms this equity investment can take.

Investors' Rights

As co-owners of your company, your investors will have some say in the way you run your company. They will:

• probably be able to vote to elect your board of directors
• have a legal right to be informed about all significant business events, and
• be able to sue you if they feel their rights are being compromised.

On the other hand, investors can bring helpful business experience with them that can strengthen your company.

Investors' Return on Investment

People who invest in your business often accept the risk of losing their entire investment without guarantee of repayment. To offset this risk, investors often want to receive substantial benefits if the business is successful. For example, an investor may insist on a generous percentage of the business profits and, to help assure that there are such profits, want your salary capped.

The terms are always negotiable; there's no formula for figuring out what's fair to both you and the investor. In the end, you and your investors will have to work out what you are both comfortable with.

Your Ownership Structure

If you are considering having equity investors in your business, you must determine which ownership structure will work best for you and your investors.

General Partnership

If you recruit people to invest in your sole proprietorship, your business will, by default, become a general partnership. This means your equity investors will be general partners, each of whom is personally liable for business debts and liabilities, whether or not he or she takes part in running the business.

Many investors will want to insulate themselves from personal liability for business debts, particularly if they’re not going to actively participate in running the business. If that is the case, consider other ways to organize your business.

Corporation

Because corporations offer shareholders protection against personal liability for business debts (called limited liability), a shareholder of a corporation who doesn't participate in corporate activities and decision making is virtually free from liability for corporate debt or activity.

A shareholder who helps run the company can be liable to outsiders for his or her own actions -- for example, making slanderous statements or negligently operating a piece of equipment -- but isn't personally liable for corporate debts or the actions of corporate employees.

Not everyone chooses a corporation as their business entity because organizing and running a corporation involves some initial and ongoing paperwork, as well as some fairly substantial start-up costs.

Limited Partnership

If you form a limited partnership and your investors become limited partners, they will have limited personal liability for business debts. A limited partner's freedom from personal liability is similar to that of a corporate shareholder, as long as the limited partner doesn't become actively involved in running the business.

Every limited partnership must have a general partner who is personally liable for the debts of the business. That will probably be you, so you should evaluate your exposure to risk before you decide to form a limited partnership.

Limited Liability Company

Another option is to form a limited liability company (LLC) and sell membership interests in the LLC to your investors. LLCs combine the limited personal liability of a corporation with the tax advantages of a partnership, and have become increasingly popular in recent years.

Compliance With Securities Laws

The law treats corporate shares, limited partnership interests, and (usually) passive LLC membership interests as securities. Federal and state securities laws regulate the issuance of these securities to investors.

Before you sell an investor an interest in your business, learn about securities laws requirements.

Exemptions. Fortunately, there are generous exemptions that normally allow a small business to provide a limited number of investors with an interest in the business without complicated paperwork.

If you aren't exempt -- reconsider. In the rare cases in which your business won’t qualify for these exemptions, you have to comply with the complex disclosure requirements of the securities laws -- such as distributing an approved prospectus to potential investors -- and register the securities. In this case, it may be too much trouble to do the deal unless a lot of money is involved.

Err on the side of disclosure. Even if you qualify for exemptions to the securities disclosure rules, investors could accuse you of providing misleading assurances. Always suggest that potential investors check with their own financial and legal advisors to evaluate the investment. The bottom line is that, although each investor will assess his or her own degree of risk, you should disclose all the relevant information to them so they can make an intelligent, informed choice.

If you are thinking about equity investors for your business, get Investors in Your Backyard: How to Raise Business Capital from People You Know, by Asheesh Advani (Nolo). It takes you through the entire process of raising business capital -- from developing and pitching a financing plan, to signing the paperwork

The Commercial Lease: What You Should Know

Know what you’re getting yourself into when you rent space for your business.

Renting commercial space is a big responsibility -- the success or failure of your business may ride on certain terms of the lease. Before you approach a landlord, you should understand how commercial leases differ from the more common residential variety, and before you sign anything, make sure you understand and agree with the basic terms of the lease, such as the amount of rent, the length of the lease and the configuration of the physical space.

How Commercial Leases Differ From Residential Leases

It's crucial to understand from the get-go that, practically and legally speaking, commercial leases and residential leases are quite different. Here are the main distinctions between them:

• Fewer consumer protection laws. Commercial leases are not subject to most consumer protection laws that govern residential leases -- for example, there are no caps on security deposits or rules protecting a tenant's privacy.
• No standard forms. Many commercial leases are not based on a standard form or agreement; each commercial lease is customized to the landlord's needs. As a result, you need to carefully examine every commercial lease agreement offered to you.
• Long-term and binding. You cannot easily break or change a commercial lease. It is a legally binding contract, and a good deal of money is usually at stake.
• Negotiability and flexibility. Commercial leases are generally subject to much more negotiation between the business owners and the landlord, since businesses often need special features in their spaces, and landlords are often eager for tenants and willing to extend special offers.

Making Sure the Lease Will Fit Your Business

Before you sign a lease agreement, you should carefully investigate its terms to make sure the lease meets your business's needs.

First, consider the amount of rent -- make sure you can afford it -- and the length of the lease. You probably don't want to tie yourself to a five- or ten-year lease if you can help it; your business may grow faster than you expect or the location might not work out for you. A short-term lease with renewal options is usually safer.

Also think about the physical space. If your business requires modifications to the existing space -- for example, adding cubicles, raising a loading dock, or rewiring for better communications -- make sure that you (or the landlord) will be able to make the necessary changes.

Other, less conspicuous items spelled out in the lease may be just as crucial to your business's success. For instance, if you expect your camera repair business to depend largely on walk-in customers, be sure that your lease gives you the right to put up a sign that's visible from the street. Or, if you are counting on being the only sandwich shop inside a new commercial complex, make sure your lease prevents the landlord from leasing space to a competitor.

The Process of Negotiating and Signing a Commercial Lease

A landlord’s proposed lease is just the starting point from which you can negotiate changes.

The lease that you and your landlord sign defines your legal relationship. Along with your insurance policy and your loan documents, your lease will be one of the most important legal documents in your filing cabinet.

What does the lease do? The lease is a contract in which:

• You agree to pay rent for a certain period of time.
• You agree to abide by other conditions (such as using the space for a consulting business only, or not displaying outside signs unless the landlord first approves them).
• Your landlord agrees to let your business occupy the space for a set amount of time.
• Your landlord may agree to physically alter the space to fit your business, or provide amenities such as on-site parking and weekly janitorial service.

The landlord usually starts the process. Typically, you’ll be working with a lease form that’s been written by the landlord or the landlord’s lawyer -- and you can bet that neither one of them will be looking out for your best legal or business interests. In order to level the playing field, you need to learn a bit about the terms of a business lease, so that the landlord’s proposed lease is just the starting point from which you’ll negotiate changes.

There are no standard leases. Contrary to what a landlord may have you believe, there is no such thing as a “standard” commercial lease. Even if the landlord brings out a form that’s widely used in your community or printed by a legal forms publisher, it can always be modified. The only constraints on your landlord’s ability to negotiate come from pre-existing promises to other tenants in the building and obligations to lenders or insurers.

There’s always room to negotiate. No matter how official-looking the document that comes out of the landlord’s or broker’s briefcase, keep in mind that it’s negotiable. Just how negotiable depends on decidedly non-legal issues such as how tight the market is for your desired space, how badly the landlord wants to rent the space to you, and how badly you want it. Within the range of negotiability, however, your knowledge of lease clauses and the market will determine the success of the lease negotiation.

You'll need to decipher the meaning of lease clauses. Leases are full of legalese. Lawyers often dress up lease clauses in dense legal verbiage or burden them with mile-long sentences.The chart below may help you match a clause title to its subject matter.

Common Commercial Lease Terms

Understand the meaning of the landlord’s lease clauses before you negotiate.

Once you’ve found suitable commercial real estate and you and the landlord have agreed on the key features of the lease, such as how much rent you’ll pay and how long the lease will run, it’s time to formally spell out your deal in a binding, written lease. Most important? Head into the lease negotiations understanding the meaning of the landlord’s lease clauses. A thorough understanding of common commercial lease clauses will help you avoid hidden, onerous traps. It will also help you bargain for modifications in your favor.

The list below introduces you to the most common lease clauses.

Parties

Leases generally begin by naming the landlord and the tenant, in a clause entitled “Parties.” Or, the clause may be entitled “Landlord and Tenant,” or “Lessor and Lessee” (the landlord is the lessor and the tenant is the lessee). Although you might not think so at first, it’s important to look at these names carefully. For example, if you are a corporation or an LLC, you’ll want to make sure that your name on the lease is your legal name, such as “Able Investments, LLC,” or “Macro Industries, Inc.” An error in the way you or the landlord is identified can have serious repercussions. If you are an LLC or corporation and you list your personal, not corporate name, you may become personally responsible under the lease (avoiding personal liability is probably one of the reasons you incorporated your business or became an LLC).

Premises Clause

Somewhere near the beginning of your lease, often right after the Parties clause, you’ll see a clause that identifies the space that you’ll be occupying. This clause is often titled “Premises.” If you’re leasing an entire building, the clause should simply give the street address (and should describe any outbuildings or lots that come with it). If you’re leasing less than an entire building, you and the landlord need to describe the space more precisely. In particular, if you will have access to storage rooms, conference rooms, parking, kitchen facilities, and the like, you should spell this out.

The Use Clause and Exclusive Clause

A use clause limits how you’ll use the rented space. The limitations can be as broad as what business you’ll conduct there, as narrow as what specific services or products you’ll offer, or as nebulous as the quality level of your operation. Landlords can impose use restrictions for any of these reasons:

• The landlord has promised other tenants that no one will compete with them.
• The landlord is worried about liability if you conduct certain kinds of businesses.
• The landlord has a personal aversion to certain kinds of business activities. 

In general, you’ll want to avoid strict restrictions on your use of the rented space. Most of the time, you’ll count yourself lucky if the lease handed to you by the landlord does not include a use clause.

An exclusive clause is a promise by the landlord that only you and no one else in the mall or building may engage in a particular type of business or carry a certain type of merchandise. (Naturally, other tenants will have use clauses that prevent them from conducting business activities that would violate your “exclusive.”) Typically, only powerful “anchor” tenants get exclusives.

Term Clause

Near the beginning of the lease, you’ll see a clause entitled “Term.” This clause describes the length of your lease and specifies the starting and ending dates. You may be tempted to cruise right through it -- after all, if you want a five-year lease and the Term clause gives you five years, where’s the complication? Alas, there’s more than one tricky wrinkle, and they’re apt to be hidden and dangerous. For example, some leases start as of the date the lease is signed, even though you haven’t conducted business for even a day. Though you might not be responsible for rent right away, you will be responsible for other obligations in the lease, such as the requirement that you carry insurance. Done properly, leases should have many “start” dates, corresponding to when you can enter to set up, when your rent is due, when you become responsible for securing insurance, when you can open for business, and so on.

Rent

For most small businesses, the amount of the monthly rent obligation is a very important issue. It’s important to look carefully at the landlord’s lease clauses to see whether your rent estimates will pan out and to determine any new costs or savings, such as:

• expenses that you didn’t anticipate -- make sure you understand which parts of the landlord’s operating costs will be passed-on to you
• savings that may make it possible to shoulder other expenses -- for example, the landlord may offer a “tenant improvement allowance,” which you will use to get the space ready for your operations, or
• issues that you want to renegotiate, such as the landlord’s expectation that the rent will increase by a certain amount on a stated date.

Security Deposits

Your landlord may ask for a security deposit to assure that cash will be available if you fail to pay the rent or don’t make other payments required under the lease. Unlike residential landlords, who in many states may not ask for more than two months’ rent as a deposit, commercial landlords may demand whatever amount they think they need as a cushion to cover rent and other tenant financial obligations.

Or, instead of a security deposit, your landlord may ask for a “Letter of Credit” from your bank, in which the bank puts aside an agreed-upon amount of your funds for use by the landlord should you not carry-out your financial obligations.

Improvements and Alterations

If your new space will have to be customized to fit your needs, a big chunk of your lease should address this issue. You and the landlord will have to reach an agreement about who does the design, who does the work, when it gets done, and who pays for it. And if you’re going to occupy space in a building not yet completed, you’ll want to be sure that you pay for as little of the finish-up work as possible.

Maintenance, Utilities, and Code Compliance

The landlord’s lease will undoubtedly contain a Maintenance clause that concerns your duties to care for your own rented space (or for the entire building, if you are the sole tenant). If you’re a tenant in a multi-tenant building, you and the landlord will also have to settle on how the utilities will be billed and paid for, so you’ll often see a Utilities clause near the Maintenance clause in the lease. Finally, the landlord may expect you to keep the building “up to code” -- whatever that means (it often isn’t clear), in a lease clause sometimes titled “Compliance” or “Compliance with Laws.”

Parking, Signs, Landlord’s Entry, and Security

You’re likely to find several clauses in the lease that concern practical understandings you have with your landlord, about such things as parking and business signs. As you negotiate these clauses, you and the landlord will be trying to smoothly integrate your needs to run your businesses wisely. Although these clauses may not pack the punch of a Rent or Maintenance clause, they can be very important to a successful and convenient tenancy.

Insurance Clauses

Several kinds of insurance are available to cover the risks of leasing commercial space, including property and liability insurance, rental interruption insurance (this covers you if your business is unexpectedly interrupted, as would happen after a natural disaster), and leasehold insurance (this coverage protects you if your lease is canceled due to circumstances beyond your control and you have to rent elsewhere at a higher rent). You’ll need to evaluate each type of insurance coverage in the context of your lease and your landlord’s requirements, your business needs, and the property -- and negotiate accordingly. An insurance broker can help too, especially when it comes to choosing adequate levels of coverage.

Commercial Leases: Negotiate the Best Terms

Save money by knowing where landlords are willing to make concessions.

When you get serious about an available business space, chances are you'll be presented with a typed or printed commercial lease prepared by the landlord or the landlord's lawyer. As you read the lease, keep these points in mind:

• Rule 1: The terms almost always favor the landlord.
• Rule 2: With a little effort you can almost always negotiate significant improvements to the terms.

In theory, all terms of a lease are negotiable. But your negotiating power depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win many landlord concessions. If your area's rental market is tight or you are chasing a unique space, you'll have considerably less leverage.

Length of the Lease

One area of the lease you should always focus on is its length -- also called its "term." A short-term lease is almost always to your benefit. Shorter leases give you more flexibility if the needs of your business change -- for example, you want more space or decide that a different location would be better. There is a trade-off here, of course. A long-term lease ensures that you'll have an affordable business space for a predictable period of time. And landlords are often willing to make more concessions on longer-term leases.

If your business isn't particularly location-sensitive (a mail-order business or software testing lab, for example) and plenty of commercial space is available in your area, then a short-term lease makes sense. Even if the landlord doesn't renew your lease, finding comparable space won't be a problem.

On the other hand, if you have found an especially favorable location for a retail shop, restaurant or other business where location is key, deciding on the best lease term is more problematic. If your business does well, you'll want the right to stay on for an extended period. On the other hand, you'll probably be nervous about signing a four-year lease in case your business goes kaput.

A good solution is to bargain for a short initial lease with one or more options to renew -- perhaps a one- or two-year lease with an option to renew for two or three more years. Typically, an option to renew gives you the right to exercise your option to stay by notifying your landlord in writing a certain number of days or months before the initial lease period expires.

If you ask for an option, expect the landlord to want a higher rent for the renewal period. If the property is particularly desirable, the owner may also want an extra fee in exchange for giving you the option of staying or leaving after your initial term is up. This is a common arrangement, and if the space is important to the success of your business, seriously consider paying it.

Rent and Rent Increases

Another primary issue to consider when leasing space is how much rent you'll pay. It's sensible to check out rates for comparable spaces. If the rent seems unjustifiably high, try asking for a reduction. Many landlords, however, usually won't consider lowering the rent (except in poor economic times or areas), but you may be able to get a few months of reduced rent to compensate for moving costs.

Landlords will usually include an annual increase to your rent in your lease terms. If the landlord insists on keeping the clause, try to get a cap on the amount of each year's increase, and try to exclude a rent increase for the first year.

When you're shopping around, look carefully at whether the landlord will pay utilities, repairs, taxes and insurance. With a "gross lease," your rent includes these costs. By contrast, with a " net lease" you pay for them separately -- potentially a large sum. In fact, the best approach may be to offer to pay a higher amount for rent in exchange for eliminating these extras.

Tenant Improvements

If you'll need lots of improvements to the space, you may want to use the lion's share of your bargaining power to have the landlord provide them at no cost to you. If you're willing to sign a long-term lease, the landlord will be more willing to pay for improvements to the property.

Subleases and Assignments

Ask for the right to sublease or assign your space. That way, if you need to move out, you'll be able to have another tenant take your space and pay the rent, without having to break the lease. Or, if you rent enough space to grow into, you can sublease some of the space until you're ready to use it.

Buying or Selling a Business: An Overview

Here are the steps you'll need to take when you're considering selling or buying a business.

Each year, some 700,000 U.S. businesses change ownership. Most are small and mid-sized businesses, like retail stores, beauty salons, quick-print shops, restaurants, tax preparation services, landscapers, electrical contracting firms, and modest manufacturing operations. If you're thinking about buying or selling a business and want to get the best deal possible, expect to do a lot of planning and preparation.

Selling a Business

No matter what kind of business you own -- a professional services company, a neighborhood bagel shop, or a home-based website that sells imported garden tools -- there’s likely to be an interested buyer or two out there (assuming the price is right). But finding the right buyer and selling the business on favorable terms will require both planning and hard work.

Your first step is considering whether you’re ready to sell. Other steps will include understanding the sales process, preparing your company for sale, setting a price, seeking potential buyers, negotiating and preparing a sales agreement and other documents, and closing the deal. For more information, see Selling or Closing a Business.

Buying a Business

If you’re planning to buy a business, you also have many factors to consider. These include whether owning a business is right for you or for your lifestyle, what the potential for success in the field you’ve chosen is, and the risks involved. Owning a business can mean that you have signed on for longer hours and more worries than you’ve ever experienced as a hired hand -- but if you succeed, the financial and personal rewards are yours to savor. And of course, if you own your own business, no one can fire you.

Other things to consider include whether to buy a franchise or an independent business, how to find a business for sale, how to know whether the asking price is reasonable, and how to research the business's history and finances (what lawyers call doing "due diligence").

For more information, see Buying a Business.

Enjoy!

Whether you're selling your long-held business or buying a new one, enjoy this next, fresh phase of your life!

How to Form a 501(c)(3) Nonprofit Corporation

Here's how to form a nonprofit corporation and receive a 501(c)(3) tax exemption.

Forming a nonprofit corporation is much like creating a regular corporation, except that nonprofits have to take the extra steps of applying for tax-exempt status with the IRS and their state tax division. Here is what you need to do:

1. Choose an available business name that meets the requirements of state law.
2. File formal paperwork, usually called articles of incorporation, and pay a small filing fee (typically under $100).
3. Apply for your federal and state tax exemptions.
4. Create corporate bylaws, which set out the operating rules for your nonprofit corporation.
5. Appoint the initial directors. (In some states you must choose your initial directors before you file your articles, because you must list their names in the document.)
6. Hold the first meeting of the board of directors.
7. Obtain licenses and permits that may be required for your corporation.

Choose a Business Name

Before you form your nonprofit corporation, you need to decide on a name that complies with the rules of your state's corporate filing office. The information packet you receive from the filing office should contain your state's rules, but the following guidelines commonly apply:

• The name of your nonprofit cannot be the same as the name of another corporation on file with the corporations division.
• The name must end with a corporate designator, such as Corporation, Incorporated, Limited, or Corp., Inc., or Ltd. (This is required in only about half of the states.)
• The name cannot contain certain words prohibited by the state, such as Bank, Cooperative, Federal, National, United States, or Reserve.

Your state's corporations division can tell you how to find out whether your proposed name is available for your use. Often, for a small fee, you can reserve the name for a short period of time until you file your articles of incorporation.

Contact Your State's Corporations Division Your state's corporate filing division, usually part of the secretary or department of state's office, will often send you a packet of nonprofit materials that will be immensely helpful to you in forming your nonprofit. This packet may include sample or fill-in-the blank articles of incorporation, your state's nonprofit corporation laws, a filing fee schedule, and forms and instructions for checking the availability of your proposed business name. Contact your state's corporate filing office to obtain this packet.

In addition to confirming that another corporation in your state isn't already using your proposed name, you must make sure your name won't violate a trademark owned by another company (in your state or out of state). To do this, you'll need to conduct a trademark search.

Once you've found a legal and available name, you aren't usually required to file or reserve the name with your state -- when you file your articles of incorporation, your nonprofit's name will be automatically registered.

Prepare and File Your Articles of Incorporation

After you've decided on your business name, you must prepare and file articles of incorporation with the corporate filing office. This document goes by a different name in a handful of states; your state may instead use the term articles of organization, certificate of incorporation, certificate of formation, or charter.

Your state's corporate filing office will usually provide you with nonprofit articles of incorporation -- either a fill-in-the-blank form or a sample on which you can base your articles. Although preparing this document isn't difficult, you do need to include specific language to ensure that you'll receive tax-exempt status. Your state's nonprofit formation packet, if available, may include the required information. If not, or if you need help understanding the requirements, consult a good legal self-help guide such as How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo), to make sure your articles comply with your state's nonprofit law.

Apply for Your Federal 501(c)(3) Tax Exemption

After the corporate filing office returns a copy of your filed articles, you can submit your federal 501(c)(3) tax exemption application to the IRS. (The IRS requires you to submit a copy of your filed articles with your application.) This is a critical step in the formation of your nonprofit organization since most of the real benefits of being a nonprofit flow from 501(c)(3) tax-exempt status.

To apply for your exemption, you must complete IRS Form 8718, User Fee for Exempt Organization Determination Letter Request, and IRS Package 1023, Application for Recognition of Exemption. For instructions on filling out these forms, read IRS Publication 557, Tax-Exempt Status for Your Organization. (You can obtain all of these items for free by calling 800-TAX-FORM, or you can download them from the IRS website at www.irs.gov.) If you need a bit of help deciphering the IRS-speak, consider downloading Nolo's plain-English eGuide, Nonprofit Corporations: Qualify for Federal Income Tax Exemption.

Read the Tax Exemption Application Before Filing Your Articles While you can't actually file your exemption application until the corporate filing office has approved your articles of incorporation, before you file your articles, take a couple of hours to learn what it takes to qualify for the tax exemption. If you file your articles and then discover a problem as you begin working through the tax exemption application, you could be stuck paying taxes while you work through these issues -- or even learn too late that your group isn't eligible for an exemption.

After the IRS reviews your application, it will send you a letter indicating that it has approved your nonprofit status, or it might ask you for more information about your organization. The IRS can also deny your application outright. If this happens, see a lawyer who specializes in nonprofits.

Apply for a State Tax Exemption (If Necessary)

In a few states (California, Montana, North Carolina, and Pennsylvania), you must complete a separate application to get a state tax exemption. In other states, as long as you file nonprofit articles of incorporation and obtain your federal 501(c)(3) tax-exempt status, your state tax exemption will be automatically granted. In still others, to get your state exemption you must send in a copy of the IRS determination letter that granted your federal exemption. Contact your state tax agency to find out what steps you must take.

Draft Corporate Bylaws

Next you must create bylaws, the internal rules that govern your nonprofit corporation. Bylaws contain rules and procedures for holding meetings, voting on issues, and electing directors and officers. To create bylaws, you can either follow the instructions in a self-help resource or hire a lawyer in your state to draft them for you. Typically, the bylaws are adopted by the corporation's directors at their first board meeting.

Appoint Directors

Directors, who meet and make decisions collectively as the board of directors, have the authority (and responsibility) to manage and run the nonprofit corporation. Many states allow nonprofits to have just one director, but other states require at least three.

Hold a Directors' Meeting

The purpose of the first meeting of the board of directors is to conduct the initial business of the corporation and take care of other formalities, such as recording the receipt of federal and state tax exemptions.

The directors should first adopt the bylaws and elect officers -- state law usually requires a president, secretary, and treasurer, and sometimes a vice president as well. Then, the directors should authorize the newly elected officers to take actions necessary to start the business of the nonprofit -- for example, setting up bank accounts and admitting members.

After the meeting is completed, minutes of the meeting should be created and filed in your corporate records book.

Obtain Licenses and Permits

Many businesses, whether operating as for-profit or nonprofit corporations, partnerships, or sole proprietorships, are required to obtain state or local licenses and permits before commencing business. So, while you may not be subject to the kind of red tape that entangles profit-making enterprises, you should check with your state department of consumer affairs (or similar state licensing agency) for information concerning state licensing requirements for your type of organization. For instance, a local business license (sometimes called your tax registration certificate) may be required for your activities, and if you sell anything to consumers, you'll need a sales tax permit.

How to Obtain 501(c)(3) Tax-Exempt Status for Your Nonprofit

How to apply for tax-exempt status for your nonprofit.

Obtaining federal tax-exempt status is a critical step in forming a nonprofit organization -- most of the real benefits of being a nonprofit flow from your 501(c)(3) tax-exempt status (such as the tax-deductibility of donations, access to grant money, and income and property tax exemptions). (For general information on forming a nonprofit corporation, which is the first step, read Nolo’s article How to Form a 501(c)(3) Nonprofit Corporation.)

To apply for tax-exempt status, you must complete IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Completing this form can be a daunting task because of the legal and tax technicalities you'll need to understand. We can't give you complete instructions on how to complete the form in this article because it is so complicated; for that, get How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo). Here we provide an overview of the form so you can familiarize yourself with the type of questions you’ll be asked to address.

When to File For 501(c)(3) Status

To get the most out of your tax-exempt status, you’ll want to file your Form 1023 within 27 months of the date you file your nonprofit articles of incorporation. (For more information on articles of incorporation, read Nolo’s article Nonprofit Formation Documents: Articles of Incorporation, Bylaws, and Organizational Minutes.) If you file within this time period, your nonprofit’s tax exemption takes effect on the date you filed your articles of incorporation (and all donations received from the point of incorporation will be tax deductible). If you file later than this and can’t show “reasonable cause” for your delay (that is, convince the IRS that your tardiness was understandable and excusable), your tax-exempt status will begin as of the postmark date on your IRS Form 1023 application.

How to Prepare Your Tax Exemption Application

Now let’s take a look at the Form 1023. It’s divided into 11 parts, with each part covering certain information.

Identification of Applicant

This section tells the IRS who you are and asks for basic information like the name of your nonprofit corporation, contact information, and when you filed your articles of incorporation.

Your nonprofit must have a federal employer identification number (EIN) prior to applying for 501(c)(3) tax exemption, even if it doesn’t have employees. If your organization held an EIN prior to incorporation, you must obtain a new one for the nonprofit corporate entity. For information on how to apply for an EIN, including information about applying online, visit the IRS website at www.irs.gov.

Organizational Structure

This section requires that you attach a copy of your articles of incorporation and your bylaws to the application form. (Most nonprofits seeking 501(c)(3) status are corporations. If your entity is an LLC, unincorporated association, or nonprofit trust, you should seek the help of a lawyer with experience in nonprofit tax law to complete your Form 1023 application.)

Required Provisions in Your Organizing Document

There are certain clauses that you must have in your articles of incorporation in order to get your 501(c)(3) exemption:

• a clause stating that your corporation was formed for a recognized 501(c)(3) tax-exempt purpose (e.g., charitable, religious, scientific, literary, and/or educational), and
• a clause stating that that any assets of the nonprofit that remain after the entity dissolves will be distributed to another 501(c)(3) tax-exempt nonprofit -- or to a federal, state, or local government for a public purpose.

In this section, you state where these clauses can be found in your articles (by page, article, and paragraph).

Narrative Description of Your Activities

Here you provide a detailed, narrative description of all of your organization’s activities -- past, present, and future -- in their order of importance (that is, in order of the amount of time and resources devoted to each activity). For each activity, explain in detail:

• the activity itself, how it furthers an exempt purpose of your organization, and the percentage of time your group will devote to it
• when it was begun (or, if it hasn’t yet begun, when it will begin)
• where and by whom it will be conducted, and
• how it will be funded (the financial information or projections you provide later in your application should be consistent with the funding methods or mechanisms you mention here).

Compensation and Financial Arrangements

The purpose of this section is to prevent people from creating and operating a nonprofit for the sole benefit of the nonprofit’s founders, insiders, or major contributors. In this section, you give information about all proposed compensation to and financial arrangements with:

• initial directors
• initial officers (such as the president, chief executive officer, vice president, secretary, treasurer, chief financial officer, or any other officer in your organization)
• trustees
• the five top-paid employees who will earn more than $50,000 per year, and
• the five top-paid independent contractors who will earn more than $50,000 per year.

In computing the amount of compensation paid, include employer contributions made to employee benefit plans, 401(k)s, IRAs, expected bonus payments, and the like. You must also answer questions relating to possible conflicts of interest, which is an important part of the application.

Members and Others That Receive Benefits From the Nonprofit

If your nonprofit will provide goods or services as part of its exempt purpose activities, you must report this on Form 1023. The IRS wants to ensure that your nonprofit is set up to provide goods and services to all members of the public -- or at least a segment of the public that is not limited to particular individuals.

Your History

If your nonprofit is a “successor” to an incorporated or preexisting organization (such as an unincorporated association), the IRS wants to know. Your nonprofit is most likely a successor organization if it has:

• taken over the activities of a prior organization
• taken over 25% or more of the assets of a preexisting nonprofit, or
• been legally converted from the previous association to a nonprofit.

Details on Your Specific Activities

This part asks about certain types of activities, such as political activity and fundraising, that the IRS scrutinizes closely. For example:

• 501(c)(3) nonprofit organizations may not participate in political campaigns (although some voter education drives and political debate activities are permitted). For information on campaigning restrictions, read Nolo’s article Limits on Political Campaigning for 501(c)(3) Nonprofits.
• Certain types of fundraising are restricted, including bingo and gaming activities, fundraising for other nonprofits, or using a professional fundraiser. For more information on fundraising restrictions, see Nolo’s podcast What Are the Rules for Nonprofit Fundraising?

Financial Data

All groups wishing to obtain 510(c)(3) exempt status must provide a statement of revenues and expenses and a balance sheet. Under new rules in effect since September 9, 2008, an organization that has been in existence for five years or more must provide financial data for its most recent five years. Other groups must provide financial data for each year they have been in existence and good faith estimates for future years for a total of three or four years, depending on how long the organization has been in existence.

These revised financial data requirements relate to new IRS rules that automatically classify all new 501(c)(3) groups as public charities as long as they can show in their Form 1023 that they reasonably expect to receive qualifying public support. If your nonprofit is a public charity, you will want to include all the information necessary to avoid misclassification as a private foundation.

Public Charity or Private Foundation

This section relates to your nonprofit’s classification as a public charity or private foundation. Public charities, which include churches, schools, and hospitals, derive most of their support from the public or receive most of their revenue from activities related to tax-exempt purposes. Most groups want to be classified as a public charity because private foundations are subject to strict operating rules and regulations.

Under new IRS regulations effective September 9, 2008, all new 501(c)(3) groups will automatically be classified as public charities for the first five years as long as they demonstrate in their Form 1023 that they reasonably expect to receive qualifying public support. These new rules eliminate the requirement that new groups applying for 501(c)(3) tax-exempt status seek an advance ruling on their public charity status.

For the first five years, the group will maintain its public charity status regardless of how much public support it actually receives. After the initial five year period, the IRS will start to monitor whether the group receives the public support necessary to qualify as a public charity.

Fee Information

You must pay a fee when you submit your Form 1023 application. This part of the application asks questions to determine the amount of your fee, which is determined according to the amount of gross receipts your group has or expects to receive annually (averaged over a four-year period).

After You File

After reviewing your application, the IRS will do one of three things:

• grant your federal tax exemption
• request further information, or
• issue a proposed adverse determination (a denial of tax exemption that becomes effective 30 days from the date of issuance).

If you receive a proposed denial of tax-exempt status and you wish to appeal, see a lawyer immediately.

For all the information you need to form a 501(c)(3) nonprofit, including line-by-line instructions on completing Form 1023 to get tax-exempt status, get How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo).

Enforcing Your Trademark Rights

Prevent trademark infringement of your business name or product name.

As the owner of a trademark, when you can stop others from using your trademark, or a confusingly similar one, depends on such factors as:

• whether the trademark is being used on competing goods or services (goods or services compete if the sale of one is likely to affect the sale of the other)
• whether consumers would likely be confused by the dual use of the trademark, and
• whether the trademark is being used in the same part of the country or is being used on related goods (goods that will likely be noticed by the same customers, even if they don't compete with each other).

Dilution Statutes

In addition, under federal (and some state) laws known as dilution statutes, you may go to court to prevent your trademark from being used by someone else if your mark is famous and the other company's use would dilute the mark's strength -- that is, weaken its reputation for quality (called tarnishment) or render it common through overuse in different contexts (called weakening). The key element is that your mark is famous -- that is, distinctive and recognizable.

Dilution statutes apply even if there is no way customers would be likely to confuse the source of the goods or services with those sold by the owner of the famous mark. For instance, consumers might not think that Microsoft toilet paper is associated with Microsoft, the software company, but the makers of Microsoft toilet paper could still be forced to choose another name under federal dilution law.

Using a Trademark Actively

A business that claims to own a trademark cannot stop others from using the same or a similar trademark unless it is actively using the trademark.

In trademark law, "using" a trademark means putting it to work in the marketplace to identify goods or services. This doesn't mean that the product or service actually has to be sold, as long as it is legitimately offered to the public under the trademark in question.

For example, Robert creates a website where he offers his new invention -- a humane mousetrap -- for sale under the trademark "MiceFree". Even if Robert doesn't sell any traps, he is still "using" the trademark as long as "MiceFree" appears on the traps or on tags attached to them and the traps are ready to be shipped when a sale is made.

Similarly, if Kristin, a probate attorney, puts up a website to offer her services under the service mark Probate Queen, her service mark will be in use as long as she is ready to respond to customer requests for her advice.

Reserving a Trademark for Future Use

If you like a certain phrase or logo but you aren't ready to use it, you may be able to reserve it for future use, which keeps someone else from taking it.

You can acquire rights to the trademark by filing an "intent-to-use" (ITU) trademark registration application with the U.S. Patent and Trademark Office (USPTO) as long as someone else hasn't actually started using the trademark. However, even if you file an intent-to-use trademark application, the mark will not actually be registered until it is used in commerce.

The filing date of the ITU application will be considered the date you first use the trademark, as long as you actually use the mark within the required time limits -- six months to three years after the USPTO approves the trademark, depending on whether the applicant seeks and pays for extensions of time.

For more information about trademark registration, see the Filing a Federal Trademark Application FAQ.

How to Stop Others From Using a Trademark

Typically, you begin by sending a letter, called a "cease and desist letter," to the wrongful ("infringing") user, demanding that it stop using the mark.

If the wrongful user continues to infringe the mark, you can file a lawsuit to stop the improper use. The lawsuit is usually filed in federal court if the mark is used in more than one state or country, and in state court if the dispute is between purely local marks.

In addition to preventing further use of the mark, you can sometimes obtain money damages from the wrongful user.

Damages for Trademark Infringement

If you can prove in federal court that the infringing use is likely to confuse consumers and that the business has suffered economically as a result of the infringement, the infringer may have to pay you money damages based on the loss.

If the court finds that the infringer intentionally copied your trademark, or at least should have known about the existing trademark, the infringer may have to give up the profits it made by using the mark as well as pay other damages, such as punitive damages, fines, or attorney fees.

On the other hand, if your business has not been damaged, a court has discretion to allow the other company to continue to use the trademark under limited circumstances that are designed to avoid consumer confusion.

For more information on trademark infringement and enforcing your rights, get Trademark: Legal Care for Your Business & Product Name, by attorney Stephen Elias (Nolo).

Business Financing FAQ

From loans to equity investments, answers about raising money for your business.

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How can I raise money for my business?

What are the main differences between borrowing money and selling ownership interests in my business?

How do business loans work?

If I borrow money, what are my repayment options?

How do I sell ownership interests in my business?

How can I raise money for my business?

The main ways to raise money are borrowing it from a friend, a family member, or a commercial lender, or selling ownership interests (equity) in your business. There’s no hard and fast rule about the best way to raise money -- you’ll have to evaluate your situation and decide what kind of loan or investment you're willing to take. (Also, of course, whoever loans or gives you money will have some input, too.)

If you'll be going beyond family and friends for loans or equity investments, you'll need a business plan.

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What are the main differences between borrowing money and selling ownership interests in my business?

If you take out a loan, you will repay the money over time (usually monthly), with interest. The lender won’t receive an ownership interest in your business, and you won’t have to share any of your future profits with the lender.

By contrast, if you raise money by selling equity (ownership interests), you won’t have to make these monthly payments or repay the investment at any particular date. Instead, if your business is profitable, you’ll have to share those profits with your investors, generally in proportion to the percentage of the business they own.

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How do business loans work?

Business loans work just like any other loan -- you and the lender agree on an interest rate and a payment schedule, and you sign a promissory note that sets out your agreement in writing. The lender may require you to provide security for the loan, such as your home or other valuable personal property that the lender can take if you fail to repay the money.

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If I borrow money, what are my repayment options?

If you decide to borrow money to raise start-up cash, there are a number of different ways you can repay it. The most common repayment schedule involves making equal monthly payments that incorporate both loan principal and interest. However, you can also make lower monthly payments for a short period of time, and pay off the remaining principal and interest in one large balloon payment. Or, you can make monthly payments of interest, and then make one large balloon payment of the principal and the remaining interest on a specified date.

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How do I sell ownership interests in my business?

If you're going to raise money by taking in co-owners, the first thing you'll need to decide is whether to structure your business as a general partnership, a corporation, a limited liability company, or a limited partnership. There are advantages and disadvantages to each of these types of business organizations, so be sure to research your choice thoroughly.

In addition, depending on how many investors you take in and how much money you raise, you may need to comply with federal and state securities laws.

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Buy-Sell Agreement FAQ

Don't neglect to write a business prenup before putting money into a venture.

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When does a business need a buy-sell agreement?

A buy-sell agreement is used for buying and selling businesses, right?

If a co-owner of a business gets divorced, can the former spouse ask the divorce court for part ownership in the business?

Can a co-owner’s personal bankruptcy affect the business?

What’s the best way to value a company when an owner is being bought out?

What happens if a company needs to, but can't afford to, buy out one of its owners?

Can a buy-sell agreement be used to avoid estate taxes?

When does a business need a buy-sell agreement?

Every co-owned business needs a buy-sell, or buyout, agreement the moment the business is formed or as soon after that as possible. Every day that value is added to the business without a plan for future transition, it increases its financial risk.

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A buy-sell agreement is used for buying and selling businesses, right?

No. Despite the name, buy-sell agreements have little to do with buying and selling companies. Instead, they are binding contracts between co-owners that control when owners can sell their interest, who can buy an owner’s interest, and what price will be paid. These agreements come into play when an owner retires, goes bankrupt, becomes disabled, gets divorced, or dies -- in other words, a buy-sell agreement is a sort of prenuptial agreement between business co-owners. Mainly these agreements guide buyouts between the owners themselves; that's why we like to call them buyout agreements.

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If a co-owner of a business gets divorced, can the former spouse ask the divorce court for part ownership in the business?

In some states, yes, and the former spouse can succeed in getting it, too. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), all earnings during marriage and all property acquired with those earnings are considered community property, owned equally by husband and wife. When property is divided during a divorce, each spouse can claim a right to all community property.

Even in non-community property states, a spouse could argue for a partial interest in the business, because marital property laws require property to be divided equitably during divorce.

To avoid this prospect, a good buyout or buy-sell agreement requires the former spouse of a divorced owner to sell any interest received in a divorce settlement back to the company or the other co-owners, according to a valuation method provided in the agreement.

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Can a co-owner’s personal bankruptcy affect the business?

In the worst case scenario, a bankruptcy trustee could liquidate the business (sell all of its assets) and take half to pay the bankrupt owner's debts. To prevent a business from getting tied up in bankruptcy court, the owners can sign a buy-sell or buyout agreement that requires a co-owner who faces bankruptcy to notify other co-owners before filing. Under the terms of this agreement, this becomes an automatic offer to sell the bankrupt owner’s interest back to the other owners. The buyout money goes to the bankruptcy trustee and the business can proceed without difficulties.

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What’s the best way to value a company when an owner is being bought out?

You can hire a professional appraiser or use a valuation formula to come up with a price using financial statements from one or more years. But the problem is that valuing a business at the time of sale usually results in co-owners seizing on different valuation formulas, which can produce very different results. For that reason, it helps for the owners to agree on a way to value the company in advance in a buy-sell or buyout agreement. This gives owners the chance to discuss and vote on how a reasonable price for the company should be calculated. The fact that a sound method was agreed to beforehand can go a long way to reducing conflict when the time for a buyout comes.

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What happens if a company needs to, but can't afford to, buy out one of its owners?

Requiring an immediate 100% lump-sum cash payout can prevent even the most successful company from buying back an owner's interest. That's why having flexible payment terms built into a buy-sell or buyout agreement, signed in advance, can help. For instance, a buyout agreement can provide for a down payment of 1/4 to 1/3 of the buyout price followed by installment payments for three to five years at a reasonable rate of interest.

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Can a buy-sell agreement be used to avoid estate taxes?

Buy-sell, or buyout, agreements have been used successfully to lower estate taxes in intergenerational businesses -- businesses where at least one co-owner plans to leave the interest to heirs who will remain active in the business. This can help a family business owner pass the business on to children or other relatives without burdening them with unnecessary estate taxes caused by an aggressive value of the business. The key for estate planning is choosing a conservative price or valuation formula for the business in the buy-sell or buyout agreement. The result can be to legally set the value of the ownership interest at an amount considerably lower than its sales value at the time of death.

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Types of Trademarks FAQ

Trademarks, service marks, certification marks, collective marks, trade dress -- learn the difference, as well as when use of an existing trademark is acceptable.

What's Below:

What is a trademark or service mark?

What is trade dress?

When can a trademark owner stop someone from using the trademark?

What is a trademark or service mark?

A trademark is a distinctive word, phrase, logo, domain name, graphic symbol, slogan, or other device that is used to identify the source of a product and to distinguish a manufacturer's or merchant's products from others. Some examples are Nike for sports apparel, Gatorade for beverages, and Microsoft for software.

A service mark does the same thing as a trademark, but while trademarks promote products, service marks promote services and events. Some familiar service marks are: Google (online searching services), Netflix (video rental service), and the FedEx logo (delivery services).

In order to be eligible for trademark protection, a word or phrase must be "distinctive" -- unique enough to help customers recognize a particular product in the marketplace -- rather than generic, like "The Coffee House." To determine whether a potential business name or product name is trademarkable, and how to trademark it, see Trademark: Legal Care for Your Business & Product Name, by Attorneys Stephen Elias and Richard Stim (Nolo), or the Qualifying for Trademark Protection FAQ.

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What is trade dress?

In addition to a label, logo, or other identifying symbol, a product may come to be known by its distinctive packaging -- for example, the blue and yellow packaging of the Advil pain reliever box. Similarly, a service may become known by its distinctive decor or shape -- for example, the yellow arches that symbolize McDonald's franchises.

Collectively, these types of identifying features are commonly termed "trade dress." Because trade dress often serves the same function as a trademark or service mark -- the identification of goods and services in the marketplace -- trade dress can be protected under the federal trademark laws and, in some cases, registered as a trademark or service mark with the U.S. Patent and Trademark Office (USPTO).

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When can a trademark owner stop someone from using the trademark?

Consumers often make their purchasing choices on the basis of recognizable trademarks. For this reason, the main thrust of trademark law is to make sure that trademarks don't overlap in a manner that causes customers to become confused about the source of a product.

If two similar trademarks are being used by companies that provide different products or services, there may not be a trademark conflict. This is especially true if the two businesses serve only local markets and are hundreds of miles apart.

However, in the case of trademarks that have become famous -- for example, McDonald's -- the courts are willing to grant broader protection and prohibit almost all use of the trademark (or anything close to it) by anyone other than the famous mark's owner.

For more information on how to prevent others from using a trademark, see Enforcing Your Trademark Rights.

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Qualifying for Trademark Protection FAQ

What makes a business or product name eligible for trademark protection.

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What types of trademarks or service marks are entitled to legal protection?

Are Internet domain names covered by trademark law?

Can a business's trade name be protected as a trademark?

Is state or federal law used to settle trademark disputes?

What types of trademarks or service marks are entitled to legal protection?

As a general rule, trademark law gives legal protection to names, logos, and other marketing devices that are distinctive. These distinctive trademarks are sometimes referred to as "strong" trademarks. Strong trademarks come in two forms: They may be "born strong" because they are creative or out of the ordinary, such as Yahoo, Exxon, or Kodak (also known as "inherently distinctive" marks). Trademarks may also become strong because they become well known to the public through their use over time or because of a marketing blitz.

Trademarks that merely describe some feature or quality of the goods or that are based on someone's name or a geographic term are usually considered to be "weak," and thus unprotectible under trademark law.

However, once the trademark owner can demonstrate substantial sales, advertising, or other public awareness of a weak trademark (known as "secondary meaning"), the trademark will be considered distinctive and can be registered with the United States Patent and Trademark Office (USPTO). Examples of weak marks that have acquired secondary meaning include Peet's Coffee, Newman's Own Salad Dressing, Bank of America, and Vision Center eyeglass stores.

For more information about qualifying for and applying for federal trademark registration, see Trademark: Legal Care for Your Business & Product Name, by Attorney Stephen Elias (Nolo) or the Filing a Federal Trademark Application FAQ.

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Are Internet domain names covered by trademark law?

The short answer is yes. Most people are familiar with website names like www.yahoo.com or www.amazon.com. The words between "www." and the .com are typically used to identify the business that owns the website or a well-known product or service that is featured on the site. Frequently, this identifier is an abbreviation of the company or product name.

The U.S. Patent and Trademark Office allows these identifiers to be registered as trademarks as long as they are being used in connection with a site that sells goods or services. And the courts offer these domain names the same protection as other types of trademark.

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Can a business's trade name be protected as a trademark?

The name that a business uses to identify itself is called a "trade name." This is the name the business uses on its invoices, letterhead, and signage. Technically, a trade name is not considered a trademark or entitled to protection under trademark laws unless it actually adorns a product or service.

If a business does use its name to identify a product or service produced by the business, the name will then be considered a trademark or service mark and be entitled to protection (if it is distinctive enough). For instance, Apple Computer Corporation uses the trade name Apple as a trademark on its line of computer products.

A trade name that is not used on a product or service may be given some protection under state and local laws (through corporate, LLC, or fictitious business name registration) or be protected against a confusing use by a competing business under federal and state unfair competition laws.

For information on choosing a name for your business rather than product or service names, see the Naming Your Business section of Nolo's website.

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Is state or federal law used to settle trademark disputes?

A number of legal principles used to protect owners against improper use of their trademarks derive from federal laws known collectively as the Lanham Act (Title 15 U.S.C. §§1051 to 1127).

In addition, all states have statutes that govern the use and protection of marks within the state's boundaries. In addition to laws that specifically protect trademark owners, states also have laws that protect one business against unfair competition by another business, including the use by one business of a name already used by another business in a context that's likely to confuse customers.

The basic rules for resolving disputes over who is entitled to use a trademark come from decisions by both federal and state courts (called "common law"). These rules usually favor the business that first used a trademark, if another company's use of the same trademark would be likely to cause customer confusion.

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Conducting a Trademark Search FAQ

Do a trademark search to verify your product or service name is legally available.

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Why do I need to conduct a trademark search?

Should local businesses care what trademark someone else in another part of the country is using?

Can I do my own trademark search?

Can I use the Internet to do a preliminary, informal trademark search?

Can I hire a professional firm to conduct a trademark search?

Why do I need to conduct a trademark search?

You need to determine whether another business is already using a trademark that's identical or similar to the one you want to use to ensure that you won't violate someone else's trademark rights.

If you are sued by a trademark owner for using its trademark, at the least you can be forced to stop using the trademark. Depending on how long and extensively you've used the business or product name, it could be costly -- you could have to change products, brochures, letterhead, business cards, signs, advertisements, and your website.

And, if you use a federally registered trademark improperly, a court will assume you knew it was federally registered, even if you did not. This means that you will be cast in the role of a "willful infringer." Willful infringers can be held liable for large damages and payment of the registered owner's attorney fees.

For help conducting a trademark search, see Trademark: Legal Care for Your Business & Product Name, by Attorney Stephen Elias (Nolo).

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Should local businesses care what trademark someone else in another part of the country is using?

Short answer: Yes. Now for the long answer: After the Internet took hold in the late 1990s, the concept of location took on a whole new meaning. Instead of being rooted in physical space, businesses now jockey for location in cyberspace. Vast numbers of businesses -- even local enterprises -- have put up their own websites, creating a new potential for competition (and confusion) in the marketplace.

Because of this, every business owner must pay attention to whether a proposed trademark has already been taken by another business, regardless of that business's physical location. Even if your business sells products or services only to local customers, a competing out-of-state business (with a similar trademark) may be trying to sell products or services to your customers.

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Can I do my own trademark search?

Yes. Under good guidance, you can do your own search of trademarks registered with the U.S. Patent and Trademark Office (USPTO) at the USPTO website (www.uspto.gov). Or you can visit one of the Patent and Trademark Depository Libraries (PTDLs), available in every state. These libraries offer a combination of hardcover directories of federally registered marks and an online database of both registered marks and marks for which a registration application is pending.

In addition to searching for registered or pending marks, you may also use product guides and other materials available in PTDL libraries to search for possibly conflicting marks that haven't been registered with the USPTO. This can be important because, even if a mark is unregistered, its existence could preclude you from registering the same or confusingly similar mark in your own name or using the mark in any part of the country or commercial transaction where customers might be confused.

In addition, you may want to review merchandise at an online store. For example, if you are selecting a trademark for a new toy, you can visit "ToysRUs" at www.toysrus.com. Once there, you can browse hundreds of toys and do a keyword search for any toy trademark that is similar to yours. This same approach can be used for any type of product by clicking the shopping category link on one of the popular search engines, such as Yahoo.com.

While you'll no doubt find hundreds of similar trademarks being used across the country, you'll need to know how to sort through your search results and determine which trademarks you are prevented from using. For help doing this, see Trademark: Legal Care for Your Business & Product Name, by Attorney Stephen Elias (Nolo).

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Can I use the Internet to do a preliminary, informal trademark search?

Yes, before doing a formal search for registered and pending marks in the USPTO's database at www.uspto.gov, you can conduct a search for unregistered marks by using an Internet search engine. For instance, by entering your proposed name in the search field on Google (www.google.com), you will get a report of every instance where the name appears on Web pages that the Google search engine has indexed. However, for some marks -- for example, "Apple" -- a search engine may unearth hundreds or thousands of results that are of no value for your trademark searching purposes. For that reason you need to focus your search, using some of the searching tips provided at the Google site (or in Nolo book mentioned below). Alternatively you may choose to use a fee-based trademark search engine such as Saegis (www.saegis.com).

You can also search domain names being used by Web-based businesses at any domain name registrar. You can find a list of domain name registrars at ICANN.org, the organization that administers registrations (www.icann.org/registrars/accredited-list.html).

This type of informal search can alert you to unregistered trademarks that are being used to sell a product or service similar to yours. It won't help you too much, however, in determining which unregistered trademarks you are prevented from using. For help doing this, see Trademark: Legal Care for Your Business & Product Name, by Attorney Stephen Elias (Nolo).

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Can I hire a professional firm to conduct a trademark search?

Many people prefer to pay a professional search firm to handle a trademark search rather than do it themselves. This can make sense if your financial plans justify an initial outlay of several hundred dollars, the minimum cost for a thorough professional search for both registered and unregistered marks. Various companies offer professional searches, the most well-known of which is Thomson & Thomson (www.thomson-thomson.com).

The trademark search report you will receive will consist of a list of similar federally registered marks, pending marks, and marks that have been canceled or abandoned, a survey of similar state registrations, and an examination of numerous sources of unregistered users of similar marks, brand names, and trade names.

If you work with an attorney when acquiring the trademark search, you will also get a legal opinion as to whether your proposed mark is legally safe to use in light of existing registered and unregistered marks. Obtaining a legal opinion may provide important protection down the road if someone later sues you for using the mark.

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How Trademarks Differ From Patents and Copyrights FAQ

Learn how patents, copyrights, and trademarks serve different purposes.

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What is a trademark?

What's the difference between a patent and a trademark?

How does copyright differ from trademark protection?

What is a trademark?

A trademark is a word, name, phrase or logo that identifies a product or service and helps distinguish it from that offered by the competition.

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What's the difference between a patent and a trademark?

A patent allows the creator of certain kinds of inventions that contain new ideas to keep others from making commercial use of those ideas without the creator's permission. For example, Tom invents a new type of hammer that makes it very difficult to miss the nail. Not only can Tom keep others from making, selling, or using the precise type of hammer he invented, but he may also be able to apply his patent monopoly rights to prevent people from making commercial use of any similar type of hammer during the time the patent is in effect (20 years from the date the patent application is filed).

Generally, patent and trademark laws do not overlap. When it comes to a product design, however -- say, jewelry or a distinctively shaped musical instrument -- it may be possible to obtain a patent on a design aspect of the device while invoking trademark law to protect the design as a product identifier. For instance, an auto manufacturer might receive a design patent for the stylistic fins that are part of a car's rear fenders. Then, if the fins were intended to be -- and actually are -- used to distinguish the particular model car in the marketplace, trademark law may kick in to protect the appearance of the fins.

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How does copyright differ from trademark protection?

Copyright protects original works of expression, such as novels, fine and graphic arts, music, audio recordings, photography, software, video, cinema, and choreography by preventing people from copying or commercially exploiting them without the copyright owner's permission.

Copyright laws do not protect names, titles or short phrases. That's where trademark law comes in. Trademark protects distinctive words, phrases, logos, symbols, slogans, and any other devices used to identify and distinguish products or services in the marketplace.

There are, however, areas where both trademark and copyright law may be used to protect different aspects of the same product. For example, copyright laws may protect the artistic aspects of a graphic or logo used by a business to identify its goods or services, while trademark may protect the graphic or logo from use by others in a confusing manner in the marketplace. Similarly, trademark laws are often used in conjunction with copyright laws to protect advertising copy. The trademark laws protect the product or service name and any slogans used in the advertising, while the copyright laws protect the additional creative written expression contained in the ad.

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