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Phillip A. Nicolosi, J.D.

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Business Organization

5 Business Name Mistakes You Should Avoid!

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You should think about the branding aspects of your business name before you start the business!  There are a few things you should always do first. Missing any of these crucial steps before starting your business or organizing it with the secretary of state (or similar agency) is a mistake that can cost you or your business immensely down the road! I am talking specifically about branding mistakes and the consequences that can potentially arise for your early missteps. Below are some common mistakes you or your partners should avoid before settling on a name for your new business.

1) Choosing a business name that does not also function as a trademark or service mark! Separate product and service branding aside, you will generally want to brand your business name. You or your partners should be thinking about a name that is eligible for state or federal protection. That means you should avoid using your last name, which generally is ineligible for protection unless “secondary meaning” can be established. You should also avoid using geographic terms. Trade names can be ineligible for protection based on the use of geographical terms. (You can use certain geographic terms to describe your mark, but it depends upon the nature of your business and how you use the term to describe the good or service.) Finally, you should choose a name that is arbitrary or unique like Google or Exxon, not a name that is merely descriptive or that is generic. The bottom line is that arbitrary or fanciful names and names which are suggestive are automatically eligible for protection. Descriptive names must acquire secondary meaning in order to receive protection and generic names are never eligible for protection. So, choose wisely.

2) Assuming that your business name is protected when you register it with the Secretary of State. Depending upon what state you plan to organize the business in, the secretary of state or equivalent department will maintain a registry of all corporations, LLC’s that have been organized (and are in good standing). If your name or the primary keywords are already taken, you will have to go back to the drawing board. You can search registered business entity filings online for most states. Your best bet is to simply call the secretary of state or appropriate department and confirm name availability.

Warning: If the name you want is available, a common mistake many business owners make is believing that by filing organizational documents with the Secretary of State, this provides protection of the business name. The secretary of state (or similar agency) will only conduct a name check to prevent the filing of multiple entities with the same name. This is meaningless from an intellectual property standpoint. In addition, even within the same state there may be different types of entities as well as sole proprietorships or general partnerships using the same name. These names will not show up on a corporate name check by the Secretary of State. The bottom line is that business organization does not secure your right to the business name nor does it protect you from claims of infringement by a prior user of the name!

3) Failing to conduct a Google and other major search engine search. I have had plenty of clients who have not even done a search on Google or another major search engine to see if the name they have chosen is being used in commerce. Trademark infringement is a serious matter. While you may not think your local business will ever run into a problem because your customers are local, you have a physical presence only perhaps or whatever your reasoning, you would be wise to consider future growth. If you operate online or a business that operates in multiple states, you need to be concerned about infringement now, not later. This post isn’t meant to tackle the specifics of trademark infringement. But, you should understand that if other consumers would be potentially confused as to the source of a good or service you sell/provide with another business, that could cause problems. You don’t want to be on the end of a cease and desist letter asking you to essentially stop using your business name months or years after working so hard to establish its branding! All of that can be avoided by making the right moves now.

4) Failing to search the USPTO (TESS) database & various business directory databases. If you pass the first 2 hurdles after you have chosen a name, you should absolutely determine if an identical or similar name is registered (or on file for registration) with the United States Patent & Trademark Office (USPTO).  The purpose of the search is to help determine whether a “likelihood of confusion” exists with the name you have chosen and another trademark or service mark. This means you are trying to determine whether the name has already been registered or applied for at the USPTO that is the same OR similar to your mark and used on related products or for related services. A Dunn & Bradstreet (D&B) database search, related business directory searches, state corporation/LLC database searches, etc. should all be evaluated to make sure you unearth any identical or similarly confusing names that may have slipped through the cracks during the first few steps.

5) Grab that domain! Maybe your thinking of different domain name instead of the name of your business. Without getting into that debate, if you intend on using the name of your business as your domain name, you better make sure its available for use and then go grab it! It’s a bad feeling getting your new business off the ground, but then a few months later you discover the corresponding .com domain isn’t available. Don’t make this critical mistake and secure your domain first. While you are at it, you should grab any related domains such as .net, perhaps an alternate version with “the” in the beginning of the name and some common misspellings of the domain. But, there is no need to go overboard. Keep in mind, using domain names that infringe upon the established trademarks or service marks of others will land your business in hot water!

Even if you don’t make these 5 common mistakes, you should still consider getting a legal opinion on the name you have chosen. Your not an expert. Duh. So why play trademark attorney and put your business potentially at risk? Granted, a search engine and USPTO search is a great start. But, it may not unearth potential problems.  The safe play is to always hire a trademark attorney.

If you cannot afford to hire an attorney or still don’t think it is necessary, you should absolutely avoid these 5 mistakes before organizing your startup!

Charging Order Protection Keeps Partners In Control

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If you own a small business, you face the prospect of losing ownership of your business in certain scenarios. A creditor can attach a judgment to any interest that an individual debtor may have in any business. In a corporation, a creditor may simply attach itself to the shares of the debtor’s stock to gain all the rights that the debtor had in the corporation, including rights to sell the shares, voting rights, the right to view books and records and rights to bring derivative actions. If the corporation is an “S” corporation and the creditor is not an individual, then the creditor’s attachment of the stock may cause the “S” election to be terminated, which would possibly result in unwanted tax consequences to the remaining shareholders. Obviously, allowing a creditor to obtain voting rights and other non-economic rights of the debtor is not in the best interests of the other owners. In single shareholder or small, closely held corporations, judgment creditors present major concerns. If you operate a corporation and are the sole shareholder or you are the majority shareholder, control of your business is essentially lost if a creditor attaches a judgment against your interest in the corporation!

Charging Order Protection Offers Partners A Shield

A limited partner or member in an LLC does not own shares of stock as in a corporation. Partners own a bundle of rights as defined by the entity’s operating agreement, including certain economic rights to distributions. But, partners do not own a direct interest in the assets of the entity. In a general or limited partnership or in an LLC, the debtor is a partner with the other owners (LLC’s are partnerships). A change in ownership due to an attachment of the partner’s interest by a creditor may disrupt operation of the partnership. This would essentially force non-debtor partners into an involuntary partnership with the creditor. State law does not allow the existence of this type of involuntary partnership to occur. Instead, a creditor is limited to obtaining a “charging order” against the partner’s interest in the business.

A charging order is the temporary right of a creditor to step into the partners shoes and only receive his or her right to distributions from the partnership until the judgment is satisfied. It is basically a garnishment by the creditor or an assignment of the partner’s economic right to distributions from the partnership. A charging order is held against the partner’s right to distributions from the entity. However, this right to payment does not make the creditor a partner or member and does not give the creditor any voting rights. Of course, any debtor-members are not typically gracious enough to vote for such distributions, so the creditors are usually stuck without any real recourse.

The creditor may also foreclose on the debtor’s partnership interest. The foreclosure is on the debtor’s interest in the partnership, not on the entity itself or its assets. This is an important distinction to understand. The foreclosure is of the charging order against the debtor’s economic right to distributions. After the foreclosure, the assignment of the right to distributions to the creditor becomes permanent. This means that the creditor becomes the owner of the distributional interest and the creditor may then attempt to sell the interest.

The creditor may also be entitled to certain derivative rights, such as the rights to inspect books and records and request distributions. This is possible when the operating agreement is not drafted to restrict the possibility of giving the creditor derivative rights to involuntary distributions from the entity. In extreme cases (where the entity is improperly structured or the operating agreement has been poorly drafted), the creditor may attempt to request the court to partition the entity’s assets and place the creditor in charge of the entity’s assets equal to the interest the creditor holds.

One disadvantage to creditors after foreclosure is that the creditor is responsible for the tax liabilities generated to the partners or members by the entity (there is substantial doubt as to whether this occurs without foreclosure of the charging order). Thus, the creditor risks becoming responsible to pay a share of the entity’s taxes even though the creditor does not receive actual profit distributions!. This may deter many creditors from foreclosing upon a debtor’s partnership interest.

You must form a “charging order protected entity” (COPE) to restrict creditors to only obtaining a charging order. Limited Partnerships (LP’s), LLC’s, Limited Liability Partnerships (LLP’s) and Limited Liability Limited Partnerships (LLLP’s) are all considered to be COPE’s. If you elect to form any of these entities, any future outside creditor will be limited to the charging order remedy (but see my warning about using single-member LLC’s below). The bottom line is that charging order protection should be a consideration in deciding which entity you use to organize your business.

Do Single-Member LLC’s Provide Charging Order Protection?

The primary purpose of the charging order is to protect the non-debtor members from being involuntarily forced into a partnership with the debtor member’s creditor. However, there is only one member in a single member LLC, so there are no non-debtor members to protect. There has been a lot of disagreement over whether the single member LLC enjoys charging order protection. Some lawyers and legal scholars argue that charging order protection does not exist for single member LLC’s. They believe it defies common logic as there are no partners to protect. Many other lawyers argue that the express language of the LLC statutes are protective of the single member from outside liabilities.

After years of theoretical debate among attorneys, this issue was finally addressed by a U.S. bankruptcy court, In re Albright, 291 B.R. 538, 540 (D. Colo. 2003). The Court in this case held that charging order protection does not exist for a single member LLC because there are no non-debtor members to protect. The court granted full economic and non-economic rights to the trustee, allowing the bankruptcy trustee to manage the debtor’s LLC. The trustee subsequently sold the LLC’s property and distributed the net proceeds to the bankruptcy estate for satisfaction of creditor claims.

In fact, in a recent case, the Supreme Court of the State of Florida decided that charging orders are not the exclusive remedy available to creditors of an LLC, especially a single member LLC (Olmstead vs. Federal Trade Commission, 2010). The court based its decision partly on the fact the Florida LLC statute was silent on whether the charging order was the exclusive remedy available to creditors of members of an LLC in general. So, this decision seems to apply equally to multi-member LLC’s. Nevertheless, the foundation of the court’s decision was the uncontested right of the sole member in a single member LLC to transfer the owner’s full interest in the LLC.

Conclusion: 1) Single member LLC’s probably will not provide charging order protection; and 2) In light of the Olmstead vs. FTC decision, some states may be safer to organize a multi-member LLC if their LLC statutes provide that the charging order is the exclusive remedy available to outside creditors. Keep in mind, this does not mean single member LLC’s do not provide substantial liability protection for owners against the liabilities of the entity itself (“internal liabilities”). Even though single member LLC’s probably don’t provide the same charging order protection as multi-member LLC’s, this is still a better option than conducting business as a sole proprietor.