Businesses enter into contracts each and every day. Contracts are formed when customers make purchases, when suppliers deliver materials, or when contractors place orders. Contracts are a critical element when it comes to operating a business, and when contracts are not honored, disputes arise.

What Is Required to Form A Contract?

A contract requires five basic requirements, and if any one of the requirements is missing, no legal contract can be formed. The requirements for a contract include:

1. Parties Capable of Entering a Contract. The parties to the contract must be legally capable of entering the contract in the first place. This means that each party to the contract must be fully aware of what they are doing by entering the contract and must understand what the contract means. As a general rule, minors are not legally capable of entering into a contract due to their inexperience, nor are individuals who are considered insane capable of understanding what it means to enter a contract.
2. Offer and Acceptance. In order for a contract to exist, an offer to contract must be made by one party, and the offer must be accepted by another party. The offer must be clear and the acceptance must be definite and unqualified.
3. The parties must exchange something. Each party makes a promise to the other or gives something of value to the other party. The consideration does not necessarily have to be fair or proportional: one party could agree to pay a single dollar in exchange for a motor vehicle, and so long as both parties agree to that arrangement, it can be binding. Consideration could also take the form of not doing something, or foregoing something a party normally would do or has a legal right to do, such as waiving certain rights. This is sometimes referred to as “bargained for exchange” or “bargained for detriment”.
4. Legal Purpose. The contract must be for a legal purpose. To say this another way, the contract cannot violate the law. The parties cannot negotiate terms for the contract that break the law, or are illegal.
5. Mutual Assent. Both parties to the contract must have a meeting of the minds, meaning both parties have a similar understanding of what the contract means, and both agree to be bound by it.

If any of the above requirements is lacking, then it is unlikely that a contract has legally been formed. Furthermore, specific types of contracts might have additional requirements in order to successfully form a valid contract. For instance, for many types of contracts encountered in business, the contract must be made in writing, identifying key terms of the contract, and signed by both parties. For instance, California Civil Code Section 1622 notes that all contracts can be made orally, unless the contract is specifically required to be made in writing by law.

Additionally, certain states may impose additional requirements for a contract to be legally binding and valid, and these laws should be taken into consideration if a specific state’s laws govern the contract.

These elements are fairly straightforward, yet when a contractual issues do arise it can be very difficult for the parties to understand and navigate the legalities in contract law.  Please contact our office if you are facing a contractual issue, dispute, or simply have additional questions relating to contracts.

Not all trademarks are created equal.  Some trademarks are ‘stronger’ in the legal sense than others, meaning that some marks are easier to register and enforce than other marks.  Trademarks need to be unique, distinctive, and not easily confused with other existing trademarks when they are applied to a product or service in order to be registerable with the United States Patent and Trademark Office (“USPTO”).

Trademarks are intellectual property that are classified into one of four categories of marks, based on how legally strong they are. The categories, listed in increasing strength, include: generic marks, descriptive marks, suggestive marks and fanciful or arbitrary marks.

Generic Marks

Generic marks are the weakest category of marks, and are not registerable or enforceable against others who use them. Generic marks are commonly used phrases associated with goods or services. Generic marks can either be generic at the outset of their use or become generic through improper use over a prolonged period of time. For example, using the mark SODA for sweet carbonated beverages would be a generic mark as the public associates the term “soda” with sweet carbonated beverages; the mark is considered generic at the outset of its use in this situation.

Marks that were once valid trademarks can further be reduced to a generic mark if the unauthorized use of the mark goes unpoliced. Distinctive, suggestive or fanciful or arbitrary marks can turn into unenforceable generic marks if the public commonly uses the mark in association with a particular good or service, and the trademark holder fails to police the use of its mark for an extended period of time. Common examples of once valid trademarks turning into generic marks include ZIPPER, ESCALATOR and ASPIRIN.

Descriptive Marks

Registerability and enforceability of descriptive marks is hit-or-miss, and that is why they are considered to be fairly weak marks. These types of marks describe some aspect of the product or service that the mark is being applied to. Descriptive marks fall into two subclasses: merely descriptive, and distinctive. Merely descriptive marks are not registerable, as they merely describe the product or services that the mark applies to (i.e., an image of brooms, vacuums and dusters for a cleaning service). However, a notable exemption allows descriptive marks that acquire distinctiveness to gain trademark protection. Distinctive marks can gain distinctiveness through extensive use in commerce for a period of 5 years or more.

Suggestive Marks

Suggestive marks are fairly strong marks, as they suggest something about the product or service to which they are applied, but do not describe the product or service. Some examples of suggestive marks include RAVISHING for a cosmetic line (suggesting that the make-up will make the user look ravishing).

Fanciful or Arbitrary Marks

The strongest marks are ones that are fanciful or arbitrary. These types of marks are easy to register and enforce based on their uniqueness.

• Fanciful marks are marks that are created from imagination. They have no definition in the dictionary, are completely unique, and are unusual. An example of a fanciful marks would be CHEMZA for use with selling hats. It is a made up word, with no significance other than being used as a trademark for selling hats.
• Arbitrary marks are marks that generally are a known thing applied to a completely different thing or service. Good examples of arbitrary marks include the mark KITTENS for use with hair accessories or MAJESTIC for weight loss management services.

For more information on the strength/distinctiveness of your mark, how to register a trademark or should you need advisement in an intellectual property matter, please reach out to our office.

When one successful company merges with or acquires another successful company, the deal attracts a lot of attention, particularly when the players are big names in high-profile industries. The growth potential of each entity can be enormous.

But what can also be profitable are strategic “carve-outs,” which occur when assets are “scooped out” of an ailing company. You may be able to purchase just the piece of the company that you are interested in, or you may be able to buy the entire company and then sell off the assets that you don’t care to keep.

There is more inherent risk with carve-outs because you are dealing with something that is currently troubled financially. The flipside is that these assets often come at a reduced price.

When looking to purchase a carve-out, it is imperative to look at every piece of the company’s financial puzzle and be sure the asset can be turned around successfully. Thorough analysis is paramount.

Some of the questions you want to ask yourself:

-From the ground up, what problems did the asset or company face?

-What does the expense structure look like?

-How long will it take to make the necessary adjustments for the company or asset to become profitable?

-Is the risk worth the potential reward?

Just because an entire company or asset is not performing well doesn’t mean it is worthless. Perhaps the asset simply needs a shift in its business strategy or a minor restructuring of its finances to put it in the black.

When looking for a carve-out, the best bets are within industries that you have experience with or carry the potential for “synergy” with your current business. This can save a lot of money and make the deal more profitable in the end. For example, if you manufacture household goods, you would do best to purchase a product that can be easily integrated into your current operation. Because you are purchasing a troubled asset, it makes little sense to take more risks than necessary.

While companies seeking carve-outs usually look to their local competition, sometimes it makes sense to go beyond your own borders, too, particularly in today’s challenging economic climate. To stay competitive and to diversify in tough times, it may make sense to expand to a global market. Of course, that carries with it a whole host of added legal requirements.

If you are a company looking to “carve-out” a competitor’s assets, it is important to speak with an experienced attorney.

Anthony Spotora is a Los Angeles entertainment lawyer and Los Angeles business attorney. To learn more, visit Spotoralaw.com.

In today’s economic downturn, more and more businesses may be looking to alter their business models. Such a plan for change is often referred to as a corporate turnaround strategy.

With revenue streams suffering, it can be difficult to figure out what to do when your business is experiencing such disappointment. But with the few tips below, it is possible to develop a plan that will help you identify problems and alter the course of your business for the better.

1. If your business is experiencing problems and feels like it is in freefall, the first step to take before you do anything else is to seek stabilization. Take a look at what assets are critical for the survival of both the company and its ownership and then protect and preserve those assets.
2. Next, you need to undertake a lengthy and comprehensive identification period. You need to get back to finding out what your business is all about. What are the core values that your company holds? Who are your main customers, and are you continuing to provide them with goods or services that they want? What do you really stand for? Have you gotten away from your business principles?
3. Once you have answered these questions, you need to make an honest list of the core problems with your business. Seek input from not only management, but staff, too. What processes are counterproductive? What uncritical functions need to be scaled back? Remove the excess. Perhaps layoffs need to take place. Perhaps entire departments need to be scaled back. If it doesn’t fit with the core values of your business, it probably needs to go.
4. Put together an implementation plan for making these changes. Provide specifics on how these changes will be implemented. Develop a timetable for taking certain steps. Eliminate the chance of chaos by carefully explaining how the restructuring will take place.
5. Now you are ready for the actual restructuring. It will be all-important to follow the specified steps in your implementation plan.
6. Review your restructuring plan periodically and make updates and tweaks as necessary.

Undertaking a corporate turnaround can be a complex and stressful process. If your business is looking to complete a turnaround, it may also be helpful to hire a consult or an experienced corporate attorney who can offer a fresh set of eyes.

Anthony Spotora is a Los Angeles business attorney, intellectual property lawyer and entertainment lawyer.  To learn more, visit Spotoralaw.com.

Becoming an S corporation for United States federal income tax purposes can be a very enticing thing to do.

S corporations are unique in that they don’t pay federal income taxes. The incomes and losses are divided among the corporation’s individual shareholders instead. Unlike C corporations, S corporations are not double-taxed through the company’s profits and shareholder dividends, which is perhaps the most important part of S corporation status. Predictably, this can result in substantial income savings.

There are a variety of other benefits a corporation can gain from electing to be treated as an S corporation, including the ability to offset losses against taxable income from other sources. Also, some corporate penalties and the federal alternative minimum tax do not come into play for an S corporation.

It is important to note that while S corporations have many advantages, there are other operational matters that should be considered. Firstly, there are other costs associated to S-Corp election, such as filing an annual S corporation tax return and quarterly and annual payroll tax paperwork. Individual and corporate assets also need to be separated.

Regardless, S corporations are becoming ever-popular in the United States. There were about 725,000 in the United States as of the mid-1980s, yet these numbers grew to more than 3 million by the early 2000s. They are currently the number one type of corporate entity.

But the Internal Revenue Service has had ongoing problems with S corporations, only 25 percent of which are believed to be in compliance. The IRS in recent years has worked to increase the number of taxes collected for S corporations.

The complete S corporation rules are contained in Subchapter S of Chapter 1 of the Internal Revenue Code (sections 1361 through 1379). It is a good idea to consult an experienced attorney to learn the ins and outs, advantages and disadvantages, of becoming an S corporation.

To learn more, visit https://www.spotoralaw.com/.

Whether pertaining to your personal or professional life, chances are you have entered into, or sought to enter into a partnership at some point.  For some, it provides a sense of security; for others, a dinner drink led to a friendly discussion about an idea you had and WHAM, you’re going to move on that idea together – as partners, or; for those timid-hearted types, perhaps you gravitated toward a partnership because you simply wanted half the responsibility, half the risk, and half the potential blame.

Whatever your cause, and whatever your (personal) purpose, you could stand to save yourself a lot of time, frustration and money by knowing up front what sort of partnership you’re actually getting into.

Whereas some people use ‘partnership’ more as a term of art (i.e., corporation owners may call themselves ‘partners’, but that does not necessarily make it so), there are, in fact, a variety of legally recognized partnerships.  They are: (1) General Partnerships; (2) Limited Partnerships; (3) Limited Liability Partnerships; (4) Limited Liability Companies and; (5) Joint Ventures. And of these different types of partnerships – some governed by corporate law and still others governed more by contract law – the one that is of particular interest in this article is that of the “General Partnership”.

Attorneys are often surprised to find the staggering number of parties involved in general partnerships who believe they are being afforded certain corporate law advantages.  Let’s take a moment to touch upon a bit of the confusion.

A General Partnership is like a sole proprietorship except that there are two (2) or more persons conducting business under one name.  Unlike Limited Liability Companies, for example, no articles need to be filed with the Secretary of State, nor does the partnership even need to enter into a written partnership agreement (although it has been considered a terrible idea not to). A significant difference between formally established partnerships (i.e., LLC’s, LLP’s, etc.) and that of a general partnership is that each partner in a general partnership is jointly and severally liable for the actions and debts of the partnership.  Since any partner may bind the partnership, the other partners may be held liable for actions, contracts and/or debts in which they didn’t even know existed.  Take that one step further — partners can even be held personally liable for the acts of agents or employees that had apparent authority to bind the partnership.

So, for those of you not wishing to formally establish a partnership at the state level, and, whether you are willing to entertain and execute a partnership agreement or not, you may wish to have a better understanding of the risky business you could be entering into, or, may already be involved in, as a partner in a general partnership.

If an individual is looking to business-incorporation/”>form a new business, they may want to consider forming a Limited Liability Company. This type of business structure is similar to a corporation but is less formal, more flexible and offers several benefits, including personal liability protection, for its owners.

What is an LLC?

A “Limited Liability Company” (LLC) is a hybrid between a partnership and a corporation. It has the operating flexibility and “pass through” tax treatment of a partnership with the limited liability for its “members” accorded to corporate shareholders. “While an LLC is a business entity, it is best to think of it as an unincorporated association,” said Anthony Spotora, an extremely experienced business attorney. “Although sometimes incorrectly referred to as Limited Liability Corporations, they are in fact not corporations.” See California Corporations Code, Title 2.6.

Further Benefits

LLCs are highly attractive to some because of the flexibility in tax choices. LLC business ventures qualify for a single layer of taxation, which prevents ownership from being double-taxed under the corporate tax structure.

“However, LLCs may also elect to be taxed under a corporate tax structure if they wish,” Spotora advised. “In fact, the full list of taxation choices for LLCs are as a sole proprietor, a partnership and either an S- or C- Corporation.”

LLCs also often require much less administrative paperwork and record-keeping than do corporations. The laws also allow LLCs to customize the rules for how the LLC is best operated.

Drawbacks

Some people feel that LLCs do have disadvantages, however.

In California and a handful of other states, LLCs must pay a franchise or capital values tax on the business.

LLC’s in California must pay an annual tax to the state’s Franchise Tax Board. The fee is $800 per year, though if the LLC’s net annual income exceeds $250,000, then there will be an additional fee that must be paid, too.

Also, some people believe LLCs have a more difficult time raising financial capital because investors may be more comfortable investing funds into corporate firms.

If a person is considering forming a Limited Liability Company or other business entity, it is important for them to speak with a knowledgeable attorney. Anthony Spotora is a Los Angeles business attorney who specializes in incorporation and can guide you on the best strategy for your business.

You can visit our blog to learn more about corporate formation and other topics in business law, including the impact of RULLCA, California’s 2014 revision of the laws governing LLCs.

Businesses looking to raise capital by selling securities have options that will offer them exemption from the SEC’s registration requirements. The Regulation D exemptions allow companies to raise capital by using a Private Placement Memorandum document as the official disclosure paperwork for investors.

Issuers of private placement memorandums (PPMs) should familiarize themselves with Regulation D, the rules that establish three transactional exemptions from the registration requirements of the Securities Act of 1933. These exemptions allow some smaller companies to offer and sell their securities without having to register securities with the SEC.

Rule 504 provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any consecutive twelve-month period. This rule does not put a limit on the number of investors, permits the payment of commissions, and imposes no restrictions on the manner of offering or on the resale of securities. In addition, no specific disclosure or registration requirements apply under this rule.

Rule 505 allows some companies which offer securities exemption from the registration requirements of federal securities laws. A company can offer and sell up to $5,000,000 of securities sold in any consecutive twelve-month period. An unlimited number of accredited investors are allowed under this rule, and sales are permitted for up to thirty-five non-accredited investors. However, Rule 505 requires the issuer to notify the prospective investors that they will receive “restricted” securities. Furthermore, under Rule 505, an issuer may not use any general solicitation or advertising in order to sell securities.

Rule 506 allows companies to raise an unlimited amount of money.  This rule is available to all issuers for offerings sold to an unlimited number of accredited investors and no more than thirty-five non-accredited purchasers. However, this rule requires that all non-accredited investors, if they are alone or with a purchaser representative, be sophisticated. This means that they must have sufficient knowledge and experience in business and financial matters that will allow them to evaluate the merits and risks of the proposed investment. Rule 506 also prohibits any general solicitation or general advertising in the sale of securities.

Los Angeles business attorney Anthony Spotora, Managing Attorney to his eponymous Century City law firm, Spotora & Associates, advises that, “Time and time again the exemptions provided by Regulation D have offered our clients a reasonable and business savvy means of achieving their often long-desired goals.  From film financing and real estate to product development, we have drafted and had the good fortune to then witness how a properly prepared PPM, inclusive of the apposite rules of Regulation D, can serve as a necessary conduit between an undercapitalized company and the investors vital to its success.”

Companies who choose to use the exemptions offered under Regulation D do not have to register their securities and generally are not required to file reports with the SEC. PPMs should be prepared in consultation with a lawyer who has experience drafting private placement memorandum and dealing with federal and state securities law.

A Private Placement Memorandum (PPM) is a document that outlines the terms of securities to be offered in a private placement. A private placement is the issuance and sale of a company’s stock to a small number of select investors and is utilized as a means of raising capital; private placement is the opposite of a public issue, in which securities are available for sale in the open market. A PPM resembles a business plan both in its content and in its structure, except these documents tend to be lengthy and extremely thorough, are broken into several components — one of which is a business plan — and are most commonly used in business to provide information to potential investors, so that they may evaluate the merits of an investment in the company.

While the content of a PPM might vary based on the particular offering or the circumstances of the company, most PPMs typically contain the following elements:

• A complete description of the security being offered for sale, including the terms of the sales and the associated fees;
• A description of the issuer which includes organizational structure, the history of the company and the context of the offering;
• A detailed business plan providing information related to market opportunity, the company’s value proposition, its products and/or services, marketing and sales plans, management, financials, and proposed use of proceeds;
• Detailed instructions on how to participate in the offer;
• A summary of relevant or possible conflicts of interests with the issuer, its principals, its affiliates, or a combination of any of the foregoing;
• The numerous risk factors associated with the investment, including risks that are common to similar investments and those risks which are unique to the issuer and its securities.

In certain contexts, particularly if securities are being offered to prospective investors who lack accreditation (unaccredited investors are less sophisticated investors who do not meet the net worth requirements under the SEC’s Regulation D and require special protection when buying stock), a PPM will be required by law. If this is the case, the contents of the PPM will be subject to and regulated by the disclosure requirements of applicable securities regulations, inclusive of state blue sky laws.

Even when a PPM is not required by law, it can provide an invaluable amount of protection for the issuer. For example, statements of an issuer, whether they are written or oral, are subject to both federal and state anti-fraud laws. Among other possible actions, a well-prepared PPM can help issuers avoid a potential securities fraud claim. The PPM will establish a record of exactly what was communicated to the investors about the offering as well as the company, and what was subsequently accepted.

Our business attorney have decades of corporate law experience in private placement and can help you navigate through the regulatory requirements and draft your private placement memorandum.

For more information contact our firm:

Spotora & Associates, P.C.
(310) 556-9641
1801 Century Park East, Floor 24
Los Angeles, CA 90067