Lance Armstrong won the Tour de France seven times and an Olympic bronze medal during his career. This success brought him fame and substantial sponsorships. However, as evidence mounted that Armstrong used illicit substances to better his performance, sponsors quickly disassociated themselves by likely utilizing a morals clause in the sponsorship contract.
As in the case of Lance Armstrong, morals clauses allow a brand or business the ability to cancel a sponsorship with the athlete/celebrity should they act in a way that damages their own brand substantially enough to hurt the sponsoring business or brand's reputation.
Importantly, morals clauses are not reserved for the elite sponsors. Morals clauses can also be found in TV show contracts, teachers' contracts, and appearance contracts.
Oftentimes, sports businesses schedule athlete appearances to boost their brands and bring in consumers. Regardless of the size of the sports business, a morals clause should not be overlooked in the appearance contract. In today's hyper-connected society, all it takes to start a controversy is a singe Tweet, which probably takes less than a minute to create and send. No business, especially a small business, wants to be stuck with an appearance by a controversial athlete amidst a scandal for fear that the business would be associated with the athlete.
This afternoon, I will be attending an event which focuses on the latest iPad solutions for retailers. I have seen several stores around Manhattan which use iPads as point of sale terminals instead of the old-fashioned cash registers, which makes sense as iPads are user-friendly and the apps are flexible in design. However, in a time where there is seemingly a major privacy leak every few months, the use of an iPad in point of sale transactions raises privacy concerns for the consumer and retailer, such as:
Social media sites like Facebook, Twitter, and Instagram have pervaded every aspect of modern society. Not surprisingly, businesses have (and should have) utilized social media to increase their brand recognition and connect with their consumers. However, social media use for businesses can be risky. Unlike personal profiles, business profiles tend to have several users who can add content. Allowing multiple people to post for a business profile increases the business' risk of inappropriate use of its page. Simply put, no business wants an unhappy employee to be able to post on their social media pages. A single inappropriate post (even if well-intended) can quickly become viral on the internet and damage the business' brand.
Click here for a few examples of social media blunders by well-known brands
In order for a brand to avoid similar scenarios and promote itself in the best light possible, businesses should have a social media policy. Such a policy can establish who has access to posting content, guidelines for appropriate posts and replies, how frequent posts may be made, and potential repercussions for violating the policy. Social media policies may also establish rules by which employees must abide in discussing the business or brand on their personal pages.
By establishing a set of rules by which employees must abide when engaging in social media on behalf of the company, the company can effectively limit its risk and avoid unintentional mistakes which may hurt the business. Unfortunately, the only way to avoid the malicious, intentional, social media postings is for a business to select employees it deems responsible and consistently reevaluate the employees' access.
Nothing can completely insulate a business from social media mistakes. However, social media policies can help avoid unintentional mistakes and create a unified voice for the brand.
One of the topics heavily discussed at last week's Sports Lawyers Association Annual Conference was ambush marketing. In case you are unaware, ambush marketing is a strategy where a brand associates themselves with an event or persons to capitalize on their fame without paying sponsorship fees. Take a look at this ad by Nike that was released around the 2012 Summer Olympics in London, England:
Nike was not a sponsor of the 2012 Olympic Games in London, England, yet cleverly utilized the public's knowledge of the games by showing sports being played in towns also called London in the United States, Norway, Jamaica, and Nigeria. Additionally the voice-over about greatness certainly conjures the image of the Olympic athlete. This ad was used as part of a larger campaign, with the ad appearing on the homepage of Youtube for a day, as well as engaging users on Twitter with the hashtag at the end of the video. Cleverly, the ad relies upon the viewer to make the association between the images, Nike's brand, and the knowledge that the Olympics were taking place in London.
Most important is what Nike does not do in this ad. Nike never shows London, England, the Olympic rings, or even says the words Olympics or games. In other words, Nike did not use any protected intellectual property associated with the Summer Olympics in London, England. Doing so would have left Nike on the wrong end of an extremely costly infringement lawsuit.
So what can businesses learn from this Nike commercial about ambush marketing?
When starting a business, one of the most important choices that is frequently overlooked is the business entity selection. The choice between forming your business as a sole proprietorship, partnership, LLC, C Corporation or S Corporation is much more than a choice of letters. Each entity alters how the business must be structured, how taxes are reported and paid by the owners, and impacts the business' ability to raise capital. Further, it is difficult to change business entities once the business is running, and doing so may incur substantial costs. This post will be the third, and final, in a series of explanations of the different corporate entities as well the features that make them attractive or unattractive to new businesses.
The final two types of business entities to discuss are known as C corporations and S corporations. Although the corporate entities have important differences, the formation of the corporations is the same. Firstly, it is important to recognize that a business which wishes to incorporate should do so in Delaware, as the State has the most robust corporate governance law in the country. In order to create a corporation in Delaware, the business must first choose a name including some derivation of one of the following words: Incorporated; Institute; Society; Union; Syndicate; Company; Club; Foundation; Corporation; or Limited. This name must be unique. Next, the business must prepare to file the certificate of incorporation. On the certificate, the business must state its registered agent, the nature of the business, the amount of shares of stock of the incorporators, the directors, and addresses for all named parties. Once completed, the certificate of incorporation must be filed with the State. Delaware also requires that corporations maintain written bylaws, although they are not required to be filed with the state. The bylaws establish the rules and procedures of the corporation, such as the size of the board of directors, the board's responsibilities, who may call shareholder meetings and where the meetings are to occur. Next, the corporation must appoint its initial corporate directors, hold its first board of directors meeting, and issue stock. Lastly, corporations must comply with any other business, tax, state (if conducting business outside of Delaware) or industry specific regulations, such as obtaining the necessary licenses to do business and filing other required paperwork.
The sole additional step in forming an S corporation is that the business must designate "S" status with the IRS within 75 days of the incorporation date (the date the business filed the certificate of incorporation). The S corporation must also meet the additional requirements of not having more than 100 shareholders, the shareholders cannot be non-resident aliens or corporations, and S status must be approved by all shareholders. These requirements generally necessitate that S corporations are small businesses.
The key distinctions of S corporations and C corporations are in the benefits that each structure receives. Although the directors and shareholders of both corporate structures enjoy limited liability, S corporations are taxed as "pass-through" entities, like LLCs and sole proprietorships. This means that the profits are passed directly to the shareholders, who must report their share of the profits as income on their personal taxes. In contrast, C corporations' profits are taxed twice as the forming of a C corporation creates its own taxable entity. The C corporation is taxed when it turns a profit, and is also taxed when the corporation pays dividends. However, a distinctive advantage for the C corporation is its ability to attract investors due to its highly regulated structure. Simply put, the regulated nature of C corporations makes the structure predictable and easily understood by investors. Contrast that with LLCs which are similar but can be structured any way the members please. Additionally, C corporations are also attractive to investors as shareholders are not subject to taxes unless the corporation pays them through dividends, distributions, or salary. This relieves investors of the possibility of being taxed on money they may not have necessarily received, as could happen under "pass-through" companies such as LLCs or S corporations.
The disadvantages of S and C corporations are few. Firstly, the requirements of S corporations, particularly that its limited to 100 shareholders, limits S corporations to small businesses. It would be extremely difficult, if not impossible, for a large corporation (or a company planning on expanding very quickly) to limit itself to 100 shareholders. Additionally, S corporations are restricted to one class of stock. Multiple classes of stock are normally issued in C corporations to establish different levels of voting rights. Under a single class of stock, the voting rights are equal. The disadvantages of C corporations are predominantly administrative. C corporations are costly and time consuming to start and operate. Additionally, C corporations have increased paperwork and recordkeeping burdens as it is highly regulated by federal and state governments. The most notable disadvantage to C corporations is the double taxation at the corporate and individual level. However, corporate tax levels are favorable as compared to income tax.
As a result of its requirements, advantages and disadvantages, S corporations are best suited for small businesses who seek greater structure than LLCs have to offer, and intend to remain small businesses. The 100 shareholder requirement is limiting, and it is important to note that changing corporate structures can be costly. As for C corporations, they are best suited for businesses that plan to utilize investor funding and/or plan to expand rapidly into large corporations. The startup and operating costs are greater than its S corporation counterpart, but any need for investor financing logically requires a business to form a C corporation.
These are just some of the advantages and disadvantages of LLCs. It is important to remember that the best choice of entity varies business to business.
When starting a business, one of the most important choices that is frequently overlooked is the business entity selection. The choice between forming your business as a sole proprietorship, partnership, LLC, C Corporation or S Corporation is much more than a choice of letters. Each entity alters how the business must be structured, how taxes are reported and paid by the owners, and impacts the business' ability to raise capital. Further, it is difficult to change business entities once the business is running, and doing so may incur substantial costs. This post will be the second in a series of explanations of the different corporate entities as well the features that make them attractive or unattractive to new businesses.
An LLC is an unincorporated business organization established by a single member, or group of people, who have limited liability for the debts and liabilities of the business. State law determines the formation and operation of an LLC. To form an LLC in New York, the organizing members must file the business' Articles of Organization with the state and pay the requisite fee. Subsequently, a notice that the LLC was formed must be published in two newspapers (that are designated by the county clerk of the county where the LLC is located) consecutively for six weeks. A Certificate of Publication, affidavits of publication in the newspapers, and the requisite fee must then be filed with the Department of State within 120 days of the initial filing of the Articles of Organization. The timing of the submission is important, as failure to provide this documentation would result in the suspension of the LLC's ability to conduct business. Additionally, the members of the LLC are required by New York law to adopt a written Operating Agreement. Under New York law, this agreement must be entered into no later than 90 days after the filing of the Articles of Organization. This document does not get filed with the State but is maintained internally by the LLC. Lastly, depending on the industry the LLC does business in, the members may have to comply with other tax and regulatory requirements. Although there are fees and several steps required to form an LLC, the benefits to its members are substantial.
The LLC is a flexible business structure that avoids some of the pitfalls of sole proprietorship. This entity allows the business to add members as it sees fit, unless otherwise provided for in the Operating Agreement. The necessity of an Operating Agreement also allows businesses to create its own organizational structure. One of the greatest advantages to the LLC is that members enjoy limited liability. This means that the members do not share in the liability of the business' debts or judgments like sole proprietors do. Essentially, the business insulates its members from liability by absorbing any debt or judgment. Limited liability is extremely beneficial to the members as their personal lives are not on the line with every debt or lawsuit. Additionally, LLCs are usually taxed like sole proprietorships, as they are considered "pass-through" entities. This means that the LLC's members report their share of the business' profits on their personal tax return. LLCs can also elect to be taxed as a C or S corporation instead of "pass-through" taxation (which will be discussed in a future blog post).
The disadvantages of LLCs are few, but could be impactful to a business. Firstly, it may be difficult for LLCs to raise money from investors. Generally, investors are hesitant to invest in LLCs due to the lack of a mandatory corporate structure and "pass-through" taxation structure. Simply put, investors may not be amenable to investing in LLCs because they would be taxed on a share of profits from the LLC, despite potentially not receiving any money to pay the taxes, and/or have tax-exempt partners who do not want to receive business income. The need for investor funding should be heavily weighed during business formation. If investor funding is, or will be, necessary for the business to thrive, it may be more advantageous to form a C corporation. Additionally, it is a disadvantage that there are no structural requirements to an LLC because it necessitates an all encompassing, tightly drafted, Operating Agreement. Such an agreement can be difficult to draft, review, negotiate and agree upon between the members.
These are just some of the advantages and disadvantages of LLCs. It is important to remember that the best choice of entity varies business to business.
When starting a business, one of the most important choices that is frequently overlooked is the business entity selection. The choice between forming your business as a sole proprietorship, partnership, LLC, C Corporation or S Corporation is much more than a choice of letters. Each entity alters how the business must be structured, how taxes are reported and paid by the owners, and the impacts the business' ability to raise capital. Further, it is difficult to change business entities once the business is running, and may incur substantial costs. This post will be the first in a series of explanations of the different corporate entities as well the features that make them attractive or unattractive to new businesses.
Sole proprietorships are a common business structure for single owner small businesses. Forming this type of business entity is very simple. Several states, including New York, only require you to register with the state if you will be doing business under a name other than your own. For instance, if Bob Jones opened up Happy Time Graphic Design in New York, he would have to register his sole proprietorship with the state. On the other hand, if Bob Jones were to do business under his own name, he could operate his graphic design business without having to register with New York. This ease of formation is what attracts single owner small businesses to this structure. Additionally, under the sole proprietorship, income is directly imputed to the owner. That means the business income is reported on the owner's taxes directly.
Sole proprietorships have two main disadvantages. Firstly, the business owner and his/her line of credit is all that is available to the business should it need additional capital. This could become particularly problematic if the business owner's credit score is low. In contrast, other business entities have the multiple methods to raise capital for their businesses. Secondly, and most importantly, sole proprietors face unlimited liability. This means that the owner can be personally sued for any debts obtained in the process of running the business or any accidents at the business. For most, the risks should outweigh any advantage. Hypothetically speaking, a sole proprietorship structure is not worth losing your family's home because someone slipped at your business and broke their arm. Yes, an owner should have insurance which would help mitigate the liability faced by the owner, but the coverage may not be sufficient.
So what types of businesses are best suited for a sole proprietorship? Home businesses are best suited for sole proprietorships. Assuming that the home business does not meet with clients in the home, the liability risk for accidents on the business premises is eliminated. The business would still be liable to creditors, but at home businesses generally operate with little overhead as compared to their storefront counterparts, so the need for a line of credit may also decrease.
These are just some of the advantages and disadvantages of sole proprietorships. It is important to remember that the best choice of entity varies business to business.
Today marks the beginning of this blog, and what I'm sure will be an ambitious endeavor to provide timely legal updates with a practical spin. No one wants to hear about the legal minutia that is laden with attorney-speak which most people wont feel like has any relation to their cases. Through this blog I will attempt to educate and enlighten because the law is always operating all around us. Though the law can be complex, it can also be comical. Lawyer jokes aside, some pretty strange stories arise out of lawsuits and the laws themselves! This blog will explore both the complex and comical, but always will ensure that the content is interesting and practical. I will post frequently, so stay tuned!
Quiles Law is an esports and sports law firm based in New York City.
1177 Avenue of the Americas
New York, NY 10036
(P) (917) 477-7942
(F) (917) 791-9782
Attorney Advertising. The information presented in this site should not be construed to be formal legal advice nor is it intended to form any attorney/client relationship. Our attorneys, collectively, are licensed to practice law in the States of New York, New Jersey, and Pennsylvania. Copyright Roger R. Quiles, Esq., 2020. All rights reserved.