What Is a Promissory Note and When Should I Use One?

You have probably heard the term promissory note, but do you understand what a promissory note is and when one can and should be used? A promissory note is simply a written promise to repay someone who has loaned you money. More specifically, it sets forth the terms for repayment of a loan on or by a specified date. A promissory note can also require repayment on demand (when the note is presented for payment) or in installments over time until a specified future date.

Promissory notes are legally enforceable and are often used by companies and individuals to obtain financing from sources other than financial institutions. The alternative funding source may be a person, another company, or an investor—any person or entity that is willing to provide the financing to the issuer under certain mutually agreed-upon terms. This type of arrangement allows almost anyone to become a lender for any (legal) reason.

Promissory notes can be described as a hybrid of a loan contract and an IOU. However, there are a few important differences that must be understood. An IOU is a flexible informal statement that money is owed, but unlike a promissory note, it may not include detailed terms for repayment and thus may not be legally enforceable. Conversely, a loan contract is a complex, legally enforceable agreement that specifies what the lender can do to recover money owed (such as foreclosure) in the event the borrower fails to make payments owed. A promissory note does not usually contain the specific measures of a loan contract that can be taken if the issuer fails to make payment. Further, in the financial world, promissory notes can be sold.

A promissory note typically contains the following information:
● Name of lender
● Name of borrower
● Amount of debt owed (original principal amount)
● Nature of or reason for the debt
● Description of any collateral (item pledged for repayment of note)
● Frequency and size of repayments
● Interest rate
● Date and place the note was first made
● Maturity date for the note
● Signature of person who owes money to someone else (issuer)

There are many different types of promissory notes. Here are some of the most common types:

● Basic note. This type of note simply serves as a promise that a debt will be repaid to the lender by the borrower and does not normally state a purpose.

● Installment payment note. This type of note is often used when buying a car or major appliance. Often the dealership or store will offer an option to purchase the item and use a note setting forth the down payment and regular (installment) repayment terms. These notes generally have higher interest rates, and lenders often do not allow prepayment of the loan balance.

● Real estate note. This promise to repay a loan used to purchase real estate is one of the most common types of notes. Like an installment note, a real estate note typically requires regular installment payments of the principal and interest and may require a final balloon payment. At the end of the term, the note may permit the borrower to elect to either pay the remaining balance (balloon payment) or reset the loan term at a higher interest rate. Normally, the real property being purchased is used as collateral to secure this type of note.

● College loan note. A college loan note is commonly used to document a student’s obligation to repay funds used for education expenses. A private lender may require a separate note for each loan the student takes out. Some schools permit students to sign one master promissory note allowing the student to receive several federal loans conditioned on the school’s certification of the student’s eligibility. These types of notes include the student’s contact information as well as contact information for the student’s personal references.

● Commercial note. If you borrow from a commercial lender, the note may state that full repayment is due immediately if you miss a payment or series of payments. The lender may include a provision allowing the lender to file an action to seize the collateral if the payments are missed.

● Investment note. Instead of obtaining a loan from a bank, business owners often execute an investment note to borrow money from investors to use as capital for their business in exchange for specified repayment terms or ownership in the business.

● Personal note. This type of note usually documents a loan agreement between friends or relatives and may include flexible repayment terms allowing the borrower to make payments without imposing a specific due date.
If a borrower stops making payments or does not repay the loan in full, the lender must enforce the note in accordance with its terms. If the note is secured by collateral, then the lender has the option to seize the collateral according to the terms of the note. If the note is not secured by collateral, the enforcement process is more complicated. In either event, the lender should make an effort to communicate with the borrower to try to reach an agreement. The lender may need to send a demand letter, hire legal counsel, or file an action in court to collect payment.

Because of their frequent use in business (and personal) contexts, promissory notes are vital to our financial world. Understanding them and the different ways they can be used is essential for you and your business. It is also important for a promissory note to be well-drafted. Call us today to schedule a consultation. We can help ensure that the promissory notes you execute on behalf of your business properly reflect your agreements with your lenders.

Strategies for Protecting Your Business’s Intellectual Property

Before launching a business, entrepreneurs spend a substantial amount of time and money researching and developing their products or services. You may have worked with graphic designers and a marketing team to create a brand name and logo for your products or services. As the business grows and your products or services take off in the marketplace, competitors or counterfeiters may try to undercut you by producing knockoff products or infringing your marks.
Consider implementing a brand protection strategy as part of your advertising and marketing game plan to combat this interference. While it is understandable to want to invest in expanding the business and reaching more consumers and clients, you must also protect the assets you have spent valuable time and money creating. As a business owner, there are several things you should do to protect your brand in the marketplace:

1. Create strong and distinctive trademarks. When selecting a trademark, it is important that the mark be distinctive. The more distinctive a mark, the stronger it is, and the greater protection it may be afforded under trademark law. Generic terms, which name the products or services offered, are the least distinctive and therefore the weakest marks. Trademarks that are merely descriptive of the product or service are also relatively weak and may only obtain limited protection. By contrast, suggestive marks (a step above merely descriptive marks that suggest something about the protect or service, e.g., Netflix), arbitrary marks (such as Shell for gas stations), and fanciful or coined marks (such as Xerox) are the strongest marks. If your mark includes any design elements, they should also be distinctive; more intricate designs may deter copying or counterfeiting.

2. Protect your intellectual property. Make a list of the intellectual property your business owns to identify elements that should be registered for copyright, trademark, or patent protection. If it is a brand name, slogan, or, logo, seeking trademark protection may be appropriate. If you have written content on your website such as a song, book, or another type of creative work, you should consider obtaining copyright protection. If one or more of your products is a unique invention or design process, then you should consider applying for a patent.

Patent, trademark, and copyright protection are available at the federal level, and most states also allow you to register your trademark at the state level, which may be an appropriate strategy if your mark is more regional and you are unsure if you are going to enter the national market. If you obtain a federal trademark registration, you can use the “®” symbol in connection with your mark. Use of this symbol deters counterfeiters and confers additional advantages if it becomes necessary to defend your mark. Finally, business owners should consider recording their intellectual property with U.S. Customs and Border Protection so that infringing or counterfeit items can be seized before entering the country.

3. Inform, inform, inform. Provide notice on your website, printed advertising, marketing materials, and packaging that you own certain trademarks, copyright, and patents. In some cases, failure to display notice of ownership of your intellectual property rights can waive certain rights. You should also inform consumers about how to spot a fake product and to notify you if they find one. Include a statement in your terms and conditions that the content on your website is the business’s intellectual property and that you will enforce your rights in it. Allow customer reviews on your website. This serves a two-fold purpose: It may alert you that a customer found a cheaper knockoff elsewhere so you can investigate a possible copycat, and it will help you identify issues with a product so you can improve it.

4. Monitor your intellectual property. You must monitor and defend your intellectual property to avoid losing your rights. Monitoring involves checking the internet for unauthorized uses of your intellectual property as well as monitoring for infringement in brick-and-mortar stores and at trade shows. If you discover that someone is infringing one of your products or a mark, you must take action. Failure to take action could be considered a waiver of your rights. There are services available that can help you monitor and defend these valuable assets.

5. Send cease-and-desist letters or file a lawsuit. What should you do if you discover infringement of your product or mark? You must send a letter to the infringer to demand that the infringer stop using your mark or other intellectual property immediately. In the letter, you should specify the nature of the infringement or unauthorized use, including when and where the infringement occurred and any other pertinent details. You should also inform the infringer that you are claiming ownership of the product or mark at issue and that if the infringing activity does not cease, you will file a lawsuit. If your letters and actions are ignored, you should consult an intellectual property attorney regarding the advisability of filing a lawsuit.

6. Keep improving. What is one of the best ways to stay ahead of an infringer? Be proactive! Devote time and resources to continued product development and improvement. Making changes to your products and services to reflect advances in technology and shifts in consumers’ and clients’ needs will help you stay ahead of your competitors.

Creating a brand protection strategy may seem daunting, but so did starting your business. It is crucial to protect the valuable time and money you spent on research and development to create and launch a product or service. An experienced intellectual property attorney can assist you in developing and maintaining your brand protection strategy by helping you identify which assets should be protected and guiding you through the registration process. An attorney can also help you create terms and conditions for your website, send cease-and-desist letters to an infringer, and file an infringement suit if necessary. Call us today to set up a consultation. We can help you get started with protecting one of your most important assets—your brand.

How Does LLC Ownership Work?

The limited liability company (LLC) is a popular business structure for new businesses, but what does it really mean to own an LLC? LLCs provide unique opportunities to customize business ownership to fit the particular needs and circumstances of the owners. Here is what you should know about LLC ownership.

The Basics
The owners of LLCs are often called members. If a single person or a single business entity owns an LLC, it is called a single-member LLC. If multiple people or entities own an LLC, it is called a multimember LLC. LLCs can have an unlimited number of members. When ownership is established, the membership interests are usually expressed in one of two ways:

● by membership units similar to corporate shares
● by percentage

The terminology you choose to use for a membership interest should correspond to your vision for the company. For example, if the business is owned primarily by your family, identifying the membership interests by percentages may keep things clear and straightforward. However, if you intend to seek funding from individuals outside of the family, you may find that labeling the ownership interests as membership units facilitates the easy transfer of ownership rights.

Establishing Ownership Rights
To be an LLC member, some form of contribution is required; however, the contribution need not be cash, which is called a capital contribution. LLC members can also contribute property or services. Additionally, unlike contributions to a corporation, when an LLC member makes a capital contribution, the concomitant ownership rights and distributions can be customized. For example, if one member were to contribute 40 percent of the capital in an LLC, that member and the other LLC members may still choose to split profits fifty-fifty.

Generally, LLC members are entitled to share in the company’s profits and losses, vote regarding key LLC matters, inspect and review the books, and enjoy a host of other rights. These rights stem from default state laws; however, they may be customized through contractual agreements. The contractual agreement that typically governs LLC ownership rights is an operating agreement. Operating agreements may include the following common customizations:

● distributing profits and losses in a way that does not match the members’ capital contributions
● creating different classes of ownership to reflect passive investor rights
● mandating member meetings

Transferring Membership Interests
Death, incapacity, and sale are the primary events that trigger transfers of membership units. However, if you intend to transfer membership units to investors, be sure to evaluate whether your interest is a security under the federal securities law. If you offer your interest to less than thirty-five investors, your interest likely qualifies for an exemption that allows you to bypass the federal disclosure requirements and even some state securities law.

Management
LLC members can choose to be managed either by the LLC members (a member-managed LLC), or by nonowners or certain members designated as managers (a manager-managed LLC). When an LLC is managed, it is vital to identify and articulate the decisions for which the members bear responsibility and the decisions the managers must make. If the decision-making authority is not clear, the resulting uncertainty can hinder effective management of the LLC.

Payment
LLC members can pay themselves in several ways, such as

● receiving income in the form of distributions of profits at the end of the year,
● receiving draws, which are periodic payments based on the estimated profits for the year, or
● receiving periodic payments as employees of the business.

These three methods are not mutually exclusive—a member can take advantage of more than one option. However, members must remember that each option has unique tax consequences. LLC members should account for Social Security and Medicare taxes. When LLC members pay themselves as employees, the LLC is expected to withhold taxes as it would for any other employee. Conversely, when members pay themselves based on their profits, they must pay self-employment taxes. Either way, LLC members must be mindful of the tax consequences of the payment methods they choose.

Next Steps
If you are considering creating an LLC, our team of experienced attorneys can help you develop the right ownership structure for your business. Call our office to schedule a meeting soon.

Preparing Your Business for an Emergency

2020 was a lesson in the need to prepare for the unpredictable. From the pandemic to natural disasters, businesses have faced numerous challenges that could force them to close. The most common emergencies that businesses typically face fall into three categories:

1. Natural disasters such as floods, fires, and earthquakes
2. Medical emergencies such as the current COVID-19 pandemic
3. Human-caused accidents resulting in physical or technological damage

The Small Business Administration estimates that 25 percent of businesses fail to reopen after an emergency or disaster. In light of this uncertain period, it is essential to take proactive steps to prepare your business for an emergency. Here are the things you should keep in mind as you develop your business’s emergency plan.

1. Assess the types of risks your business is most likely to face. Your risk mitigation plans should emphasize the emergencies your business is most prone to encounter. To properly assess those emergencies, consider your business’s location, the industry you operate within, and the typical circumstances in your community or environment. For instance, businesses that operate in California are likely to prepare for earthquakes because of the geographical elements in their location. On the other hand, businesses that deal with dangerous chemicals ought to focus their preparations on the risks those chemicals pose. By analyzing your business’s unique risks, you position your business to make intentional decisions with a greater positive impact.

2. Reevaluate your business insurance. After assessing your business’s various risks, review your business insurance to make sure your coverage appropriately addresses those risks. Also, take this time to evaluate whether you have the right amount of coverage. Obtaining the correct type of coverage in the proper amount allows your business to access much-needed funds if disaster strikes.

3. Craft a communication plan. To effectively implement an emergency plan, you must keep your team abreast of emergency situations that impact your business. One way to keep your employees in the loop is to create a communication plan that outlines how information regarding your business is circulated within your company. This plan should include important contact information and the essential roles to be filled by your employees. Remember to keep your communication and emergency plans in an accessible location that can withstand natural disasters. Due to technological advancements, you can also store your business’s important documents digitally in the cloud.

4. Create a business emergency fund. The inability to quickly access funds is one of the primary reasons that businesses remain closed after a disaster. Even if you have obtained insurance and have a valid claim that your insurers will accept, it will likely take some time before those funds are distributed. As a result, it is critical to have access to cash so that you can meet the business commitments necessary to continue operating. These commitments may include maintaining payroll, ordering supplies, and maintaining your manufacturing systems.

5. Document and practice your emergency plan. If the unthinkable occurs and impacts your clients or staff, it may open the door to litigation. However, a clearly documented emergency system that identifies best practices as part of your plan will serve as evidence of the careful steps you have taken to mitigate the risk of damage or harm. Furthermore, by practicing your plan, particularly in areas prone to natural disasters, you can help your team avoid unnecessary risks.

6. Ensure that your legal documents provide sufficient liability protection. One of the primary reasons people form legal entities such as limited liability companies and corporations is to avoid personal liability for claims against the business. With business entities that provide limited liability, if the business is held responsible for claims stemming from an emergency, the owners and management may be entitled to such protections. Nevertheless, you should review your formation and management documents carefully to confirm that they include the proper designations and provisions regarding liability limitations.

Prepare Today
The saying “luck favors the prepared” is especially true for business owners hoping to survive life’s emergencies. Our team of knowledgeable attorneys is experienced in helping businesses like yours create and execute plans that mitigate risk during uncertain times. To develop a plan that meets your business’s unique needs, call our office to schedule an appointment today.

Asset Protection for Entrepreneurs

Going into business for yourself is a risky endeavor. From investing in goods and services and hiring employees to simply carrying out the daily tasks related to your business, each step is fraught with risks. This is especially true given the litigious nature of our society. As a result, many entrepreneurs employ asset protection strategies. Asset protection is a form of strategic planning aimed at minimizing risk and protecting assets from creditors’ claims and litigation.

Careful asset protection can help you retain and sustain the value of the property and accounts you own. As an entrepreneur, here are a few strategies you can use to protect your assets:

1. Separate your personal assets from your business assets by establishing a limited liability business entity. The default structure for an individual starting a business is the sole proprietorship; the default structure for multiple people starting a business together is a partnership. These entities, though simple to create, do not legally protect the business owners’ personal assets. However, business structures like the limited partnership, limited liability company, and the corporation provide limited liability. This means that the owners of the business are not personally liable for the company’s debts or other liabilities—for example, if a judgment is obtained in a lawsuit against the business. A properly established and maintained limited liability business structure restricts liability to assets belonging only to the business. Creating a separate legal entity is one of the first steps every entrepreneur should take to protect personal assets. Subsequent practices like opening a separate business account, complying with legal requirements such as paying state filing fees, and not commingling personal funds with business funds further establish the legal separation between personal assets and business assets.

2. Keep multiple business ventures separate. Many entrepreneurs are serial business owners who wear many different hats and run a variety of businesses. In these cases, another way to protect your business assets is to ensure that you keep the assets of each business separate. This requires setting up different legal entities for each of your businesses, ensuring that they incur separate liabilities and debts. Failure to legally separate your diverse endeavors will expose all of your businesses to each business’s creditors if litigation arises and one of your businesses is found liable. As a result, it is important to separate these business interests as soon as possible and to ensure that the documentation, banking, accounting, and record-keeping for each business reflect the separation.

3. Obtain sufficient business and personal insurance. Problems and accidents are inevitable, and when they occur, having insurance in place helps insulate you and your business from paying for any losses directly. Various types of insurance are available to you as an entrepreneur; the types you should obtain depend on the type of business you conduct and your unique preferences. Once you have obtained insurance, diligently review your insurance policies to ensure that your insurance coverage remains adequate to cover the value of your assets.

4. Avoid personal guarantees. As an entrepreneur, you may encounter vendors who request personal guarantees. A personal guarantee is an agreement that you will be held personally responsible for the debt your business incurs in the event the business is unable to satisfy it. If you are asked to sign a personal guarantee, consider negotiating a higher payment to the vendor to eliminate the need for the personal guarantee. Despite the short-term discomfort that may be involved in such negotiations, they can provide long-term benefits to business owners.

5. Transfer some of your assets to a trust. A trust is a legal tool that allows a third party, the trustee, to hold assets for the benefit of another, the beneficiary. There are various types of trusts available to individuals. For business owners, one of the preferred types is an irrevocable trust because the business owner relinquishes ownership and control of the business assets, and therefore, the assets are not subject to the risks of loss associated with a revocable trust. A revocable living trust, on the other hand, does not provide protection to business owners against personal liability for the business’s debts or lawsuits because the business owner, who is typically also the trustee, can change the terms of the trust at any time before death and is still treated as the owner of the property held in the trust. However, a revocable living trust can protect from creditors assets that pass to your spouse and children after your death. Entrepreneurs interested in asset protection should strongly consider setting up an irrevocable trust early in their business development. If a trust is created after litigation arises, the trust may be viewed with suspicion by a court as a tool of liability avoidance.

We Are Here for You
The protection and preservation of the wealth you create as an entrepreneur does not just happen on its own. It involves strategic planning and intentional execution. Our team of experienced attorneys is available to help you assess how best to reduce your risk and maximize asset protection for yourself and your business. Call our office to schedule an appointment today.

Estate Planning is Like Building a Snowman

A complete estate plan must include certain essential parts. In fact, it is similar to building a snowman in some respects. The traditional snowman has several critical components: bottom, middle, and top snowballs, as well as “arms” and a “ face.” If any of these are left out, the snowman can look a little odd! The consequences of an incomplete estate plan are much more serious, however. If you leave out important documents when you create your estate plan, it is unlikely to accomplish all of your goals, and the benefits you thought you were gaining could melt away.

Step 1: Shape a strong foundation—the trust
The foundation of a snowman is the large snowball at the bottom that acts as its base. Likewise, a trust is the foundation of your estate plan. It enables you to name a trusted individual as co-trustee or successor trustee to carry out your wishes upon your death and to manage your affairs if you become so ill you cannot do it yourself. Using a trust, you can specify that distributions from the trust be made to your beneficiaries for specific purposes, e.g., college tuition or health care expenses, or at a certain age. Trusts are often used to ensure that your money and property benefit your own family, rather than, e.g., the new family of a spouse who eventually remarries. In addition, trusts provide a means to pass on your money and property to your family and loved ones without the inevitable delays and costs that accompany the probate proceedings required when you use a will. Trusts also provide your family with more privacy than a will—as your will becomes part of a public record once it is admitted to probate and can be viewed by anyone. Certain types of trusts can also be used to protect your money and property not only from being accessible to satisfy the claims of your future creditors (including a divorcing spouse), but also those of your beneficiaries. These are only some of the benefits that a trust can provide as the bedrock of your estate plan.

Step 2: Form a solid core—the medical power of attorney
Additional strength and stability are provided by the snowman’s middle snowball. You can similarly solidify your estate plan by executing a medical power of attorney that names a trusted agent who can make medical decisions on your behalf if you cannot make them for yourself or are unable to communicate them to the relevant health care providers. Your agent is bound, to the greatest extent possible, to make the decisions you would have made if you had been able to make them yourself. By appointing someone you trust to act on your behalf and making sure they have important information, such as your preferred providers, medical conditions, treatment and medical history, medications, allergies, and religious beliefs, you can gain substantial peace of mind. A comprehensive estate plan describes not only what happens to your money and property when you die, but also how your care should be handled during your lifetime.

Step 3: Cap it off—the financial power of attorney
The third step in building a snowman is adding the snowball representing the “head.” Although it is typically smaller than the snowman’s middle and lower sections, it is no less important. In an estate plan, another essential document is a financial power of attorney. It authorizes someone you choose to make financial decisions for you if you are unconscious, too ill to make or communicate them yourself, or otherwise unavailable to do so. If you do not have a financial power of attorney, your family, including your spouse in some instances, will likely have to go to court to be granted the authority to handle your financial affairs. The person the court appoints to this role may not be the person you would have chosen to handle your financial matters. You can do your family and loved ones a huge favor by making sure you have named an agent to step into this role, avoiding unnecessary delays or disputes.

Step 4: Extend a hand—the funeral instructions for your loved ones
Next, branches are inserted to act as the snowman’s “arms.” You can give your family one last hug by making your wishes for your funeral or memorial service known using a remembrance and services memorandum. Most people would rather avoid thinking about their own funeral, but if you don’t make these plans and arrangements in advance, the burden will fall on your grieving family after you pass away. You can use a remembrance and services memorandum to list people who should be notified after you pass away, provide information you would like to be included in your obituary, give instructions for handling your remains, and specify what you would like to be included in your funeral or memorial service—or to indicate that you prefer that no service be held. Don’t just assume your family knows what you want, as there is a good chance they do not. If several family members have conflicting opinions about what you would have wanted, avoidable disputes could arise, causing additional heartache, delay and potential expense. Taking the time to write down your wishes can be one of the most caring things you can do for your loved ones.

Step 5: Add some personality—the ethical will or letter of instruction
No snowman is complete without the coals and carrot used to create its “face” and add a little personality. You can use an ethical will, sometimes called a letter of instruction or legacy letter, to infuse your estate plan with your personality. An ethical will provides a way to communicate important knowledge, experiences, and values you have acquired over the course of your life to your family and loved ones. The contents of the ethical will are likely to vary widely from individual to individual because each of us is unique and has lived a life unlike anyone else, so the wisdom each person finds valuable and wants to pass on to his or her loved ones is different. The ethical will is not a legally binding document, but it may be one of the most precious gifts you can give to those you will eventually leave behind—as well as future generations of your family who otherwise would not have a chance to know you.

Don’t Give Us the Cold Shoulder—Call Us Today
Without a complete estate plan, you are skating on thin ice. Make sure your estate plan has more than a snowball’s chance in the tropics of accomplishing your wishes. As experienced estate planning attorneys, we can help you create a comprehensive plan without being snowed under by all of the details necessary to address your unique circumstances. Don’t wait for a cold day in July—call us today to set up a meeting!