Cloud computing is the delivery of information technology services over the internet without the need for businesses to purchase or install software or run their own application and data servers. Applications are hosted in the data centers of the cloud computing provider, benefiting from massive economies of scale which in turn lower the costs of the service to the businesses.
Cloud computing services include: Software as a Service, Platform as a Service and Infrastructure as a Service, all of which involve delivering information technology components that had previously been regarded as infrastructure or hardware.
Benefits and risks
Cloud computing services offer to a number of benefits but also expose businesses to certain risks, although the risks are often ignored with the result that businesses may enter into a cloud computing contract without having considered all potential issues including legal and compliance. Some of the benefits of cloud computing include: low, fixed charges; improved support and maintenance through greater competition between service providers; anytime, anywhere access; ease of adoption; greater flexibility with business requirements that can expand or contract as required. Some of the risks include: standard solutions may not precisely match business needs, limited warranties, indemnities, lack of integration and management of legacy systems, lack of control over data and content with potential data protection issues, risk of lock-in, risk of hidden extras for additional users, storage and so on, risk that a business fails to control usage or increased storage and ends up paying more than what it had budgeted for.
What are the legal issues?
Cloud computing operators generally offer their services on standard terms. Standard terms tend to be for the benefit of the operator, including only limited warranties. In particular, cloud computing providers may reserve the right to delete customer data for breach of contract, such as non-payment. For businesses this may be disastrous vis-a-vis their customers.
In the UK, standard terms between UK companies (and, in particular, any exclusions or limits of liability) are subject to the Unfair Contract Terms Act and must be reasonable. However, this requirement is not necessary in the event of international contracts (as most of the cloud computing contracts are). In addition, it is far safer to negotiate key provisions in advance rather than rely on statutory protection after an issue arises and business will need to know what kind of service levels and service credits will be offered to it. In the event of use of cloud computing services for key operations such as outsourcing then, the parties must have a properly negotiated agreement, including service levels and support.
The legal issues to consider are various and include: concluding contracts inadvertently; data protection; intellectual property issues and defamation; software licensing, open source use; liability; law and jurisdiction.
More in detail:
- The risk of concluding contracts inadvertently: for example, if an employee signs up to a cloud-computing application using a computer at work for a purpose related to their employment, then the company could be bound by the terms of that cloud computing service.
- The risk of data protection compliance: if employees input personal data held by their employer into the cloud, the company must comply with its data protection obligations.
- The risk of intellectual property infringement: liability may arise when employees post defamatory or copyright-infringing content into the public areas of many cloud-computing services. In all the above, appropriate policies, procedures and training must be given to employees to ensure compliance.
- Appropriate licences: when users have online use of software at a computer without a licence, they commit copyright infringement. The licences granted by cloud computing operators are usually very narrow and limited to use of the online application for the business own purposes. Customers have no rights to make copies of or modifications or enhancements to the software, and they cannot sub-license to third parties. So the business, before accepting the software licence, must ensure that it can comply with its obligations and if not it must make the necessary changes to allow for sub-contracting or outsourcing.
- Intellectual property issues: a cloud computing operator may not always own the intellectual property rights in the software that is the subject of the cloud-computing service. In this case, the operator will need to arrange for the right to sub-license the software to its customers, or for a direct licence to be entered into between the customers and the relevant third-party licensor.
- Use of open source software: although the use of open source software helps keeping the costs down and many cloud computing operators build their services using such software, the open source software licences vary considerably and some require onward licensing of source code when open source is incorporated into other software or deployed in a hosted environment, which could have serious consequences for businesses. It is thought however, that pure cloud services are not considered to involve a conveyance according to the General Public Licence Version 3 and therefore code disclosure requirements should not be triggered. However, it is preferable for businesses to check this issue with their provider.
- Content licence: the standard terms offered by many cloud computing operators allow them to use any content stored on its servers. These licences are often expressed as being perpetual and irrevocable often giving the cloud computing providers the right to pass the content to third parties or use it for the purpose of promoting the cloud computing service. This may not be appropriate for information such as personal data, third-party intellectual property rights or confidential information contained in or attached to e-mails. Customers should therefore take care in identifying and amending any rights they are agreeing to provide to the cloud computing operator before they sign the relevant contract.
- Liability: the cloud computing provider will seek to exclude all liability for content stored or posted on its services and will normally include a right in its standard terms to remove any data from its servers. This is because internet service providers can be liable for failing to take down offensive, defamatory or intellectual property infringing content and cloud-computing applications often blur the line between public and private networks. In these circumstances, corporate customers should seek an indemnity for any loss suffered as a result of material being unnecessarily deleted or moved and should look to impose a requirement to be notified in advance if any content is to be removed.
- Intellectual property indemnity: it is common in all IT contracts to include an intellectual property indemnity for the customer’s benefit in the event that a third party makes a claim that the use of IT products by the customer (particularly software) infringes the third party’s intellectual property. However, it is important for the customer to ensure that such indemnity is not unreasonably limited or subject to unnecessary conditions. The inclusion of intellectual property indemnities in cloud-computing contracts remains important because customers have to rely on the cloud computing provider to ensure that software licensing issues have been resolved so as to entitle the customer to use the software as part of the service. One of the benefits of cloud-computing arrangements is that the burden of the upkeep of software licensing arrangements is generally lifted from the customer. However, if the arrangements are not properly made, the customer may still infringe the intellectual property of a third party even though it may have no knowledge of the infringement. Cloud-computing users need to be aware of the possibility of patent infringement through the use of cloud-computing arrangements. Patent protection is increasingly available for computer software in the US and in the EU. Where cloud-computing arrangements are established on an international basis, the intellectual property indemnity needs to be wide enough to protect the cloud services’ customers in all jurisdictions in which the software will be used.
- Jurisdiction and governing law: Where the parties have not expressly chosen a legal system in their contracts: (a) contractual obligations will be governed in accordance with the law of the country in which the party who will perform obligations characteristic of the contract has its habitual residence or central administration this will generally be the law of the place in which the cloud computing provider locates its servers; (b) non-contractual obligations arising in civil and commercial matters between parties, the law applicable will be the law of the country in which the damage occurs or is likely to occur.
Also a business needs to take care during cross-border dealings to ensure that foreign law does not give rise to unexpected and binding non-contractual obligations (for example, duties of good faith in negotiations which do not exist under English law).
Under the Brussels Regulation a person domiciled in a contracting state may be sued in the courts of another contracting state where a contractual obligation is owed. A cloud computing provider based in the EU can be sued in all the jurisdictions in which it provides services to its customers. The Brussels Regulation also provides for mutual recognition and enforcement of judgments.
However, where the cloud computing provider is based outside the EU, jurisdiction will depend on the relevant rules of court relating to service of proceedings on the cloud computing outside the jurisdiction. Customers often take the view that the cloud-computing contract should be governed by their local law as this is the legal system of which they have greatest knowledge. However, this will be difficult to negotiate. Further, it may not necessarily be the most advantageous position. If the cloud computing does not have a sizeable presence in the customer’s jurisdiction then any court order that might be obtained will be difficult to enforce in the cloud computing provider’s jurisdiction. This applies particularly between EU customers and US cloud computing providers and where there is a need to obtain emergency remedies against a cloud computing provider for example, if the customer considers that its data has been misused by the cloud computing provider. In these circumstances, obtaining emergency remedies will generally be more straightforward if the governing law of the contract is the local law of the cloud computing provider. For a checklist of the cloud computing key issues see our article.
This article by Dr Maria Anassutzi, intellectual property and information technology law expert, discusses cloud computing, its benefits and risks and the legal issues that involves for businesses. This article is for general purposes and guidance only and do not constitute legal or professional advice.
Which entity is right for your US business startup?
Before you can start a business you need an idea, a business plan, and the necessary financial backing. But, that’s just enough to get you started.
The next big question you’ll need to tackle before you start trading is which entity is right for your US business startup?
It’s a good idea to get some professional guidance on this as it’s essential to know the right entity to use; it will make a difference to the paperwork you’re required to keep as well as your personal liability.
The Main Types Of Business Entities
Here’s a quick guide to the different options available to you:
In effect you’re a one-person operation, you are the company. Your business will operate in your name, you’ll be liable for all income, expenditure, and taxes.
This is the simplest arrangement and ensures you have complete control of your business.
If there is more than one of you investing in your business, this can be financial, via available resources, or just for experience; then you’re a partnership. You can’t be a sole trader if there is more than one person running the business.
You’ll need a proper agreement between the partners, this will establish responsibilities. However, all the partners will still remain liable for the debts of the business; the line between personal and business finances is still blurred.
This is similar to a partnership but it is permissible to have partners that don’t have the financial liability for the business. This keeps your personal assets safer, limiting any loss to the amount of a partner’s investment.
Limited Liability Company (LLC)
At this stage, your business is going to become more formalized. Limited liability companies are effectively separate structures to the business founders. Any funds you invest in the business will be seen as a loan that needs to be repaid and you’ll have no personal liability.
However, the paperwork side of things will dramatically increase when you have this type of business. You can also issue shares to each investor and classify the shares, allowing you to pay different dividend rates.
This is a good option if your developmental and looking to attract investors who want you to make a loss to help their tax declarations!
At this stage, you’ll have the option to float on the stock market and offer shares to the general public. This is generally an option for much larger companies that are well-established and may need venture capitalist help.
However, you should note that there are two types of corporation; C class and S class. Both will require you to do more filing and record minutes of annual meetings. But, there are also crucial differences that you should speak to a professional about first.
The great news is that you can change the entity of your business, this is commonly done as the business grows and improves; allowing you to benefit from the different entity types, helping your business to become successful.
Six Ways to Protect Your Company in 2019
A new business has enough to worry about without the addition of legal trouble. With how complicated the legal system is, and how many branches of it affect businesses today, it can be a real challenge to stay within the law without inadvertently breaching it.
Not only are there plenty of laws to follow, but they also change. One year you might be well within the legal system, the next you’re breaching it because they have made a change to how you’ve been running your business for the last five, ten, or even twenty years.
Adapting with the times is a sign of a successful business, and to help you improve your company’s adaptability you will want to follow this guide:
1. Have a Legal Team of Experts on Hand
Legal advice is invaluable, which, of course, is why it can be so expensive. For new businesses, small businesses, and those who have a narrow profit margin, this can mean a difficult period can be incredibly difficult to budget for.
A great way to avoid the unexpected legal fees, however, is to subscribe to them. That way you can budget appropriately and have a professional financial lawyer on your side as you need to. If your allocated hours run up, you will then benefit from an 80% discount for extra hours until the next month.
2. Create an Anti-Harassment Policy
Discrimination and harassment laws should never be taken lightly. In the States, discrimination laws usually don’t come into effect until you have more than 15 employees working for you, but this changes from state to state. Assuming is your enemy, so always check up on what you are legally entitled to do and go one step beyond.
3. Get Your Business Model Written Down
You want your company’s business model, including partner agreements, to be written down and formalized. If they aren’t this could spell trouble in the future when your partner tries to take more than his share, but you don’t have a legal document stating he can’t.
4. Get Your Company Trademarked
Another way to protect your company is to get it trademarked. Not every brand name can be, of course, but if you have a unique name it is best to get it trademarked so that there will never be any doubt as to which company a customer is trying to deal with.
5. Get the Necessary Copyright (When Applicable)
On top of trademarking your brand your will also want to apply for patents and copyright when applicable. New products that have a unique or distinctive design can be patented and trademarked and therefore protected from copycats.
6. Keep Your Books in Order
Last but not least, you will always want to keep your accounts in order. Not having this information can make it difficult to acquire tax discounts, but more importantly it can be a huge disadvantage if your company is audited or money goes missing from your account.
By keeping up to date with your finances you better protect yourself and can work on how to budget better.
What Do Trade Secrets Protect?
According to the United States Patent and Trademark Office, a trade secret is “information (that) can include a formula, pattern, compilation, program, device, method, technique or process.”
At first glance, you may think that a trade secret looks very similar to a utility patent, but as you will see, they are very different. For starters, a utility patent is something that is filed and approved through a rigorous process, whereas a trade secret is only granted limited protection in certain cases.
A trade secret aka ‘confidential information’ is non-patented information that provides a company with a competitive advantage in their industry. This could be anything from a marketing strategy to a recipe for award-winning cookies, and at their core, they enable a company to keep an edge on their competition.
As everything comes down to ‘interpretation’, and even lawyers interpret the law in a way that works for their client. Disclaimer: Don’t get caught out in a way your competitors can steal your information. A patent attorney in Orlando recommends always seeking legal advice. Startups are particularly vulnerable to the prying eyes of competitors. The options for protecting your intellectual capital or business trade secret include non-disclosure agreements (NDA), and of course if deemed the appropriate strategy, applying for a patent.
Read more below about what types of protections you are granted in the United States for a trade secret.
What is a Trade Secret?
A trade secret is anything that gives you a competitive edge in your industry, whether it is a process, recipe, or simply a method of doing something. In some cases, trade secrets are eligible for patents; in other cases, a trade secret must simply be protected by ensuring this information is not leaked.
Trade secrets are not protected like a patent – instead, they only protect against unauthorized disclosure. This means that if a contractor were to leak your trade secret to a competitor, you may be able to seek damages from the contractor, royalties from the competitor, and possibly have a court force the competitor to keep the trade secret from leaking further.
However, there is nothing that bars a competitor from independently discovering the same secret. In a patent, your invention is clearly laid out by the USPTO. Since a trade secret is not disclosed in the same nature, you can not take up legal actions against a third party who has come across the same information under their own labors.
How Does a Trade Secret Work?
Since trade secrets include such a wide variety of things, they vary slightly depending on the information in question. One good example of a trade secret is a simple customer pricing list for a sales organization.
If this list were to be leaked to the competition, there is little stopping competitors from simply offering better rates to steal these clients. One way that this list can be handled is through the use of a non-disclosure agreement, otherwise known as an NDA. In the NDA, the company can indicate all information that is not to be released or shared outside of the company, and in many cases, can not be shared within the company either.
If a trade secret is shared or discovered by misappropriation, a court may force the entity to take measures to keep the information from going any further, as well as forcing royalty payments, legal fee reimbursement, and more.
Remember though: if your competition independently discovers the same information as your trade secret, you are not granted any legal protection. If you are concerned about this and believe that your trade secret is truly unique and useful, explore your options for getting it patented in order to enjoy complete protection.
What’s in a Name: How to Choose & Legally Protect Your Business Name
When starting out on a new business, one of the most exciting parts of getting set up is choosing the perfect business name. We want something witty that sticks in people’s minds, and perfectly sums up exactly what it is that we do. Brainstorming the perfect business name can be hard, and it is made harder by the fact that just because we think we have come up with the perfect business name does not mean that we can use it.
Before we start doing anything with our amazing new business name, we need to make sure that we are actually allowed to use it. We don’t want to find ourselves with a great new website and fancy business cards only to have another business come in and stop us from using our new name, and even potentially request damages. We can save ourselves a lot of time and stress by taking the time to properly confirm whether our chosen business name is available for us to use.
Business names are regulated under Trademark Law. Regulations are in place to prevent businesses from using a business name that is likely to lead them to be confused with a competing business. If a business is found to be infringing on the trademark of another business, it can be forced to change its name, which can be a costly setback, and sometimes forced to pay damages.
It is not always prohibited to use a business name that is already in use. If the business that is already using the name is relatively small, and provides drastically different services to you, you may still be able to use the name. The same applies if the business is located a significant distance from where you are and only serves a limited community, which your business is unlikely to serve.
Research your Business Name
Once you have come up with an appropriate business name, there are a number of searches to conduct in order to ensure that it is available to use. While a federal database of registered trademarks exists, it is not sufficient to just search here. Some companies with a local focus will only register their trademark on the state level, and under United States law, a business can lay claim to a trademark by using it, without registration.
As well as searching the federal database of registered trademarks, which includes every trademark registered by the United States Patent and Trademark Office, also do a state level search for your state, and neighbouring states if you think that your business will be active there.
The next place to search is the world wide web. In fact, it is probably worth doing a basic internet search before investing time and effort in trademark searches as most companies have a web presence, so this is a fast way to eliminate names.
As well as searching for companies using your exact name, look out for companies using a similar name that are active in a similar field. If there is too much crossover in your brand and service, these companies may also be able to prevent you from using your selected name under trademark law.
This type of internet search also helps you make sure that your selected business name is available as a domain name for when it comes to establishing your own web presence. Check with different abbreviations and hyphens as well as alternative top-level domains (such as .com or .net). While you may legally be able to use a business name, you may still want to avoid it if another company is already using your preferred web domain, or a very similar domain.
Conduct Business Entity Search
Finally, you need to check if the business name is available in your state.This search has to done on a state level. Each state maintains a database of all corporations, limited liability companies (LLCs) and limited partnerships registered in the state. Each state will also have a fictitious name database, which is a list of all registered business names in the state regardless of whether they have registered a trademark or registered as a corporation with the state. This is the final search that will show up unregistered companies without a web presence.
Register your Trademark
Once you have found a business name that you can use, it is a good idea to think about registering. While it is not legally required to register a trademark to start using it, registering your trademark can be useful if you do ever find that you need to defend your trademark in court. Plus, it may help reduce the risk of others using your name, as it will be easier for them to locate your business when they do their own new business trademark search.
Brexit Unknown Makes UK Businesses Nervous
Brexit is certainly making businesses nervous right now, and there are many reasons for that. Despite almost three years having passed since the original vote, things are no clearer as to what the impact will be on business or what kind of trading relationships the UK will have with the EU going forward. Therefore, some nervousness is to be expected.
UK Businesses Rely on EU Workers
UK businesses of all kinds and in all industries employ EU workers. The question that remains unanswered is how those working relationships will function after Brexit has properly occurred.
There are guarantees in place that workers currently residing in the UK will be able to carry on living here, but it’s not at all clear whether more EU workers will be able to move here with ease after Brexit, and most indications suggest that won’t be the case. This will certainly have a big impact on businesses in many sectors. See this article on: Solicitors talk Brexit.
All Types of Workers Are Required for the UK Economy to Function
One idea that has been floated by the UK government is the idea of an income threshold, meaning only those earning more than a certain amount of money will be allowed to live and work in the UK. This would mean that highly skilled workers would find it much easier to work in the UK than low skilled workers would.
However, the UK economy relies on both skilled and low skill labour in order to function properly. If that supply of low income workers was cut off after Brexit, more businesses would struggle.
Contingency Planning Might Not be Enough for Small Businesses
For big businesses, contingency plans are already being put in place. This is expensive and time-consuming for large companies, but it will mean that they’re able to protect themselves against the upheaval brought about by Brexit. On the other hand, small businesses don’t always have that option because they don’t have the resources to put adequate contingency plans in place. It’s those small businesses, therefore, that are likely to be hit hardest.
It’s clear that small businesses are not opening at the rate they previously were because of Brexit uncertainty too. This denies the UK economy future growth prospects as well as depriving society of potentially successful ideas and businesses.
What Can Business Do to Prepare?
In terms of what businesses should be doing now, it’s best to seek professional legal advice about the situation, what you can expect and where your business and its staff stand. You should also analyse your supply chain and think about how that could change in the future under various Brexit scenarios. It might also be a good idea to look at existing contracts with EU companies and seek clarifications regarding those.
The Brexit situation is constantly in a state of flux, so things can change very quickly in one direction or the other. Therefore, it’s important for businesses to be watching and listening so that they can work out what their next move should be in order to prepare properly and minimise risk.
If You Own A Business, You Need An Estate Plan
It’s an unfortunate fact that arguments over material possessions break out between family members when somebody dies. It’s rough when one beneficiary thinks they’re entitled to that person’s possessions and financial resources more than the others. The complexity of the situation is amplified when the deceased person owned a business.
If you’ve got a family, you have every reason to care about what will happen to your business when you die. Your business has the potential to be an investment for your children or a nest egg for your spouse. If you haven’t created an estate plan that includes your business, it’s time to create one.
Start with a will
Your will is the most basic estate planning document. It allows you to declare who will be named the executor of your business. Your business executor will be responsible for continuing the business.
Dying without a will places a huge burden on your employees, business partners, and the success of your company.
Although a will is important, it’s not everything.
Your will isn’t the principle governing document of your estate
Our USA based readers may be interested in what’s in this article titled: What Might Surprise You About Your Will, CG Trust explains that many assets don’t fall under a will or probate like real estate, life insurance, and mutual funds. When you purchase these assets, you’re asked to assign a beneficiary and sometimes a contingent beneficiary.
When you specify a beneficiary for an asset, that overrides anything stated in general terms in your will. For example, say you leave everythin’ to your aunt Suzie in your will and your children are listed as beneficiaries on your life insurance policy. Your aunt Suzie can’t touch your life insurance policy – only your listed beneficiaries can.
Identify your designated beneficiaries for all business assets. If it’s not somebody you want to inherit that asset, change your beneficiary immediately. Remember, a beneficiary on a specific asset overrides what’s in your will.
Focus on minimizing your taxes
Most people don’t realize that when a business owner passes away, the estate taxes can tank the business. Estate taxes can be more than 50% of the value of your business and must be paid within nine months of your death. Most businesses need to liquidate to pay these taxes.
Thankfully, the IRS has tax breaks in Section 303 and Section 6166 that can protect your business. Section 303 deals with using stock to pay death and funeral taxes; Section 6166 deals with Federal estate taxes.
Both sections make it easier to pay necessary taxes without breaking up your business.
Avoid probate as much as possible
Although the process is mostly clerical, probate ties up assets for months (sometimes years) and can be expensive. It’s best to plan ahead to avoid probate as much as you can.
When you create a properly structured ILIT living trust, the benefits paid from the insurance policy won’t pass through probate. The funds will be available immediately to cover estate taxes and other financial obligations.
You can also establish a grantor retained annuity trust (GRAT). With this trust in place, if your assets grow over the terms of that trust, the appreciation won’t be subject to estate taxes. This allows you to pass your business assets to your kids or your spouse.
Declare power of attorney
You need to declare power of attorney to someone trustworthy to handle legal matters on behalf of the business when you pass away. This individual will be in charge of things like payroll, managing vendor payments, and financial assets.
If you don’t declare power of attorney to someone before you die, the court will appoint a guardian who may not have your company’s best interests in mind.
You also need a succession plan
A succession plan is designed to ensure your business runs as smoothly as possible; it’s a plan that chooses decision makers and creates a strategy for transferring company information to the right people. Although the details for every business will be different, Fidelity.com describes what might be included in this plan.
For example, a management succession plan might include training your successors, delegating responsibilities, and bringing in an outside advisor for their objectivity. An ownership succession plan might include defining who will own vs. manage the business, creating terms that consider your family’s best interests and timing the transfer of your business to avoid a discounted sale of your business.
Get professional guidance
Making sure your business survives and stays in good hands when you die is important. If you’re not sure where to start, contact an estate planning professional for help.
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