Archive for 'The Legalities of Owning an App'

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So I have heard of trademarks and trade secrets and that they are helpful for protecting your app but I really didn’t know too much about them.  Let’s talk about both of those and try to really understand them and then understand their impact on app development.

Trademarks

So like a copyright, you get some rights without having to do anything on your part.  Simply by using your logo or some other symbol representing your product it can be your trademark.  This is referred to as a “common law” trademark.  But even more so than copyright laws, these “common law” trademarks don’t buy you a lot.  It becomes much more difficult to stop someone else from using a very similar trademark if you haven’t registered it with the USPTO. On the US Patent and Trademark website there is a lot of information that should be very useful to you on trademarks; it even has step by step instructions for how to file a trademark online.  Filling a trademark provides you many more benefits and makes it significantly easier to defend your trademarks.  Once something has been trademarked with the USPTO you have the right to use the ® symbol after your trademark allowing you to more easily build brand reputation.  In short, trademarks prevent others from using a confusingly similar mark.

So now that we have talked about how to get a trademark, what exactly is a trademark?    To quote WiseGEEK they said “Generally speaking, a trademark is a word, symbol, phrase or device which uniquely identifies a particular company or individual” (WiseGEEK – What is a trademark?).  Common examples of well-known trademarks are Coca-Cola, the apple logo, the android guy, the Nike “swoosh”, and the Nike phrase “just do it”.

From what I have read this may be one of the ways to get the most “bang for the buck” on protecting your app.  And although a trademark does not protect your idea you can trademark the logo/symbol/mark of your app or company and start to build brand equity.  So that when the app copy cats come along people will recognize and think of your app when they go to look for apps in your specialized area.

In order to create a strong trademark, you need to choose something that doesn’t seem obvious.  Extremely obvious names (cough cough, like my app, Food Substitutes) are very hard to trademark because the name more explain the app.  But for example if you choose names that are made up, like Google, Exxon, or Groupon, or names that are non-obvious like Apple for a computer company it becomes much easier to trademark.  Even though, it makes sense to choose an obvious name, it may be more difficult in the long run to protect that time.  For example, how many recipe apps are there out there?  If you were going to come out with the best recipe app and called it “recipes”, there would be no stopping someone else from creating an app with the same name.  Instead coming up with a name like BigOven is much easier to trademark.  The same is true with icons.  If you created a recipe app and you icon was just something that displayed the word recipes or a math app that just had the plus sign symbol it would be difficult to protect.  But if you do something to the app to make it more distinctive, like choosing a logo that appears like the top of an oven in a text bubble, it becomes easier to trademark.

In summary of trademarks they are very important.  If you gain any popularity at all you should file your trademark with the USPTO.  Remember to be non-obvious and distinctive with your potential trademarks.  Trademarks are one of the easiest and most cost effective ways to protect your app.

Trade Secrets

So I wanted to include some information about trade secrets in here because I didn’t really know what it meant previously.  I had a guess but I wasn’t entirely sure.  Trade Secrets are just that, secrets of your trade.  You don’t have to do anything special to file your trade secret.  In fact you don’t have to file your trade secret at all.  All you have to do is take reasonable steps to make sure your secrets stay secret and if they are stolen from you, you can the entity that stole it from you.

An example of something you might want to keep as a trade secret would be the ideas of your next app, the planned list of features that you are going to add to your app overtime, or a really efficient algorithm that does something much faster or better than what is currently out there.

So in order to keep something as a trade secret you need to take some action steps on your part.

  • Caution: If you are careless or negligent with whom you talk to or what you write about, you would not be able to up hold you trade secret.  The same goes for your employees, if you have any, make sure they keep confidential things confidential.
  • Contractual Protection: Make sure that you make use of non-disclosure agreements if you need to share any information with someone who is not part of your company.  Make sure your employees, if you have any, are under contract to maintain confidentiality about your ideas. Make sure any confidential documents are marked confidential.
  • Source Code: Make sure your source code is protected and that there is some security measures in place to access it.

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Patents are extremely powerful and can be very useful.  The idea is that the person who files a patent in a certain country (probably the United States in this case) will get exclusive rights to use or sell that invention.  But in order to file a patent the person must fully disclose and explain how the invention works so that someone well instructed in that field would be able to reproduce the invention.  In return for this disclosure, the inventor will gain exclusive rights to that invention for a period of 20 years.

This sounds pretty great, but is your idea really patentable.  In order to patent something your idea has to contain 3 characteristics; useful, new, and not obvious.   To claim something is useful your patent must explain how it is useful and then show how it meets that useful objective.  A patent must be new or novel.  This is pretty easy to understand; you cannot patent something that already exists with the exception that you can patent a new use for an old product. Lastly your patent needs to be non-obvious.  That essentially means that an average person with knowledge in that field would not be able to easily come up with that invention.  There must be some sort of creative step.  But also keep in mind that non-obvious is highly subjective and things have been patented that in many cases seems rather obvious.

So now that we know all this information about patents, should you try to patent your app?  The answer is probably no.  Given the fact that most apps have a relatively short life-cycle and a relatively long process to file a patent (at least 2 -3 years), it is probably not the best idea.  Not to mention the cost, you can pretty much guarantee that it will cost you at least $10,000 or more to file a patent.  Plus you still need to prove how it is useful, new, and non-obvious.  Than in the end, if someone copies your invention, you can’t even file a suit against them until your patent is granted.  And on top of that if you file the patent but someone can prove that came up with the concept first you patent could still be overturned.  But there still may be exceptional cases where they have a long term goal and you can wait 3 years to file your patent.

Either way you need to decide fairly early on if you want to patent your app.  Once you publish your app, write about it on a blog, or announce publicly is some other way you have to file the patent within 1 year.  So probably determine this before launching the app.

You can apply for a patent by yourself but it seems to not be recommended unless you have some prior legal experience.  It is not an easy process.  Although, a good recommendation is try to fill out the paperwork yourself before you hire a patent lawyer so that hopefully you can finish the process up a little bit quicker and hopefully cause that person to charge you less money.

In the end patents are powerful and provide a lot of protection assuming you can wait 2-3 years, have the money to spend on a patent, and you really have a new, useful, non-obvious invention.  But since this really doesn’t describe the target market of this article, it is probably a safe bet to say you should not patent your app.

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So the first thing that I was unsure of was if I needed to do anything to copyright my app or was it just copyrighted automatically.  Then if I needed to do something to copyright my app, what did I need to do and how?

To answer the first question, in the United States and most countries around the world you content is automatically copyrighted from the moment it is created.  According to Copyright.gov a “Copyright, a form of intellectual property law, protects original works of authorship including literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture. Copyright does not protect facts, ideas, systems, or methods of operation, although it may protect the way these things are expressed. See Circular 1, Copyright Basics, section ‘What Works Are Protected.” (Copyright.gov – Frequently Asked Questions about Copyright)

In terms of your app, this generally means that you get your source code, graphics, or any text inside your app copyrighted. But normally your ideas, facts, systems, or methods of operation will not be protected.

So even though copyrights are “free”, there are some advantages of registering your copyright.  When you register your copy right with US Copyright office they know when and what you copyright. By doing this it makes it much easier to protect code and could allow you to win more money in a lawsuit.   To file a copyright it can be as cheap as $35 and can be filed completely online at http://www.copyright.gov/eco/. ECO stands for “electronic copyright office”.  If you wish to file the copyright yourself this is a helpful tutorial online at http://www.copyright.gov/eco/eco-tutorial.pdf.

Remember that there are some limitations to copyrights as well.  For example if you have an app that recommends food substitutes your graphics and text are copyrighted but not your concept.  A copyright would not protect someone else from making an app with similar concepts.

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Ok, so just by reading this question you can tell that I didn’t even understand enough to ask the right question.  When I said “Legal Disclaimer” I really meant an EULA (End User License Agreement).  So when do you need to include an EULA with your app?  There is a lot of vague answers out there and there is still a lot of gray area around EULA’s.  Honestly, I included an EULA in my app just because everyone else does, not because I had any idea why.

I liked the definition from WiseGEEK, they said “An EULA is an End User License Agreement, and is a license that grants a user the right to use a piece of computer software in a specific way. Usually, an EULA delineates the amount of computers a user can use the software on, how they can use the software, and any legal rights they are giving up by agreeing to the EULA.” (WiseGEEK – What is an EULA?)

EULA’s are kind of a funny thing because you are held accountable to them but most of the time you can’t even read them until after you buy the software (not that anyone besides lawyers reads them in the first place).  But situations like this have caused there to be some controversies in EULA’s and when court cases have arisen some courts go one way and some the other.

For creating my EULA, I used the tutorial found on Making Money with Android – How to add an EULA to your Android App.  It was really informative and helpful for me.

In the end I invite you to read over all the links I have found and make your own decision, but I figured it is better to be safe than sorry.  You may argue that it hurts the user experience, but most users out there are already trained to do this as part of the process.  It won’t hurt anything by being in there.

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Whereas the last question deals with sales tax, this question deals with how to pay taxes on the money you earn from your app.  So let’s say you had some sales of your app, Google will take its share of 30%, and at the end of the month Google sends you a check (or direct deposit).  Is that all your money or do you have to pay taxes on it?

The answer really depends on your situation and what type of entity you are in.

I would imagine that most single person app development shops would be a single owner LLC.  According to NOLO.com this would work as follows: “The IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS.  As the sole owner of your LLC, you must report all profits (or losses) of the LLC on Schedule C and submit it with your 1040 tax return. Even if you leave profits in the company’s bank account at the end of the year — for instance, to cover future expenses or expand the business — you must pay income tax on that money.” (NOLO – How LLC Members Are Taxed)

Another circumstance would be if you are selling apps as a Sole Proprietor. Again according to NOLO.com “As a sole proprietor you must report all business income or losses on your personal income tax return; the business itself is not taxed separately. The IRS calls this “pass-through” taxation, because business profits pass through the business to be taxed on your personal tax return.” (NOLO – How Sole Proprietors Are Taxed)  You will have to put the income or loss information on a Schedule C and submit it to the IRS on a form 1040.

There are additional details and caveats about what you may or may not have to pay so I encourage you to read in-depth for the situation that you are in.  Again, it is always important to consult a legal advisor before taking any action based on something you read online.

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This question deals with the issue of sales tax.  When I was getting ready to publish my app I wondered about a lot of questions relating to sales tax.

  • Am I supposed to charge the user sales tax and then turn it in?
  • Is there even sales tax for app sales?
  • Does Google, Apple, or Amazon take care of it for me?

After reading some FAQ’s and documentation from Google’s website the answer is essentially “It’s not our problem, it’s yours”.  If there is sales tax to charge you are in charge of being aware and charging it and remitting payment.  It is completely up to you.

Here is a snippet from Google’s site “You are solely responsible for specifying your own tax rates and for updating them if tax rates for your location change. Google won’t apply taxes to your orders if you don’t provide any tax information in the Merchant Center or via the Checkout API, so be sure to keep this information up-to-date. For tax assistance, please consult with a qualified tax professional.” (Google – Charging tax).

But for Amazon and Apple, they will take care of the sales tax for you if they deem it is necessary for your situation.  This is typically determined based on the address that you are purchasing with.  On Amazon’s site they say “Items sold by Amazon.com LLC, or its subsidiaries, and shipped to destinations in the following states are subject to tax:” and then they list Kansas, Kentucky, New York, North Dakota, Texas, and Washington.  (Amazon – Sales Tax Requirements)  I have tested this out since I live in Texas by purchasing my own app.  I was charged sales tax but in my reporting dashboard it only reports the sale of $0.99.  Apple is the same way; they take care of sales tax for you.  Their site says “Your total price will include the price of the product plus any applicable sales tax; such sales tax is based on the bill-to address and the sales tax rate in effect at the time you download the product. We will charge tax only in states where digital goods are taxable.” (Apple – Terms and Conditions)

So in the end, do you have to worry about sales tax? Google – Yes, Amazon – No, Apple – No.

I am hesitant to list exactly how you file and pay sales tax on this website since that is changing constantly.  I read somewhere that sales tax laws haven’t really caught up to the internet and digital sales (like apps or music).  If you go online you can read a lot of information about amazon and the sales tax battles they are having.  Either way this area is in a state of constant flux and I recommend checking out the following site to make sure you are up to date; IRS – Taxes – State Links.

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So the first thing you are probably wondering if you are creating an app is “can I just publish it or do I need to create some sort of business to sell the app”.  This is a pretty loaded question and until I started to do research I didn’t even know what the right questions were to ask.  The extremely simple answer (and please read on) is no you don’t need to file or create a business to publish an app.  But if you don’t you could be taking a lot of risk.

To quote robmiracle from the Corona SDK Community Forums he said “It’s about how much legal protection do you think you need. If you do not do an LLC and someone sues you, your personal assets, like your house and car are up for grabs. An LLC, they can only take the assets of the LLC.  Making a medical advice app? [Create an] LLC without a second thought.” (Corona SDK Community Forums – Do you need to start an LLC to develop and sell apps?)

Alpha Consumer on US News: Money said “There’s also a whole other category of people who should consider forming an LLC, Duggan says, and that is anyone who engages in entrepreneurial activities online, from selling e-books on Amazon to handmade scarves through a personal website. Anything can happen with knitted goods… In every circumstance, there’s a lawsuit that exists. If you’re creating something that has value, with value comes the risk that somebody might attack, he says, and an LLC can provide some level of protection, especially over personal assets.” (US News – Money – Do You Need to Form an LLC?)

So in the end it is about how much risk you are willing to take vs. the cost of creating an LLC.  It can be a difficult decision in some cases when you are not sure if you will make any money but can you afford not to create one?

This article jumped right into talking about an LLC, but what is an LLC?  Are there other types of business/entities that I could create instead?

There are many types of business or entities out there.  Here are a few of the most common for small businesses and startups (that I could find).

  • LLC: “Think of the LLC as a merger of the partnership and the corporation, except it has the best of both worlds — all the good qualities of each and none of the bad. It offers full limited-liability protection to all the owners (like the corporation), yet has a pass-through tax status (like the partnership). In addition, the LLC has a second layer of liability protection that shields the business from any personal lawsuits that may befall you. And it doesn’t stop there! The list of benefits goes on and on.” (Dummies – What Is a Limited Liability Company (LLC)?)
  • C-corp: “C corporation refers to any corporation that, under United States federal income tax law, is taxed separately from its owners. A C corporation is distinguished from an S corporation, which generally is not taxed separately. Most major companies (and many smaller companies) are treated as C corporations for U.S. federal income tax purposes.” (Wikipedia – C corporation)
  • S-corp: “An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.  In general, S corporations do not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.” (Wikipedia – S corporation)
  • Sole Proprietorship: “A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor’s” (Wikipedia – Sole proprietorship)
  • Partnership: A partnership is pretty similar to a sole proprietorship except there are multiple parties involved.  Check out this IRS site to learn more (IRS – Partnerships).

So after doing this research, I found that the first 3 (LLC, C-corp, and S-corp) are the most common for startups and other small businesses.  There are a lot of details to understand about all of them and again I recommend talking to a legal professional before deciding what to do.  But here is an extremely summed up version of an LLC vs. S-corp vs. C-corp.

Essentially the differences between an LLC and C-corp/S-corp is that the LLC requires less paperwork and record keeping, more flexibility to share profits, similar protection over your personal assets, and less taxes to be paid out.  Overall, it seems from multiple sites I read most recommend the LLC for small businesses and startups.  But please read these links to understand better what the differences are.

After reading these articles, you may come to the same conclusion that I did and decide that you should create an LLC.  If that is the case, then the next step you need to do is form your LLC.  I am not going to go over all the details of this process.  I really liked NOLO’s 50 state guide to forming an LLC (see below).  Keep in mind that each state has different rules and different fees you need to pay.  For example, in Texas you need to pay a $300 filing fee, and then you need to pay yearly fees based off of how much you make.

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