Like so many of us who live in the desert Southwest, I loves me some tacos. We are definitely blessed to have some of the best in the nation. However, a business that recently contacted me from, let’s just say Tucson, highlights the importance of small businesses taking their legal structure and brand name seriously. Failure to do so could set your business up for a serious case of indigestion, legally speaking.
The business in question was a local restaurant that also operated a popular taco truck, which we’ll call “XYZ Killer Tacos”. When I asked the owner what kind of legal structure he was operating the business through, his answer was sole proprietor. Ugh. Sole proprietor. In the business of serving food. To the public. (yikes)
Nonetheless, his restaurant (and its tacos [prepared in a method popular in a certain region of Mexico]) must’ve been pretty darn good, as XYZ Tacos had an impressive, nearly five-star rating over the span of several dozen reviews on Google.
Since the business was not operating through any actual legal entity, the owner was simply operating XYZ’s Killer Tacos as a “doing business as” or “D/B/A”. And although he easily could have done so in minutes, the owner had not even bothered to register a trade name with the Secretary of State for “XYZ Killer Tacos”.
A Taco Imposter
It so happens that a local competitor, which had been operating in Tucson by a different name entirely, had taken it upon itself to register a new domestic limited liability company (LLC) with the Arizona Corporation Commission under the name of, you guessed it, “XYZ Killer Tacos”!
While it is possible that this competitor didn’t know about the existence of XYZ, it is pretty unlikely. In legal terms, this is what is known as a d*ck move.
To make matters worse, competitor was actually not even from Arizona but, rather, based in a neighboring state but also operating here.
Unfortunately for our taco shop owner, there is nothing to stop the competitor from actually registering an available name with the Corporation Commission, since the database which the ACC would look at (which, for those of you who aren’t familiar, is also cross-indexed with the Secretary of State’s) would not have shown a competing or confusingly similar name pending or already registered.
This situation also highlights a common misconception I see among first time business owners; that the staff of the ACC or SOS actually scrutinizes and does a thorough and complete worldwide “clearance” of any names applied for. Sorry, but this is just not the case. They will check an applied-for name against the existing database and, assuming there are no conflicts that are exactly identical or obviously similar, then the registration will likely issue.
However, while there was nothing to stop the competitor from administratively taking the name, this is not to say that what the competitor did was 100% legal.
Lessons for Arizona Small Business Owners
Register Your Business Name (and any Trademark)
And, no, they are not the same thing. Trademarks, particularly Federal registration, are something that our law firm handles for clients routinely. But I normally tell clients on nearly a weekly basis that, unlike Federal registration through the USPTO, a State trademark registration is usually worth only about the paper its registration certificate is printed on.
However, if your business is strictly local or intra-state, and you are operating as a sole-priorietor, you should take the time to register your trade name with the Arizona Secretary of State. If your business also uses any trademark in commerce as a source identifier or something to distinguish your goods and services from that of your competition, you should also strongly consider registering your trademark (or trademarks) with the AZSOS, too.
In this case, however, I believe timely Arizona registration would’ve given XYZ’s owner several legal advantages:
- Doing so would have likely blocked the competitor from registering an LLC or Corporation or trade name in the identical or very similar name as our taco shop owner.
- Because of the public record nature of the registered name, it would’ve probably set the competitor up for a state trademark infringement claim and possibly even a claim for unfair competition had the competitor continued to use XYZ’s name without its consent.
While such claims would have to be brought in a lawsuit, which would be expensive, outcome-uncertain, and time-consuming, it is still better to have this potential leverage against the competitor than having none at all.
Master Your (Business’) Domain
While XYZ’s owner did not actually have a website for the business (deriving traffic to the business entirely from their social media channels), I strongly advised him to immediately register the domain name immediately (like, yesterday) and preferably buying the .com, as well as any other, TLDs. I told XYZ’s owner this not to be their marketing strategist but because I felt this was the next place the competitor was likely to go. After all, if they would bother to impersonate XYZ to the ACC, or at least deny the name to our taco shop owner, was it really out of the realm of imagination for them to go to a GoDaddy or Bluehost or similar registrar and pay a modest registration fee to secure the name?
While, yes, our taco guy would probably have a very meritorious case under a UDRP proceeding to get the registration cancelled or transferred, did XYZ Killer Tacos really want to go through the time and expense of that when they could simply buy the domain name outright far more cheaply and without the uncertainty of a UDRP arbitration panel? They could then simply hold onto the domain indefinitely and either do nothing with it or later build out a site using the domain name when they were ready to.
Monitor Use of Your Name and Marks on the Internet
Business owners should also consider designating a staff person to continually monitor the Internet and search results for Google search results and, especially, paid ads of competitors that are clearly (or very likely) using your business’ name or trademarks in the ad copy. If your business is smaller or lacks the staff to undertake this role, there are monitoring services that will do this for you [for a fee, of course].
(For the love of all that is holy) Just Say No to Sole-Propietorship
Last but certainly not least, if you’re going to be doing business with the public in any form, but particularly preparing, delivering, or serving food, PLEASE put on your big boy (or girl) pants/suit and form a legal business structure to operate the company out of. It really doesn’t cost that much, and certainly does not take a lot of time; you can even do it yourself (although, depending on the complexity of your business and any partners you might have, this may not be a great idea) and doing so will almost certainly cost you far less in the long run than exposing you and your personal assets to third-party liability as a sole proprietor or [gasp] general partnership.
Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a startup, technology, and e-commerce law practice advising founders and management teams on company startup, corporate and technology transactions, e-commerce, as well as Internet privacy concerns. The firm serves corporate and individual clients throughout Arizona, the United States, and internationally. Our offices are conveniently located along the Camelback corridor in Phoenix’s financial district. For more information about our Company Startup practice, feel free to reach out using the contact form on the right or call us at (602) 222-5542 to schedule a meeting. Connect with Ben on LinkedIn or Avvo.