You have toiled many years small company isn’t always bring success to your invention and tomorrow now seems to be approaching quickly. Suddenly, you realize that during all period while you were staying up shortly before bedtime and working weekends toward marketing or licensing your invention, you failed in giving any thought to a couple of basic business fundamentals: Should you form a corporation how to patent your idea run your newly acquired business? A limited partnership perhaps or even sole-proprietorship? What are the tax repercussions of deciding on one of these options over the some other? What potential legal liability may you encounter? These tend to be asked questions, and those that possess the correct answers might see some careful thought and planning can now prove quite beneficial in the future.
To begin with, we need to consider a cursory examine some fundamental business structures. The most well known is the consortium. To many, the term “corporation” connotes a complex legal and financial structure, but this is absolutely not so. A corporation, once formed, is treated as though it were a distinct person. It has the ability buy, sell and lease property, to enter into contracts, to sue or be sued in a court of law and to conduct almost any other legitimate business. The benefits of a corporation, as you might well know, are that its liabilities (i.e. debts) cannot be charged against the corporations, shareholders. Various other words, if you have formed file a patent small corporation and you and a friend would be only shareholders, neither of you always be held liable for debts entered into by the corporation (i.e. debts that either of your or any employees of the corporation entered into as agents of the corporation, and on its behalf).
The benefits for the are of course quite obvious. With and selling your manufactured invention along with corporation, you are safe from any debts that the corporation incurs (rent, utilities, etc.). More importantly, you are insulated from any legal judgments which the levied against the business. For example, if you are the inventor of product X, and an individual formed corporation ABC to manufacture promote X, you are personally immune from liability in the event that someone is harmed by X and wins a program liability judgment against corporation ABC (the seller and manufacturer of X). From a broad sense, these are the basic concepts of corporate law relating to non-public liability. You ought to aware, however that we have a few scenarios in which pretty much sued personally, it’s also important to therefore always consult an attorney.
In the event that your corporation is sued upon a delinquent debt or product liability claim, any assets owned by this business are subject to some court judgment. Accordingly, while your personal assets are insulated from corporate liabilities, any assets which your corporation owns are completely vulnerable. Should you have bought real estate, computers, automobiles, office furnishings and etc through the corporation, these are outright corporate assets and they can be attached, liened, or seized to satisfy a judgment rendered resistant to the corporation. And just these assets might be affected by a judgment, so too may your patent if it is owned by the corporation. Remember, patent rights are almost equivalent to tangible property. A patent may be bought, technology sold, inherited and even lost to satisfy a court common sense.
What can you do, then, to avoid this problem? The answer is simple. If you chose to go this company route to conduct business, do not sell or assign your patent for a corporation. Hold your patent personally, and license it to the corporation. Make sure you do not entangle your finances with the corporate finances. Always make certain to write a corporate check to yourself personally as royalty/licensing compensation. This way, your personal assets (the patent) along with the corporate assets are distinct.
So you might wonder, with all these positive attributes, won’t someone choose to conduct business the corporation? It sounds too good actually!. Well, it is. Conducting business through a corporation has substantial tax drawbacks. In corporate finance circles, the thing is known as “double taxation”. If your corporation earns a $50,000 profit selling your invention, this profit is first taxed to the corporation (at an exceptionally high corporate tax rate which can approach 50%). Any moneys remaining a quality first layer of taxation (let us assume $25,000 for the example) will then be taxed back as a shareholder dividend. If the remaining $25,000 is taxed to you personally at, for example, a combined rate of 35% after federal, state and native taxes, all to be left as a post-tax profit is $16,250 from an initial $50,000 profit.
As you can see, this is really a hefty tax burden because the earnings are being taxed twice: once at the corporation tax level and once again at a person level. Since this manufacturer is treated as an individual entity for liability purposes, also, it is treated as such for tax purposes, and taxed for this reason. This is the trade-off for minimizing your liability. (note: there is the way to shield yourself from personal liability though avoid double taxation – it works as a “subchapter S corporation” and is usually quite sufficient most of inventors who are operating small to mid size businesses. I highly recommend that you consult an accountant and discuss this option if you have further questions). Once you do choose to incorporate, you should be able to locate an attorney to perform straightforward for under $1000. In addition it does often be accomplished within 10 to twenty days if so needed.
And now on to one of probably the most common of business entities – the only real proprietorship. A sole proprietorship requires nothing at all then just operating your business within your own name. Should you want to function under a company name could be distinct from your given name, nearby township or city may often will need register the name you choose to use, but this is a simple undertaking. So, for example, if you’d like to market your invention under a credit repair professional name such as ABC Company, you simply register the name and proceed to conduct business. Motivating completely different from the example above, where you would need to go to through the more and expensive process of forming a corporation to conduct business as ABC Inc.
In addition to its ease of start-up, a sole proprietorship has the benefit of not being put through double taxation. All profits earned coming from the sole proprietorship business are taxed to your owner personally. Of course, there can be a negative side to the sole proprietorship in this particular you are personally liable for all debts and liabilities incurred by the business. This is the trade-off for not being subjected to double taxation.
A partnership become another viable option for many inventors. A partnership is a link of two much more persons or entities engaging in business together. Like a sole proprietorship, profits earned by the partnership are taxed personally to owners (partners) and double taxation is certainly. Also, similar to a sole proprietorship, the those who own partnership are personally liable for partnership debts and legal responsibility. However, in a partnership, each partner is personally liable for the debts, contracts and liabilities of the other partners. So, any time a partner injures someone in his capacity as a partner in the business, you can take place personally liable for your financial repercussions flowing from his activity. Similarly, if your partner enters into a contract or incurs debt your past partnership name, have the ability to your approval or knowledge, you can be held personally responsible.
Limited partnerships evolved in response on the liability problems built into regular partnerships. In a limited partnership, certain partners are “general partners” and control the day to day operations on the business. These partners, as in normal partnership, may be held personally liable for partnership debts. “Limited partners” are those partners who perhaps not participate in the day to day functioning of the business, but are protected from liability in that the liability may never exceed the involving their initial capital investment. If constrained partner does employ the day to day functioning belonging to the business, he or she will then be deemed a “general partner” and will be subject to full liability for partnership debts.
It should be understood that they are general business law principles and are in no way intended to be a replace thorough research against your part, or for retaining an attorney, accountant or business adviser. The principles I have outlined above are very general in scope. There are many exceptions and limitations which space constraints do not permit me to search into further. Nevertheless, this article must provide you with enough background so which you will have a rough idea as that option might be best for you at the appropriate time.