You have toiled many years small company isn’t always bring success in your own invention and on that day now seems always be approaching quickly. Suddenly, you realize that during all period while you were staying up late into the evening and working weekends toward marketing or licensing your invention, you failed in giving any thought onto a basic business fundamentals: Should you form a corporation to run your newly acquired business? A limited partnership perhaps or even a sole-proprietorship? What the actual tax repercussions of selecting one of these options over the any other? What potential legal liability may you encounter? These tend to be asked questions, and people who possess the correct answers might find out that some careful thought and planning now can prove quite attractive the future.
To begin with, we need think about a cursory in some fundamental business structures. The renowned is the provider. 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 features to boost buy, sell and lease property, to enter into contracts, to sue or be sued in a court of justice and to conduct almost any other legitimate business. Greater a corporation, as you may well know, are that its liabilities (i.e. debts) can’t be charged against the corporations, shareholders. Various other words, if anyone might have formed a small corporation and both you and a friend will be only shareholders, neither of you could 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 of this are of course quite obvious. By including and selling your manufactured invention together 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 in a position to levied against the corporation. For example, if you the actual inventor of product X, and experience formed corporation ABC to manufacture market X, you are personally immune from liability in the presentation that someone is harmed by X and wins merchandise liability judgment against corporation ABC (the seller and manufacturer of X). In a broad sense, these represent the concepts of corporate law relating to non-public liability. You always be aware, however that we have a few scenarios in which you can be sued personally, vital that you 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 the organization are subject a few court judgment. Accordingly, while your personal belongings are insulated from corporate liabilities, any assets which your corporation owns are completely vulnerable. If you have had bought real estate, computers, automobiles, office furnishings and other snack food through the corporation, these are outright corporate assets and also can be attached, liened, or seized to satisfy a judgment rendered to the corporation. And because these assets might be affected by a judgment, so too may your patent if it is owned by tag heuer. Remember, patent rights are almost equivalent to tangible property. A patent may be bought, sold, inherited instances lost to satisfy a court litigation.
What can you do, then, to prevent this problem? The fact is simple. If under consideration to go the organization route to conduct business, do not sell or assign your patent to some corporation. Hold your patent personally, and license it for the corporation. Make sure you do not entangle your finances with the corporate finances. Always certainly write a corporate check to yourself personally as royalty/licensing compensation. This way, your personal assets (the patent) and also the corporate assets are distinct.
So you might wonder, with each one of these positive attributes, why would someone choose to be able to conduct business any corporation? It sounds too good really was!. Well, it is. Doing business through a corporation has substantial tax drawbacks. In corporate finance circles, the issue is known as “double taxation”. If your corporation earns a $50,000 profit selling your invention, this profit is first taxed to this business (at an exceptionally high corporate tax rate which can approach 50%). Any moneys remaining after this first layer of taxation (let us assume $25,000 for the example) will then be taxed back as a shareholder dividend. If the other $25,000 is taxed to you personally at, for example, a combined rate of 35% after federal, state and local taxes, technology all that’s left as a post-tax profit is $16,250 from an initial $50,000 profit.
As you can see, this is often a hefty tax burden because the income is being taxed twice: once at the corporation tax level much better again at the average person level. Since the business is treated being an individual entity for liability purposes, it is additionally treated as such for tax purposes, and taxed accordingly. This is the trade-off for minimizing your liability. (note: there is the best way how to obtain a patent shield yourself from personal liability yet still avoid double taxation – it is definitely a “subchapter S corporation” and is usually quite sufficient for most inventors who are operating small to mid size organizations. I highly recommend that you consult an accountant and discuss this option if you have further questions). If you do choose to incorporate, you should be able to locate an attorney to perform incorporate different marketing methods for under $1000. In addition it’s often be accomplished within 10 to 20 days if so needed.
And now in order to one of one of the most common of business entities – the only real proprietorship. A sole proprietorship requires anything then just operating your business using your own name. If you wish to function under a company name as well as distinct from your given name, neighborhood township or city may often require you to register the name you choose to use, but could a simple undertaking. So, for example, if you wish to market your invention under a company name such as ABC Company, just register the name and proceed to conduct business. It is vital completely different for this example above, where you would need to become through the more complex and patent ideas expensive process of forming a corporation to conduct business as ABC Corporation.
In addition to its ease of start-up, a sole proprietorship has the benefit of not being subjected to double taxation. All profits earned with sole proprietorship business are taxed towards the owner personally. Of course, there is a negative side to your sole proprietorship given that you are personally liable for every debts and liabilities incurred by enterprise. This is the trade-off for not being subjected to double taxation.
A partnership become another viable option for many inventors. A partnership is an association of two additional 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 prevented. Also, similar to a sole proprietorship, the people who own partnership are personally liable for partnership debts and obligations. However, in a partnership, each partner is personally liable for the debts, contracts and liabilities of the additional partners. So, should you be partner injures someone in his capacity as a partner in the business, you can be held personally liable for that financial repercussions flowing from his activity. Similarly, if your partner enters into a contract or incurs debt within the partnership name, great your approval or knowledge, you could be held personally in the wrong.
Limited partnerships evolved in response towards 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 a regular partnership, may be held personally liable for partnership debts. “Limited partners” are those partners who tend not to participate in day time to day functioning of the business, but are resistant to liability in that the liability may never exceed the level of their initial capital investment. If a restricted partner does take part in the day to day functioning of this business, he or she will then be deemed a “general partner” and can be subject to full liability for partnership debts.
It should be understood that these are general business law principles and are living in no way meant to be a alternative to thorough research on your part, or for retaining an attorney, accountant or business adviser. The principles I have outlined above are very general in setting. There are many exceptions and limitations which space constraints do not permit me invest into further. Nevertheless, this article should provide you with enough background so that you will have a rough idea as this agreement option might be best for you at the appropriate time.