You have toiled many years in an effort to bring success towards your invention and that day now seems to be approaching quickly. Suddenly, you realize that during all period while you were staying up late at night and working weekends toward marketing or licensing your invention, you failed to give any thought onto a basic business fundamentals: Should you form a corporation to drive your newly acquired business? A limited partnership perhaps or maybe a sole-proprietorship? What are the tax repercussions of deciding on one of possibilities over the some other? What potential legal liability may you encounter? These tend to asked questions, and those that 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 acquire a cursory in some fundamental business structures. The most well known is the enterprise. 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 although it were a distinct person. It is able buy, sell and lease property, to initiate contracts, to sue or be sued in a lawcourt and to conduct almost any other kinds of legitimate business. Can a corporation, as you might 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 as well as a friend will be only shareholders, neither of you may 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. Which includes and selling your manufactured invention together with corporation, you are protected from any debts that the corporation incurs (rent, utilities, etc.). More importantly, you are insulated from any legal judgments which become levied against the business. For example, if you include the inventor of product X, and own formed corporation ABC to manufacture and sell X, you are personally immune from liability in the presentation that someone is harmed by X and wins a system liability judgment against corporation ABC (the seller and manufacturer of X). In a broad sense, these represent the concepts of corporate law relating to private liability. You should be aware, however that there exist a few scenarios in which totally cut off . sued personally, and you need to therefore always consult patenting an idea attorney.
In the event that your corporation is sued upon a delinquent debt or product liability claim, any assets owned by the corporation are subject together with a court judgment. Accordingly, while your personal assets are insulated from corporate liabilities, any assets which your corporation owns are completely vulnerable. If you have bought real estate, computers, automobiles, office furnishings and etc through the corporation, these are outright corporate assets and also can be attached, liened, or seized to satisfy a judgment rendered against the corporation. And because these assets might be affected by a judgment, so too may your patent if it is owned by this manufacturer. Remember, patent rights are almost equivalent to tangible property. A patent may be bought, sold, inherited and even lost to satisfy a court litigation.
What can you do, then, to avoid this problem? The answer is simple. If you’re considering to go the corporate route to conduct business, do not sell or assign your patent to some corporation. Hold your patent personally, and license it towards 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) as well as the corporate assets are distinct.
So you might wonder, with every one of these positive attributes, recognize someone choose for can i patent an idea you to conduct business the corporation? It sounds too good to be real!. Well, it is. Working 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 tag heuer (at an exceptionally high corporate tax rate which can approach 50%). Any moneys remaining next first layer of taxation (let us assume $25,000 for your example) will then be taxed to you personally as a shareholder dividend. If the remainder $25,000 is taxed to you personally at, for example, a combined rate of 35% after federal, state and local taxes, all that’ll be left as a post-tax profit is $16,250 from catastrophe $50,000 profit.
As you can see, this can be a hefty tax burden because the income is being taxed twice: once at this company tax level and whenever again at the average person level. Since this manufacturer is treated with regard to individual entity for liability purposes, it is also treated as such for tax purposes, and taxed for this reason. This is the trade-off for minimizing your liability. (note: there is a means to shield yourself from personal liability yet still avoid double taxation – it can be described as “subchapter S corporation” and is usually quite sufficient for lots of inventors who are operating small to mid size establishments. I highly recommend that you consult an accountant and discuss this option if you have further questions). Pick choose to incorporate, you should have the ability to locate an attorney how to patent a product idea perform the method 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 – truly the only proprietorship. A sole proprietorship requires nothing more then just operating your business under your own name. Should you want to function within a company name which can distinct from your given name, neighborhood library township or city may often need to register the name you choose to use, but could a simple undertaking. So, for example, if you desire to market your invention under a company name such as ABC Company, you simply register the name and proceed to conduct business. Individuals completely different for this example above, where you would need to relocate through the more complex and expensive process of forming a corporation to conduct business as ABC Incorporated.
In addition to its ease of start-up, a sole proprietorship has the benefit of not being put through double taxation. All profits earned with sole proprietorship business are taxed to the owner personally. Of course, there is often a negative side towards sole proprietorship in this particular you are personally liable for any and all debts and liabilities incurred by the business. This is the trade-off for not being subjected to double taxation.
A partnership may be another viable choice for many inventors. A partnership is a connection of two far more persons or entities engaging in business together. Like a sole proprietorship, profits earned by the partnership are taxed personally to pet 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 obligations. However, in a partnership, each partner is personally liable for the debts, contracts and liabilities of the additional partners. So, any time a partner injures someone in his capacity as a partner in the business, you can be held personally liable for your financial repercussions flowing from his activity. Similarly, if your partner enters into a contract or incurs debt each morning partnership name, even without your approval or knowledge, you can be held personally accountable.
Limited partnerships evolved in response to the liability problems inherent in regular partnerships. In the 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 tend not to participate in the day to day functioning of the business, but are shielded from liability in their liability may never exceed the involving their initial capital investment. If a smallish partner does employ the day to day functioning with 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 of the general business law principles and are living in no way developed 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 scope. There are many exceptions and limitations which space constraints do not permit me invest into further. Nevertheless, this article must provide you with enough background so you’ll have a rough idea as in which option might be best for you at the appropriate time.