You have toiled many years in an effort to bring success to your invention and tomorrow now seems in order to become 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 make any thought to some basic business fundamentals: Should you form a corporation to manage your newly acquired business? A limited partnership perhaps or even a sole-proprietorship? What are the tax repercussions of selecting one of choices over the remaining? What potential legal liability may you encounter? These tend to be asked questions, and people who possess the correct answers might find out some careful thought and planning now can prove quite attractive the future.
To begin with, we need to consider a cursory examine some fundamental business structures. The renowned is the group. To many, the term “corporation” connotes a complex legal and financial structure, but this is not really so. A corporation, once formed, is treated as although it were a distinct person. It to enhance 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 kinds of legitimate business. Greater a corporation, perhaps you might well know, are that its liabilities (i.e. debts) are not charged against the corporations, shareholders. Various other words, if you have formed a small corporation and you and a friend end up being the only shareholders, neither of you end up being the 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 occurence are of course quite obvious. Which includes 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 this manufacturer. For example, if you will be inventor of product X, and experience formed corporation ABC to manufacture market an invention idea X, you are personally immune from liability in the expansion that someone is harmed by X and wins merchandise liability judgment against corporation ABC (the seller and manufacturer of X). Within a broad sense, these are the basic concepts of corporate law relating to personal liability. You end up being aware, however that we have a few scenarios in which is actually sued personally, and you should therefore always consult an attorney.
In the event that your corporation is sued upon a delinquent debt or product idea liability claim, any assets owned by this company are subject along with court judgment. Accordingly, while your personal assets are insulated from corporate liabilities, any assets which your corporation owns are completely vulnerable. In case you have bought real estate, computers, automobiles, office furnishings and the like through the corporation, these are outright corporate assets furthermore can be attached, liened, or seized to satisfy a judgment rendered resistant to the corporation. And since these assets may 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 common sense.
What can you do, then, to prevent this problem? The fact is simple. If under consideration to go this company 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 personal finances with the corporate finances. Always always write a corporate check to yourself personally as royalty/licensing compensation. This way, your personal assets (the patent) and the corporate assets are distinct.
So you might wonder, with each one of these positive attributes, why would someone choose not to conduct business the corporation? It sounds too good actually was!. Well, it is. Conducting 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 patent, this profit is first taxed to this company (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 for you personally 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 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 can be a hefty tax burden because the income is being taxed twice: once at this company tax level and whenever again at the personal level. Since this company is treated with regard to individual entity for liability purposes, it’s also treated as such for tax purposes, and taxed appropriately. This is the trade-off for minimizing your liability. (note: there is the best way to shield yourself from personal liability though avoid double taxation – it can be described as “subchapter S corporation” and is usually quite sufficient most 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). Should you choose to choose to incorporate, you should have the ability to locate an attorney to perform incorporate different marketing methods for under $1000. In addition it does often be accomplished within 10 to 20 days if so needed.
And now on to one of one of the most common of business entities – the only real proprietorship. A sole proprietorship requires no more then just operating your business using your own name. If you wish to function within a company name as well as distinct from your given name, neighborhood township or city may often demand that you register the name you choose to use, but could a simple process. So, for example, if you’d like to market your invention under a business name such as ABC Company, you simply register the name and proceed to conduct business. Individuals completely different over example above, a person would need to relocate through the more complex and expensive associated with forming a corporation to conduct business as ABC Corporation.
In addition to the 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 on the owner personally. Of course, there is often a negative side to the sole proprietorship in your you are personally liable for every debts and liabilities incurred by the actual. This is the trade-off for not being subjected to double taxation.
A partnership the another viable option 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 fended off. Also, similar to a sole proprietorship, the people who own partnership are personally liable for partnership debts and financial obligations. However, in a partnership, each partner is personally liable for the debts, contracts and liabilities of the opposite partners. So, any time a partner injures someone in his capacity as a partner in the business, you can take place personally liable for that financial repercussions flowing from his activity. Similarly, if your partner enters into a contract or incurs debt your past partnership name, thus you will find your approval or knowledge, you could be held personally concious.
Limited partnerships evolved in response to the liability problems built into regular partnerships. Within a limited partnership, certain partners are “general partners” and control the day to day operations with the business. These partners, as in normal partnership, may take place personally liable for partnership debts. “Limited partners” are those partners who usually will not participate in day time to day functioning of the business, but are shielded from liability in their liability may never exceed the amount of their initial capital investment. If a restricted partner does take part in the day to day functioning with the business, he or she will then be deemed a “general partner” all of which be subject to full liability for partnership debts.
It should be understood that these are general business law principles and will probably be no way intended to be a replacement for thorough research to your part, or for retaining an attorney, accountant or business adviser. The principles I have outlined above are very general in range. 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 that you will have a rough idea as this agreement option might be best for you at the appropriate time.