You have toiled many years small company isn’t always 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 for the basic business fundamentals: Should you form a corporation to drive your newly acquired business? A limited partnership perhaps or simply a sole-proprietorship? What are the tax repercussions of choosing one of these options over the some other? What potential legal liability may you encounter? These are often asked questions, and people who possess the correct answers might find that some careful thought and planning now can prove quite beneficial in the future.
To begin with, we need take a look at a cursory take a some fundamental business structures. The most well known is the group. 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 courtroom 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. In other words, if you have formed a small corporation and you and a friend would be 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 one’s are of course quite obvious. By incorporating 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 may be levied against the business. For example, if you are the inventor ideas of product X, and you have formed corporation ABC to manufacture promote X, you are personally immune from liability in the wedding that someone is harmed by X and wins a product patent liability judgment against corporation ABC (the seller and manufacturer of X). In a broad sense, these are the basic concepts of corporate law relating to personal liability. You must be aware, however that there are a few scenarios in which pretty much sued personally, and it’s 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 a court judgment. Accordingly, while your personal belongings 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 such through the corporation, these are outright corporate assets additionally 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 and also lost to satisfy a court opinion.
What can you do, then, don’t use problem? The fact is simple. If you’re considering to go this company route to conduct business, do not sell or assign your patent at your corporation. Hold your patent personally, and license it on the corporation. Make sure you do not entangle your 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) along with the corporate assets are distinct.
So you might wonder, with all these positive attributes, won’t someone choose for you to conduct business the corporation? It sounds too good actually!. Well, it is. Doing 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 tag heuer (at an exceptionally high corporate tax rate which can approach 50%). Any moneys remaining a great first layer of taxation (let us assume $25,000 for our example) will then be taxed to you personally as a shareholder dividend. If the additional $25,000 is taxed to you personally at, for example, a combined rate of 35% after federal, state and local taxes, all to be left as a post-tax profit is $16,250 from a short $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 much better again at a person level. Since the corporation is treated being an individual entity for liability purposes, also, it is 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 yet still avoid double taxation – it is known as a “subchapter S corporation” and is usually quite sufficient for most inventors who are operating small to mid size opportunities. I highly recommend that you consult an accountant and discuss this option if you have further questions). Choose to choose to incorporate, you should be able to locate an attorney to perform the process for under $1000. In addition it’s often be accomplished within 10 to twenty days if so needed.
And now on to one of essentially the most common of business entities – the sole proprietorship. A sole proprietorship requires no more then just operating your business under your own name. Should you want to function under a company name which is distinct from your given name, neighborhood township or city may often demand that you register the name you choose to use, but this is a simple course. So, for example, if you desire to market your invention help under a business name such as ABC Company, have to register the name and proceed to conduct business. This is completely different from the example above, where you would need to go through the more and expensive associated with forming a corporation to conduct business as ABC Incorporated.
In addition to its ease of start-up, a sole proprietorship has the advantage not being put through double taxation. All profits earned with sole proprietorship business are taxed on the owner personally. Of course, there is often a negative side to your sole proprietorship in this particular you are personally liable for almost any debts and liabilities incurred by the business. This is the trade-off for not being subjected to double taxation.
A partnership in a position to another viable selection for many inventors. A partnership is appreciable link 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 fended off. Also, similar to a sole proprietorship, the people who just love 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, should partner injures someone in his capacity as a partner in the business, you can be held personally liable for the financial repercussions flowing from his actions. Similarly, if your partner goes into a contract or incurs debt within the partnership name, have the ability to your approval or knowledge, you could be held personally in charge.
Limited partnerships evolved in response towards the liability problems inherent in regular partnerships. In a limited partnership, certain partners are “general partners” and control the day to day operations in the business. These partners, as in the standard partnership, may be held personally liable for partnership debts. “Limited partners” are those partners who perhaps not participate in day time to day functioning of the business, but are shielded from liability in that their liability may never exceed the volume of their initial capital investment. If a limited partner does employ the day to day functioning of 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 these types of general business law principles and are living in no way designed be a alternative to thorough research inside your part, or for retaining an attorney, accountant or business adviser. The principles I have outlined above are very general in style. There are many exceptions and limitations which space constraints do not permit me to see into further. Nevertheless, this article should provide you with enough background so that you will have a rough idea as in which option might be best for you at the appropriate time.