You have toiled many years in an effort to bring success to your invention and tomorrow now seems always be approaching quickly. Suddenly, you realize that during all period while you were staying up let into the evening and working weekends toward marketing or licensing your invention, you failed to give any thought to some basic business fundamentals: Should you form a corporation to run your newly acquired business? A limited partnership perhaps or even sole-proprietorship? What become the tax repercussions of selecting one of choices over the any other? What potential legal liability may you encounter? These are often asked questions, and those that possess the correct answers might find that some careful thought and planning can now prove quite valuable in the future.
To begin with, we need acquire a cursory in some fundamental business structures. The renowned is the enterprise. 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 though it were a distinct person. It is able 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. Can a corporation, perhaps you might well know, are that its liabilities (i.e. debts) can’t be charged against the corporations, shareholders. In other words, if anyone might have formed a small corporation and inventions ideas your 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 this 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 in a position to levied against the corporation. 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 wedding that someone is harmed by X and wins a procedure liability judgment against corporation ABC (the seller and manufacturer of X). In the broad sense, these are the basic concepts of corporate law relating to private liability. You ought to aware, however that there exist a few scenarios in which you are sued personally, and you need 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 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. For people with bought real estate, computers, automobiles, office furnishings and such like through the corporation, these are outright corporate assets but they can be attached, liened, or seized to satisfy a judgment rendered against the corporation. And just these assets may 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 even lost to satisfy a court judgment.
What can you do, then, to prevent this problem? The fact is simple. If you chose to go the business 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 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 every one of these positive attributes, recognize someone choose to be able to conduct business via a corporation? It sounds too good actually was!. 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 organization (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 that example) will then be taxed to your account as a shareholder dividend. If other $25,000 is taxed to you personally at, for example, a combined rate of 35% after federal, state and local taxes, all that will be left as a post-tax profit is $16,250 from the first $50,000 profit.
As you can see, this is really a hefty tax burden because the profits are being taxed twice: once at this company tax level much better again at the personal level. Since this manufacturer is treated the individual entity for liability purposes, it is additionally treated as such for tax purposes, and taxed subsequently. This is the trade-off for minimizing your liability. (note: there is a method to shield yourself from personal liability but still avoid double taxation – it is known as a “subchapter S corporation” and is usually quite sufficient for lots of 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). Should you choose to choose to incorporate, you should be able to locate an attorney to perform straightforward for under $1000. In addition it could be often be accomplished within 10 to twenty days if so needed.
And now in order to one of the most common of business entities – the only real proprietorship. A sole proprietorship requires nothing more then just operating your business under your own name. In order to function underneath 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 this is a simple procedures. So, for example, if you desire to market your invention under a business name such as ABC Company, just register the name and proceed to conduct business. This can completely different coming from the example above, the would need to become through the more complex and expensive associated with forming a corporation to conduct business as ABC Inc.
In addition to its ease of start-up, file a patent sole proprietorship has the selling point of not being already familiar with double taxation. All profits earned coming from the sole proprietorship business are taxed towards the owner personally. Of course, there is really a negative side towards sole proprietorship in your you are personally liable for all debts and liabilities incurred by enterprise. This is the trade-off for not being subjected to double taxation.
A partnership end up being another viable option for many inventors. A partnership is vital of two additional persons or entities engaging in business together. Like a sole proprietorship, profits earned by the partnership are taxed personally to the owners (partners) and double taxation is definitely avoided. Also, similar to a sole proprietorship, the people who own partnership are personally liable for partnership debts and responsibility. However, in a partnership, each partner is personally liable for the debts, contracts and liabilities of the opposite partners. So, if your 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 approaches. Similarly, if your partner enters into a contract or incurs debt each morning partnership name, have the ability to your approval or knowledge, you can be held personally in charge.
Limited partnerships evolved in response to the liability problems built into regular partnerships. In the limited partnership, certain partners are “general partners” and control the day to day operations in the business. These partners, as in a regular partnership, may be held personally liable for partnership debts. “Limited partners” are those partners who usually will not participate in time to day functioning of the business, but are protected from liability in that their liability may never exceed the amount of their initial capital investment. If a limited partner does employ the day to day functioning in 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 are general business law principles and are having no way developed how to get an idea patented 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 setting. There are many exceptions and limitations which space constraints do not permit me invest into further. Nevertheless, this article ought to provide you with enough background so that you’ll have a rough idea as this agreement option might be best for you at the appropriate time.