You have toiled many years so that you can bring success inside your invention and on that day now seems staying 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 companies, you failed in giving any thought to a couple of basic business fundamentals: Should you form a corporation to run your newly acquired business? A limited partnership perhaps or even sole-proprietorship? What always be tax repercussions of deciding on one of these options over the remaining? What potential legal liability may you encounter? These tend to asked questions, and those who possess the correct answers might find that some careful thought and planning can now prove quite beneficial in the future.
To begin with, we need acquire a cursory take a 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 though it were a distinct person. It is actually able buy, sell and lease property, to enter into contracts, to sue or be sued in a court of law and to conduct almost any other types of legitimate business. Greater a corporation, as perhaps you may well know, are that its liabilities (i.e. debts) are not charged against the corporations, shareholders. Some other words, if you’ve got formed a small corporation and both you and a friend the particular 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 occurence are of course quite obvious. With and selling your manufactured invention through 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 organization. For example, if you will be inventor of product X, and experience formed corporation ABC to manufacture market X, you are personally immune from liability in the event that someone is harmed by X and wins a system liability judgment against corporation ABC (the seller and manufacturer of X). Within a broad sense, these represent the concepts of corporate law relating to personal liability. You should be 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 liability claim, any assets owned by this company are subject to a 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 such like through the corporation, these are outright corporate assets furthermore can be attached, liened, or seized to satisfy a judgment rendered contrary to the corporation. And just these assets might be affected by a judgment, new inventions so too may your patent if it is owned by the corporation. Remember, patent rights are almost equivalent to tangible property. A patent may be bought, sold, inherited instances lost to satisfy a court opinion.
What can you do, then, to avoid this problem? The answer 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 for 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, recognize someone choose never to conduct business through a corporation? It sounds too good really was!. Well, it is. Doing business through a corporation has substantial tax drawbacks. In corporate finance circles, the problem is known as “double taxation”. If your corporation earns a $50,000 profit selling your invention, 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 that example) will then be taxed for 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 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 is a hefty tax burden because the profits are being taxed twice: once at the corporation tax level much better again at the average person level. Since the corporation is treated as an individual entity for liability purposes, it is also treated as such for tax purposes, and taxed subsequently. This is the trade-off for minimizing your liability. (note: there is a means to shield yourself from personal liability though avoid double taxation – it is known as a “subchapter S corporation” and is usually quite sufficient folks 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 be able to locate an attorney to perform certainly for under $1000. In addition they can often be accomplished within 10 to twenty days if so needed.
And now in order to one of essentially the most common of business entities – truly the only proprietorship. A sole proprietorship requires anything then just operating your business using your own name. If you would like to function within company name which is distinct from your given name, regional township or city may often need to register the name you choose to use, but the actual reason being a simple procedures. So, for example, if you’d like to market your invention under a business name such as ABC Company, inventhelp inventions store you simply register the name and proceed to conduct business. This can completely different over example above, the would need to go through the more complex and 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 already familiar with double taxation. All profits earned coming from the sole proprietorship business are taxed to the owner personally. Of course, there is a negative side to your sole proprietorship in your you are personally liable for any debts and liabilities incurred by enterprise. 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 or 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 prevented. 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 another partners. So, any time a 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 goes into a contract or incurs debt each morning partnership name, have the ability to your approval or knowledge, you can be held personally in the wrong.
Limited partnerships evolved in response towards liability problems inherent in regular partnerships. From a limited partnership, certain partners are “general partners” and control the day to day operations of the business. These partners, as in the standard partnership, may take place personally liable for partnership debts. “Limited partners” are those partners who usually will not participate in the day 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 restricted partner does take part in 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 in no way meant to be a alternative to 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 go into further. Nevertheless, this article ought to provide you with enough background so that you will have a rough idea as that option might be best for you at the appropriate time.