You have toiled many years in an effort to bring success in your own invention companies and on that day now seems being 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, you failed to give any thought right into a basic business fundamentals: Should you form a corporation to manage your newly acquired business? A limited partnership perhaps or simply a sole-proprietorship? What become the tax repercussions of deciding on one of choices over the other? What potential legal liability may you encounter? These tend to asked questions, and people who possess the correct answers might find out some careful thought and planning can now prove quite attractive the future.
To begin with, we need to take a cursory examine 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 not truly so. A corporation, once formed, is treated as although 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 kinds of legitimate business. Can a corporation, perhaps you might well know, are that its liabilities (i.e. debts) cannot be charged against the corporations, shareholders. Consist of words, if possess formed a small corporation and as well as a friend the particular only shareholders, neither of you become 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 include 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 the levied against the corporation. For example, if you end up being inventor of product X, and an individual 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 program 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 personal liability. You always be aware, however that there’re a few scenarios in which you are sued personally, it’s also important 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 to some 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 such like through the corporation, these are outright corporate assets and they can be attached, liened, or seized to satisfy a judgment rendered resistant to the corporation. And just as 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 then lost to satisfy a court common sense.
What can you do, then, to reduce problem? The fact 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 on the corporation. Make sure you do not entangle your finances with the corporate finances. Always remember to write a corporate check to yourself personally as royalty/licensing compensation. This way, your personal assets (the patent) and also the corporate assets are distinct.
So you might wonder, with every one of these positive attributes, why would someone choose never to conduct business via a corporation? It sounds too good to be true!. Well, it is. Doing work 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, this profit is first taxed to this business (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 our example) will then be taxed for your requirements 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 that will be left as a post-tax profit is $16,250 from an initial $50,000 profit.
As you can see, this is really a hefty tax burden because the profits are being taxed twice: once at the company tax level much better again at the average person level. Since this manufacturer is treated as an individual entity for liability purposes, it’s also treated as such for tax purposes, and taxed subsequently. 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 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). Pick choose to incorporate, you should be able to locate an attorney to perform incorporate different marketing methods for under $1000. In addition it’s often be accomplished within 10 to 20 days if so needed.
And now in order to one of one of the most common of business entities – the one proprietorship. A sole proprietorship requires no more then just operating your business below your own name. If you would like to function within company name as well as distinct from your given name, neighborhood township or city may often need to register the name you choose to use, but the actual reason being a simple undertaking. So, for example, if you wish to market an invention idea your invention under an agency name such as ABC Company, just register the name and proceed to conduct business. This is completely different for this example above, a person would need to use through the more complex and expensive associated with forming a corporation to conduct business as ABC Corporation.
In addition to its ease of start-up, a sole proprietorship has the advantage not being already familiar with double taxation. All profits earned by the sole proprietorship business are taxed to your owner personally. Of course, there can be a negative side for the sole proprietorship given that you are personally liable for almost any debts and liabilities incurred by enterprise. 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 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 certainly. Also, similar to a sole proprietorship, the owners of 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, if your partner injures someone in his capacity as a partner in the business, you can be held personally liable for that financial repercussions flowing from his actions. Similarly, if your partner enters into a contract or incurs debt your partnership name, thus you will find your approval or knowledge, you could be held personally in charge.
Limited partnerships evolved in response on the liability problems inherent in regular partnerships. In the limited partnership, certain partners are “general partners” and invention ideas control the day to day operations on the business. These partners, as in the standard partnership, may take place personally liable for partnership debts. “Limited partners” are those partners who may not participate in the day to day functioning of the business, but are shielded from liability in that the liability may never exceed the volume of their initial capital investment. If a limited partner does employ the day to day functioning belonging to the business, he or she will then be deemed a “general partner” and can 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 that will be a replace thorough research inside 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 see into further. Nevertheless, this article must provide you with enough background so that you’ll have a rough idea as to which option might be best for you at the appropriate time.