You have toiled many years in an effort to bring success to your invention and 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, you failed to make 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 always be tax repercussions of choosing one of these options over the a number of? What potential legal liability may you encounter? These tend to be asked questions, and those that possess the correct answers might see some careful thought and planning now can prove quite valuable in the future.
To begin with, we need to consider a cursory in 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 just isn’t so. A corporation, once formed, is treated as although 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 court and to conduct almost any other legitimate business. The benefits of a corporation, as perhaps 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 both you and a friend would be 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 occurence are of course quite obvious. By incorporating and selling your manufactured invention through 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 business. For example, if you include the inventor of product patent X, and you have 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). Within a broad sense, these represent the concepts of corporate law relating to personal liability. You always be aware, however that there’re 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 tag heuer are subject how to invent a product some court judgment. Accordingly, while your personal belongings 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 etc through the corporation, these are outright corporate assets but they can be attached, liened, or seized to satisfy a judgment rendered with corporation. And because these assets possibly be affected by a judgment, 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 as well as lost to satisfy a court opinion.
What can you do, then, to avoid this problem? The solution is simple. If you’re considering to go the organization route to conduct business, do not sell or assign your patent towards the corporation. Hold your patent personally, and license it on the corporation. Make sure you do not entangle your finances with the corporate finances. Always certainly write a corporate check to yourself personally as royalty/licensing compensation. This way, your personal assets (the patent) as well as the corporate assets are distinct.
So you might wonder, with every one of these positive attributes, businesses someone choose for you to conduct business any 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 this company (at an exceptionally high corporate tax rate which can approach 50%). Any moneys remaining a quality 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 additional $25,000 is taxed to you personally at, for example, a combined rate of 35% after federal, state and local taxes, all that’ll 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 individual level. Since tag heuer is treated with regard to individual entity for liability purposes, it is also treated as such for tax purposes, and taxed accordingly. This is the trade-off for minimizing your liability. (note: there is a means to shield yourself from personal liability yet still avoid double taxation – it works as a “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). If you do choose to incorporate, you should be able to locate an attorney to perform certainly for under $1000. In addition it can 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 sole proprietorship. A sole proprietorship requires nothing at all then just operating your business through your own name. If you would like to function with a company name as well as distinct from your given name, regional township or city may often will need register the name you choose to use, but the actual reason being a simple undertaking. So, for example, if you would to market your invention under a company name such as ABC Company, essentially register the name and proceed to conduct business. This is completely different coming from the example above, a person would need to use through the more and expensive associated with forming a corporation to conduct business as ABC Inc.
In addition to its 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 into the owner personally. Of course, there is a negative side towards sole proprietorship in this particular you are personally liable for all debts and liabilities incurred by the business. This is the trade-off for not being subjected to double taxation.
A partnership end up being another viable choice for many inventors. A partnership is a connection of two or higher 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 fended off. Also, similar to a sole proprietorship, the owners of 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 another partners. So, or perhaps 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 manners. Similarly, if your partner goes into a contract or incurs debt within the partnership name, great your approval or knowledge, you can be held personally in charge.
Limited partnerships evolved in response towards 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 a regular 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 their liability may never exceed the volume of their initial capital investment. If a smallish partner does gets involved in 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 are living in no way intended to be a alternative to popular thorough research on 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 to travel to into further. Nevertheless, this article must provide you with enough background so that you’ll have a rough idea patent as that option might be best for you at the appropriate time.