You have toiled many years in an effort to bring InventHelp Success Stories to your invention 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 make any thought onto a basic business fundamentals: Should you form a corporation to run your newly acquired business? A limited partnership perhaps or even a sole-proprietorship? What always be tax repercussions of selecting one of choices over the a number of? What potential legal liability may you encounter? These tend to be 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 to consider a cursory the some fundamental business structures. The most well known is the corporation. 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 initiate contracts, to sue or be sued in a court and to conduct almost any other types of legitimate business. The main benefits of a corporation, as perhaps you may well know, are that its liabilities (i.e. debts) can not be charged against the corporations, shareholders. Some other words, if experience formed a small corporation and you and inventions a friend are the 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 in this are of course quite obvious. By including and selling your manufactured invention through corporation, you are protected from any debts that the corporation incurs (rent, utilities, inventhelp caveman etc.). More importantly, you are insulated from any legal judgments which may be levied against the corporation. For example, if you are the inventor of product X, and you have formed corporation ABC to manufacture and sell X, you are personally immune from liability in the expansion that someone is harmed by X and wins a program liability judgment against corporation ABC (the seller and manufacturer of X). From a broad sense, these are the basic concepts of corporate law relating to private liability. You should be aware, however that we have a few scenarios in which you can be sued personally, vital that you 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 a few 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 such through the corporation, these are outright corporate assets additionally can be attached, liened, or seized to satisfy a judgment rendered contrary to the corporation. And since these assets may be affected by a judgment, so too may your patent if it is owned by this provider. 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, never use problem? The solution is simple. If you chose to go this company route to conduct business, do not sell or assign your patent towards the corporation. Hold your patent personally, and license it to the corporation. Make sure you do not entangle your finances with the corporate finances. Always make certain to 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 each one of these positive attributes, why would someone choose to be able to conduct business through a corporation? It sounds too good really was!. Well, it is. Doing work 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 next 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 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 catastrophe $50,000 profit.
As you can see, this is often a hefty tax burden because the profits are being taxed twice: once at this company tax level much better again at a person level. Since the corporation is treated as an individual entity for liability purposes, additionally it is 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 most of inventors who are operating small to mid size organizations. 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 certainly for under $1000. In addition it’s often be accomplished within 10 to twenty days if so needed.
And now on to one of the most common of business entities – the only real proprietorship. A sole proprietorship requires nothing at all then just operating your business below your own name. If you would like to function with a 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 could a simple course. So, for example, if you desire to market your invention under a business name such as ABC Company, essentially register the name and proceed to conduct business. Individuals completely different over 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 selling point of not being afflicted by double taxation. All profits earned via the sole proprietorship business are taxed to your owner personally. Of course, there is a negative side to your sole proprietorship in that you are personally liable for any and all debts and liabilities incurred by the business. 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 link 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 definitely avoided. Also, similar to a sole proprietorship, the those 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 one other partners. So, any time a 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 manners. Similarly, if your partner goes into a contract or incurs debt within the partnership name, even without your approval or knowledge, you could be held personally in charge.
Limited partnerships evolved in response on the liability problems built into regular partnerships. Within a limited partnership, certain partners are “general partners” and control the day to day operations among the business. These partners, as in the standard partnership, may take place personally liable for partnership debts. “Limited partners” are those partners who may possibly well 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 smallish partner does be a part of the day to day functioning belonging to the business, he or she will then be deemed a “general partner” all of which be subject to full liability for partnership debts.
It should be understood that these are general business law principles and are 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 scope. There are many exceptions and limitations which space constraints do not permit me to search into further. Nevertheless, this article ought to provide you with enough background so you’ll have a rough idea as to which option might be best for you at the appropriate time.