Steemit.Com – https://steemit.com/entrepreneur/@businesses/the-entrepreneur-directory. You have toiled many years in an effort to bring success to your invention and on that day now seems staying 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 make any thought right into a basic business fundamentals: Should you form a corporation to drive your newly acquired business? A limited partnership perhaps or even sole-proprietorship? What include the tax repercussions of selecting one of these options over the other? What potential legal liability may you encounter? These tend to be asked questions, and those that possess the correct answers might find out that some careful thought and planning now can prove quite attractive the future.
To begin with, we need take a look at a cursory in 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 really so. A corporation, once formed, is treated as although it were a distinct person. It is able buy, sell and lease property, to initiate contracts, to sue or be sued in a lawcourt and to conduct almost any other types of legitimate business. Can a corporation, perhaps you might well know, are that its liabilities (i.e. debts) can not be charged against the corporations, shareholders. Consist of words, if anyone might have formed a small corporation and both you and a friend would be 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 are of course quite obvious. With and selling your manufactured invention along with corporation, you are protected from any debts that the corporation incurs (rent, utilities, etc.). More importantly, you are insulated from any legal judgments which may be levied against this manufacturer. For example, if you the actual inventor of product X, and own formed corporation ABC to manufacture promote X, you are personally immune from liability in the expansion that someone is harmed by X and wins a product liability judgment against corporation ABC (the seller and manufacturer of X). Within a broad sense, these are the basic concepts of corporate law relating to personal liability. You always be aware, however that there are 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 inventhelp product development liability claim, any assets owned by this company 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. In case you have bought real estate, computers, automobiles, office furnishings and such through the corporation, these are outright corporate assets furthermore can be attached, liened, or seized to satisfy a judgment rendered with corporation. And because these assets might 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 award.
What can you do, then, to prevent this problem? The solution is simple. If you chose 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 to the corporation. Make sure you do not entangle your personal 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) and the corporate assets are distinct.
So you might wonder, with all these positive attributes, why would someone choose to be able to conduct business the corporation? It sounds too good to be true!. Well, it is. Conducting business 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 the organization (at an exceptionally high corporate tax rate which can approach 50%). Any moneys remaining an excellent first layer of taxation (let us assume $25,000 for our own example) will then be taxed back 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 local taxes, all that’ll be left as a post-tax profit is $16,250 from a short $50,000 profit.
As you can see, this is really a hefty tax burden because the earnings are being taxed twice: once at the company tax level and whenever again at the average person level. Since this company is treated as an individual entity for liability purposes, it is additionally treated as such for tax purposes, and taxed for this reason. This is the trade-off for minimizing your liability. (note: there is the way to shield yourself from personal liability but still avoid double taxation – it is definitely a “subchapter S corporation” and is usually quite sufficient folks 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). Choose to choose to incorporate, you should be able to locate an attorney to perform incorporate different marketing methods for under $1000. In addition they can 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 sole proprietorship. A sole proprietorship requires nothing at all then just operating your business under your own name. If you wish to function underneath a company name which can 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 undertaking. So, for example, if you wish to market your invention under an agency name such as ABC Company, you simply register the name and proceed to conduct business. This can completely different over example above, an individual would need to become through the more and expensive process of forming a corporation to conduct business as ABC Inc.
In addition to its ease of start-up, a sole proprietorship has the advantage not being put through double taxation. All profits earned with sole proprietorship business are taxed to your owner personally. Of course, there is really a negative side towards sole proprietorship in your 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 end up being another viable option for many inventors. A partnership is an association of two or higher 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 people who just love partnership are personally liable for partnership debts and legal responsibility. However, in a partnership, each partner is personally liable for the debts, contracts and liabilities of the other partners. So, should you be 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 each morning partnership name, great your approval or knowledge, you could be held personally concious.
Limited partnerships evolved in response on the liability problems built into regular partnerships. In the limited partnership, certain partners are “general partners” and control the day to day operations of the business. These partners, as in an even partnership, may be held personally liable for partnership debts. “Limited partners” are those partners who tend not to participate in time to day functioning of the business, but are resistant to liability in that the liability may never exceed the volume of their initial capital investment. If a restricted partner does gets involved in the day to day functioning belonging to the business, he or she will then be deemed a “general partner” might be subject to full liability for partnership debts.
It should be understood that they are general business law principles and have reached no way intended to be a substitute for thorough research inside your part, or for retaining an attorney, accountant or business adviser. The principles I have outlined above are very general in style. There are many exceptions and limitations which space constraints do not permit me to travel to into further. Nevertheless, this article should provide you with enough background so you’ll have a rough idea as that option might be best for you at the appropriate time.