Incorporation, Taxes, Trademarks, Patents, and Contracts for People, Products, Money and More

Should I incorporate? If so, when? How? What will it cost me?

How do I license? Commercialize? Bring my product to market?

Beyond bootstrapping: Can I really get financing? How?

These legal and business questions are discussed in brief below.

1. Business Choices and Incorporation

   A new business can operate as a sole proprietorship or general partnership, without filing, or as a limited partnership, corporation (profit or non-profit), or limited liability company (LLC) or limited liability partnership, where state filing is required.

   The big benefit of a corporation or LLC is to insulate all its owners from personal liability. These also give management continuity, and define rights of owners and those who deal with the business. They add credibility to your business in the marketplace.

   However, Corporate or LLC benefits cost. First, there is incorporation redtape: Articles of incorporation, bylaws, minutes, banking resolutions, shares, plus operation agreements for LLCs. This legal paperwork costs $1000 and more, between lawyer's costs, expenses and State fees. Second, there is upkeep. Creating a corporation or LLC is creating a new legal person. To get the legal benefits, you have to treat her (him) right. That means transferring assets over to the new entity, so that it owns something, and then keeping separate records, using corporate letterhead, checks, etc., so that you act through this legal/paper person.

2. Taxation and S Corporations or LLCs

   Paperwork and Dollar costs are reasons why startups often put off incorporation. Another putoff is taxes. As a new person, a new corporation or LLC files for its own taxpayer ID. It must file its own tax returns and pay annual franchise taxes ($456 per year in Massachusetts for a corporation, $500 per year for an LLC).

   Normally, corporations are also taxed on their income, but if a corporation files to be an "S Corporation", it avoids income taxes. Owners can also take losses on their personal tax returns, while the "S" is still a regular corporation in other respects. LLCs offer these same S Corporation advantages, without some of the technical S Corporation restrictions. LLCs also offer additional flexibility normally found in partnerships to split income, losses and capital disproportionately among members.

   There are also disadvantages to S Corporations and LLCs -- direct owner tax on all income, and loss of a chance for the 14 percent tax on sales of shares held five years or more.

3. Trademarks, Patents, Proprietary Protection

   Care should be given in choosing a business name and logo as well. Filing a state or a Federal trademark or service mark gives protection against those who would try to sell under your registered name. Where unincorporated or using a non-corporate trade name, a DBA certificate should be filed with the city or town.

   Even more care should go to protect inventions, new products, trade secrets and information proprietary to the business. This starts even before going into business: think about any documents signed with present or past employers; assure your rights in "intellectual property" and to transfer it "free and clear" to your new business. Where feasible, patents should be filed to protect new inventions or improvements, or copyrights filed as to expressions of ideas. Confidentially agreements should be considered with employees and those who do business with you. (Samples are available upon request.)

4. Contracts for People, Products, Money and More

Supply contracts, equipment purchases or leases, credit terms Product development, milestone payments, sales orders Licensing, manufacture, marketing, distribution, "strategic alliances" Professional service providers, insurance and State regulation Employees, independent contractors, compensation, benefits Founders shares, buy-sell, stockholder agreements, restrictions Venture capital, send financing and Securities law compliance Home Based Business and zoning, office leasing, insurance

Mr. Adelson may be contacted directly via email: radelson@engelschultz.com.