Engel & Schultz, LLP
Incorporation, Taxes, Trademarks, Patents, and
Contracts for People, Products, Money and More
Federal grants are an overlooked option for bootstrapping startups
by Robert A. Adelson, Esquire
As an entrepreneur or a consultant now in business, advising on or thinking of going into business, legal questions often come up:
- 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.
- 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.
- 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.
- 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.)
- Contracts for People, Products, Money and More
Among the other issues for a new business, just as important, are:
- 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
This column is the first of several contributions prepared by Attorney Robert A. Adelson that are to appear, with his permission, in The Business Forum Online® in succeeding months. The next column will be on the subject of "Strategic Alliances and Business Contracts," scheduled to appear in October.
Robert A. Adelson, Esq. is a partner at the Boston law firm of Engel & Schultz, LLP. Mr. Adelson is a graduate of Boston University, Phi Beta Kappa, and Northwestern University Law School in Chicago, where he was a member of the Law Review. He has an advanced law degree, an LLM in Taxation, from New York University.
Mr. Adelson is a member of the Massachusetts, New York and U.S. Tax Court bars. He has been an attorney in practice since 1977, specialized in business law, including corporate, taxation, securities, options, licensing and technology contracting. With a stress on value-added services, Mr. Adelson represents many new and smaller corporations and businesses in many fields such as software, biotechnology and emerging technology areas.
You may also want to read Mr. Adelson's Culpepper Letter
(Newsletter Issue 163, September 1997)
Negotiating the Terms of Executive Employment:
Getting What You Deserve
Robert A. Adelson, Esq.
Telephone: 617.951.9980, ext. 205
Your comments and suggestions for these pages are most welcome!
[See Index of Columns by Robert A. Adelson, Esq.]
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