Types of Legal Entities

Often times the hardest decision for your start up business is deciding which legal entity will best serve you and your business model.  There is no formula to determine which is ideal for you and thus choosing a legal entity should be done on a case by case basis.  Each type of entity has both advantages and disadvantages.  Look at both the pros and cons when filing your entity to be sure you are finding the correct fit.

Sole Proprietorship

The simplest form of business structure is the sole proprietorship.    The sole proprietorship is a business entity that is run and owned by one owner.  It is unincorporated and is therefore not a legal entity.

The owner and the business entity are viewed as the same and there is no distinction between the two of them.  A sole proprietorship may operate and run under a trade name or the owner’s name.

Advantages

• No legal or business formalities
• Small capital required to start – up
• Owner receives all profit from sales of services or product
• Owner has complete control
• Can mix personal with business
• Quick, easy, and inexpensive
• Added element of secrecy

Disadvantages

• Unlimited personal liability for debts, losses, and liabilities of the business
• Cannot raise capital by selling an interest
• Hard to raise money so limited resources banks reluctant to lend to – few assets
• Continuation of business is difficult when the owner is deceased

 Partnership

A Partnership is a single business that is composed of two or more persons who share ownership and contribute to all aspects of the company.  Because each partner adds money, property, and labor to the business, each partner shares in the profits and losses of the business.

There are three types of partnerships, General Partnership, Limited Partnership, and Joint Ventures. Just like a Limited Liability Company, a partnership should be registered with the State to enjoy the tax advantages of operating as a partnership.

Advantages

• Easy and inexpensive to form
• Financial Commitment is spread among different partners so that one person is not financially supporting the Company
• Allows for partners with various different types of skill sets

Disadvantages

• Partnerships are joint and severally liable for the company debts
• Often times disagreements arise between partners
• Partners each share in the profits which allows some to rise the successes of other partners

 Limited Liability Company

A limited liability company is a hybrid of the partnership and the corporation.  LLC’s are developed by state statute and are considered a company not a corporation.  Owners of the LLC are considered Members.  There is no maximum number of persons who can serve as members.  There may be single member LLC’s or multi – member LLC’s.

The LLC is an attractive form of business because it provides limited amount of liability to its owners.  Due to the limited liability, it protects each member’s personal assets from any debts or any legal claim that is brought against the company or by the company.

Advantages

• Easy to setup with little paperwork
• Reduces personal liability of each member
• Easy management because compliance requirements of the LLC are much less formal than those of a C or S Corporation
• Ability to have a one (1) person company
• You can produce a business credit that is unrelated to personal credit
• Pass through taxation that avoids the double taxation of the corporation
• Great flexibility in structuring of the company
• Governed by the Operating Agreement of the Company
• Members can receive profits and write off losses in excess to their individual ownership percentage
• Members qualify for fringe benefit treatment
• Members are not subject to self – employment tax

Disadvantages

• Raising capital can be difficult because the business cannot issue stocks of the company to investors
• Laws for LLC’s vary by state meaning here is no legal uniformity
• To outsiders is can be confusing who is in charge of the LLC because there are not specific roles like there are in the corporation
• If there is only one member it will be taxed as a sole proprietorship
• As a member of a LLC, you may not pay yourself wages

Corporation

A corporation is an organized independent legal entity that is separate from the person who own, control, and manage the corporation.  Under the eyes of the law, a corporation is a viewed as a person thus a corporation has legal rights and responsibilities under the law.

Corporations can either be classified as ‘for profit’ or ‘not for profit’.  Corporations consist of shareholders who hold stock in the company.  Shareholders acquire stock through purchase or investment and they can sell/transfer their stock.

There are two types of corporations, a C- Corporation and the S – Corporation.  The C – Corporation is taxed independently from its owners whereas the S – Corporation is generally not taxed separately and instead flows through to the owners of the corporation.

S – Corporations are taxed on their pro rata shares of income based on each owners share holdings.  All corporations when filed are a C – Corporation and they must elect to become an S – Corporation with the IRS.

Advantages

• You can obtain more capital by sale of stock of the company
• You can also transfer ownership through the sale of stock
• Governed by state laws
• Changes in ownership do not affect management
• You can deduct costs of benefit packages that the company offers to its managers and employees
• Personal assets of an owner are protected from the liabilities and debts of the company
• They last for an unlimited life that will extend beyond the death of an owner

Disadvantages

• Extensive legal formalities
• Much more expensive than Sole Proprietorship or Limited Liability Company
• Governed by both state and federal rules and regulations
• Double taxation
• Require extensive paperwork and documentation of all actions taken by shareholders

What are Your Intellectual Property Rights

Intellectual Property laws provide legal protections and rights to the inventor or creator through trademarks, patents, and copyrights.  Intellectual property is defined as ownership of intangible and non – physical goods.

More simply put, intellectual property is creations of the mind.  This includes any type of literary, artistic, symbols, names, designs, and images.  Rights in these are rooted in intellectual property laws.  Trademarks, patents, and copyrights provide different and distinct intellectual property rights to the inventor or creator.0

Trademark

A trademark is any word, logo, phrase, name, sign, design, expression or any combination of these, known as a mark that is registered to an owner so that products or services will be recognizable to consumers.  Trademarks distinguish particular products and services from others so that a consumer may exclusively identify the commercial source.

Trademarks are used to protect the owner of the mark and the consumers.  An owner registering the mark prevents others from using the same or similar mark.  Marks may be owned or licensed by any legal entity such as an individual or business organization.  The owner of a trademark has rights in the “mark” and may pursue legal action known as trademark infringement against a party that uses the mark.

While trademarks protect the owner, they also protect the consumer.  Trademarks inform the buying public of the origin of products and services. Knowing the source of the product and service allows the consumer to make educated decisions on their purchases based off reputation, marketing, and knowledge of the company.  Trademarks may be located on any packaging, label, voucher, or other advertisement of the owner.  Several symbols indicate that a mark is trademark such as ® and ™.

Patent

Patents are a tool for inventors so that they may legally protect their invention.  A patent will give an inventor property rights over the invention which prevents all the rest of the world from making, using, or selling the patented invention without permission.  It is important to note that the patent does not protect the idea of the invention, it only protects the invention.

A patent lasts for a limited time period, generally 20 years from the date the application for the patent is filed. A patent is only valid in the country which the application is filed.  Patents are available to inventors in all fields of technology.  The application for a patent needs to meet relevant patentability requirements.  The application must include one or more claims that define the invention which must be useful, novel, and non – obvious.

Copyright

A copyright gives the creator of an original work exclusive right’s to the work for a limited period of time.  Copyrights are available to any expressible form of an idea or information. The work must be both substantive and discrete.  Works included musical, dramatic, and artistic creations which can include movies, books, songs, sculptures, and software.

Copyrights serve as a way to give the creator of the work credit, determine who may financially benefit from the work, evaluate who may adapt the work to other forms, and other various related rights.  With a copyright, the creator can publicly display, produce, and sell the copyrighted work.  The work does not have to published in order to be copyrighted, it only needs to be produced.