Question

Topic: Strategy

Sub S Corp Or Llc Entity For New Ip Portfolio ???

Posted by Anonymous on 2/11/2010 at 10:33 PM ET 250 Points
Caveat: I know this question has BOTH legal and accounting implications. However, given the nature of future business model, the other factors cited below allow for "practical" advise from experience in the licensing and leveraging world of trademark and brand assets.

I am currently forming new entity to hold trademark asset. Future goal is to establish and build the value of the Intellectual Property while minimizing the initial cost and maintenance (tax filings, min. tax payments, etc.).

Seems like the proper choices are to either to from a LLC or to form a Corporation (Sub S).

Setting up either with a top law firm runs $800-1000, which is about 2-3x's as costly as doing it oneself. However, very convenient and will get done properly the first time. So I'll do this part right.

The real issue for me is which entity is the best platform from which to readily sell or license or partner intellectual property assets from. S Corp allows one to have shares which one could sell or trade for capital investment.

If a significant revenue stream was generated from initiative, then the tax implications would play a part in this choice. From my research, the LLC could incur tax rates similar to a sole proprietorship, which are high, whereas the S Corp would incur taxes at the Corp rate.

Thank you for your input and suggestions.
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RESPONSES

  • Posted by wnelson on 2/11/2010 at 11:10 PM Member
    There's not an answer to this, there's a thought process.

    The difference between the organizational structures very from state to state. In my state, there is a law case that I have heard of where an LLC company was denied personal immunity from a case because "they didn't behave like a corporation." What they didn't do, as I have heard it, was they didn't have a corporate meeting each year, as required by an S-corp. In PA, an LLC can "behave" like an S-corp and receive the same tax benefits - e.g. they won't be double taxed on salaries to the owners. The major differentiation from a legal and tax purpose in PA (varies state to state) is from a tax situation. Talk to your CPA.

    If you are an LLC and decide later that you want to become an S-corp - you can. Part of that decision would include the benefits versus the additional cost (basically the cost of incorporating from the start.) Big deal.

    To become an S-corp from the beginning, you pay an attorney almost the same fee as you would if you paid them to be an LLC. The penalty, you have to do an annual meeting - some buck to a lawyer if you can't figure out how to do it yourself. Accounting might be a bit more complicated.

    Bottom line from an accounting or legal perspective - eh! Who cares! You'll do it now or later. So what.

    From a marketing perspective, you can put an inc after the name versus an LLC - eh. So don't put either. You're OK there too..

    Here's the thing: The difference is largely in your mind. However you think of it, that's the way the market will perceive of it. Your behavior will be the same. If you believe you need to scrimp and save a few hundred dollars and do an LLC yourself because you might fail and you don't want to put the money out there - you probably fail anyway and you will save the money you want to save. If you believe you will be successful long term and you put the dollars out there to do with via advice from an accountant and you get an attorney involved to make sure you doing it right and set the business up for the future, you will probably be successful. The other down side of "being your own attorney" is the time it takes to do this. An attorney will require $150 to $300 per hour. They will be more efficient than you. If you can't earn $150 5o $300 per hour doing business at what you're good at - then be your own lawyer. That's a better use of your time. Make sure you take into account the efficiency factor. It will take you twice or more effort than the attorney.

    Good luck with your decision and business.

    I hope this helps.

    Wayde
  • Posted by wnelson on 2/11/2010 at 11:10 PM Member
    oops...sorry for the extra underline!
  • Posted by Inbox_Interactive on 2/12/2010 at 6:09 AM Accepted
    First of all, S corporations do not pay any federal income taxes whatsoever, so they are not taxed at the corporate rate.

    Rather, the earnings of the S corporation flow through on a pro rata basis to its shareholders, who in turn claim that share as personal income via the K-1 and Schedule E.

    I guess I see a disconnect here. You're willing to pay $1,000 to have the entity formed by an attorney, but you're asking for advice on the Web (on a marketing forum, no less!) about which kind of entity to create.

    If you want to do half of this process on your own, I would spend the $1,000 getting counsel on which type of entity to form, then doing the actual formation part of the job on my own.

    As it sounds like you can appreciate, it does matter which entity you choose. It seems to me that choosing the correct entity might be more important than creating that entity in lawyer-like fashion.

    Best of luck with your business. If you think of it, let us know which business form you chose, as well as how you went about creating it.

    Paul
  • Posted by CarolBlaha on 2/12/2010 at 7:36 AM Member
    You need a tax guy--

    Don't spend the $1K on a lawyer till you get a tax guy. Every situation is different. When I needed a car, thought about remarrying (it's a tough world), before I put my house on the market, before I moved to another state- I talked to my tax guy.

    When I decided how to structure my biz, there was a slight advantage to a corp vs LLC. But make no bones about it- the IRS won't let any money sitting on the table. They'll have a different name for the tax, but there is no windfall loophole.

    But the LLC is so easy to do, it's just a mouseclick on your state's webpage. It costs zero.

    As far as from a marketing standpoint, customers buy the brand. The structure of the org isn't important to them.
  • Posted by Inbox_Interactive on 2/12/2010 at 8:28 AM Accepted
    Not to muck things up, but LLCs can actually be taxed as corporations, partnerships, or even sole proprietorships...

    S corporations can actually have up to 100 shareholders now, although it doesn't sound like you'll be looking for that many people to get involved.

    However, most professional investors -- should you need them -- do not like S corporations IF the profits are going back into the business (that is, earnings are not being distributed), because they have to pay tax on earnings that they didn't get to touch. (If it IS an S corporation, then there's usually enough of a distribution to pay the taxes, but then not every investor will want or need the distribution, and you have to treat all shareholders the same. It can create quite a problem.)

    Are you sorry yet that you asked this question in a marketing forum? :)

    Paul
  • Posted by Jay Hamilton-Roth on 2/12/2010 at 8:37 AM Accepted
    If you haven't already, check out nolo.com:
    https://www.nolo.com/legal-encyclopedia/chart-29025.html
    https://www.nolo.com/legal-encyclopedia/article-30065.html
  • Posted on 2/12/2010 at 10:33 PM Author
    Thank you all very much for your thoughtful comments. Big help as I continue to roll this thing forward. I really agree with Wade's comments around intent.
    I spoke to my corp attorney this morney and he stated LLC, in Deleware, period, as NuCo Pro has clearly stated.
    Again, thank you! Nice community you guys have here...first time user!
  • Posted by Inbox_Interactive on 2/13/2010 at 10:38 AM Member
    I agree with NuCoPro...generally, you are far better off simply forming your businesses entity in your home state.

    When you form your business elsewhere, you *always* need a registered agent -- someone to receive legal papers should they be served on your business. And you'll also file more paperwork.

    If there ever comes a time where you have a legitimate reason to incorporate in another state, you can always reincorporate in that state at that time.

    Keep your life simple.
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