The corporate form provides its shareholders with a shield. Their personal assets generally cannot be touched by lenders, suppliers, or plaintiffs with claims against the corporation. On the other hand, incorporation can subject you to a number of drawbacks: higher state taxes, stricter laws concerning the operation of your business, more elaborate accounting procedures, and legal papers that are required for many major business decisions. Of course, legal and accounting fees will be higher as a result. You can avoid the extra effort and taxes by operating as a partnership or sole proprietorship, but you remain personally liable for debts and judgments against your business. There are a variety of different ways to incorporate, inclusive of C-corporations, S-corporations, Non-profits, Limited Liability Companies, and others. It is best to seek both legal advice and accounting advice on the proper form for a given situation. Our standard fee cap for incorporation is $195.
The traditional corporation is a C-corporation. The C-corporation is established in Maryland by filing Articles of Incorporation with the State Department of Assessments and Taxation.
The corporate Bylaws serve as the internal operating document for the corporation. Generally, Bylaws detail the responsibilities, rights, and duties of directors, shareholders and officers.
It may be possible for a C-corporation to gain tax-exempt status under Subchapter S of the IRC. This is done on a yearly basis by filing a timely Subchapter S election (Form 2553) at any time before the16th day of the 3rd month of the tax year. The general definition of an S corporation in IRC Sec. 1361 includes the following restrictions on the type and number of shareholders and the operation of corporation that can qualify.
- It is a domestic corporation.
- It has no more than 75 shareholders.
- Its only shareholders are individuals, estates, exempt organizations described in section 401(a) or 501(c)(3), or certain trusts described in section 1361(c)(2)(A).
- It has no nonresident alien shareholders.
- It has only one class of stock (disregarding differences in voting rights).
- It is not one of the following ineligible corporations:
- A bank or thrift institution that uses the reserve method of accounting for bad debts under section 585;
- An insurance company subject to tax under the rules of subchapter L of the Code;
- A corporation that has elected to be treated as a possessions corporation under section 936; or
- A domestic international sales corporation (DISC) or former DISC.
If an S corporation violates these restrictions, its S election will be automatically terminated. In light of the above stock and shareholder restrictions, it is often difficult and cumbersome to achieve S-status at an early stage, and the S-corporation status may not be appropriate.
Some corporations can be organized as a tax-exempt organization under Internal Revenue Code (IRC) section 501(c). IRC § 501(c)(3) refers to the most common tax-exempt structure for nonprofits, and the most desirable one under most circumstances. The requirements for these organizations are many and strict, including:
- formation separate from any sponsoring companies;
- organization and operation exclusively for educational or charitable purposes;
- no benefit to a private shareholder;
- no participation in a political campaign on behalf of a candidate for public office;
- no substantial participation in political or lobbying activities;
- serving only a public purpose.
The process of applying for and maintaining § 501(c)(3) status is complicated and long. Moreover, the public meeting and disclosure requirements of tax-exempt organizations may be undesirable. Nevertheless, so long as the fund-raising tax advantages outweigh the administrative disadvantages, it may be appropriate to organize as a tax-exempt organization under Internal Revenue Code (IRC) section 501(c).
- Limited Liability Company (LLC)
The LLC is often the best choice for a start-up company because it offers significant tax advantages plus limited liability. Under the Maryland LLC laws, the members remain shielded from the company's debts unless they personally guarantee such debt.
In addition, the Internal Revenue Service has ruled that an LLC will be treated as a partnership for tax purposes so long as it was formed in accordance with IRS regulations. The limited liability company is easily created by the filing of a document similar to articles of incorporation. It is governed in accordance with an Operating Agreement (similar to corporate by-laws). The Operating Agreement sets the rules for governing the company (such as the rules for meetings, if any) as well as the rights and responsibilities of the members for contributions to capital, who shall receive distributions, the amounts, who shall be allocated the various tax attributes of the company such as profits, losses, gains and credits, and under what circumstance the company will dissolve, among others. Again, the LLC is an excellent way to start a business.
For more information on patents, visit our Patent FAQ.
Before patents, the only way to protect an idea was to keep it secret. However, secrecy stifles innovation because scientists stop sharing ideas. To stimulate our country's pace of innovation, our forefathers devised the Patent system which lures new ideas out into the public so that others can learn from them. The Patent system promotes the free flow of technology and stimulates invention by giving inventors a monetary incentive to publish their ideas. The inventor gets a monopoly from the bargain and, in return, publishes the idea for the world to see. All printed patents go on file at the Patent Office, the largest public technology library in the world.
- There are different types of patents.
- Utility Patents. For any new and useful process (including software), machine, manufacture, compositions of matter, or any new and useful improvement of one of these can receive a utility patent.
35 U.S.C. 101 www.law.cornell.edu/uscode/35/101.html.
More detail on utility patents...
- Plant Patents. For any asexually reproduced and new variety of plant, including cultivated sports, mutants, hybrids, and newly found seedlings, other than tuber-propogated plant or a plant found in an uncultivated state.
35 U.S.C. 161 www.law.cornell.edu/uscode/35/161.html.
More detail on plant patents...
- Design Patents. For new, original, and ornamental designs for articles of manufacture. A Design patent can be obtained for a broad range of manufactured articles, including furniture, jewelry, clothing, industrial articles and even computer icons displayed on a computer screen.
35 U.S.C 171 www.law.cornell.edu/uscode/35/171.html.
More detail on design patents...
- General Patent Requirements
There are certain prerequisites to obtaining a patent.
- First, the invention described in the application must be sufficiently complete. Per the first paragraph of Section 112 of Title 35 of the United States Code, the invention is complete when it is possible to "describe it, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, to make and use the same".
- Second, the invention must be novel:
Even if you have created something different from the most nearly similar thing known, you cannot patent it if it would be an obvious difference to one skilled in the art. On the other hand, many minor improvements can be patented.
- The Inventor's Booby-trap. The Statutory Bar. 35 U.S.C. section 102(b) erects the following "statutory bar" to the filing of patent applications:
"no patent shall be granted on any application for an invention. . . which had been in public use or on sale in this country more than one year [prior to filing of the application]."
This "on sale" statutory bar can be triggered by numerous events, including a mere offer for sale or solicitation. The underlying policy is simple: the public already has access, and the government has nothing further to gain in return for the monopoly. Therefore, the patent option is foreclosed. Similar statutory bars exist in most other countries, and these are even more restrictive because they do not afford the one-year grace period as given in the U.S.
- Scope of Patent Protection
- The right to exclude others. Not the right to make, sell or use for one's self. Many people do not realize that one who makes his own patented device might still be infringing any more basic patents that came before his.
- The right to exclude others from using the claimed invention. The patent claims are key as they define the subject matter that is actually protected by the patent. In order for a device to infringe a patent, the device must embody every feature recited in any one claim. Therefore, a device will not infringe a patent unless at least one claim can be read substantially word-for-word onto the infringing device.
- Lifetime. Utility and plant patents give a monopoly term of twenty years from the application's filing date. Design patents last only fourteen years from issuance of the patent.
- Only National rights. A U.S. patent will protect against infringement by methods or devices made, used and/or sold by others in the U.S. Thus, for example, infringing devices made in a foreign country and imported or sold in the United States would still be considered an infringement. Otherwise, U.S. patents give only national patent rights and give no protection if the invention is copied and made, used or sold entirely outside the U.S. To prevent this, corresponding foreign patent applications must be obtained. Foreign applications must be filed within one (1) year of the U.S.A. filing date in order to claim priority based on the U.S. patent. Foreign patents are generally much more expensive to apply for, obtain and maintain than domestic ones.