Q: Hypothetical: Let’s say I manufacture a product, I can make a lot of them, and my margin is good, but I’m bringing in an investor because I need someone to help me with advertising. I also have a couple […]
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Structuring Your Business Entity

November 14, 2015

Q: Hypothetical: Let’s say I manufacture a product, I can make a lot of them, and my margin is good, but I’m bringing in an investor because I need someone to help me with advertising. I also have a couple of independent contractors (relatives) who are helping me out. But we’ve got this outsider who has some money, and he likes this product, and he wants to help me build this business. What business form and what other general concerns might you have for me, the primary owner of this business, (and inventor and manufacturer of this product), that I plans to sell nationwide?

A: There are quite a few issues embedded in the hypothetical, so let’s address some of them:  

In terms of formal entity, there is first the issue of whether you need to form an entity. With any really active business, really any business that is going to be selling products nationwide, you need a legal entity to provide some protection of the personal assets of the owners from the liabilities of the business.

It’s also important to have an entity so that the transactions by the business can be separated from personal transactions.

It’s also critical to have an entity so that the intellectual property that’s associated with the product or service is held by that entity and not just by an individual. That helps provide continuity because individuals can come and go, and it’s also very important for an investor.

An investor wants to know what he or she is investing in, and wants to know that their investment will represent a share, or a portion, of the business including the IP of the business. Consequently, it’s important to have an entity and for everyone who is either an employee of the entity or an independent contractor who is consulting for the entity assigned all of their work product to the entity so that it’s known clearly and there is a clear record that there is an entity which has all rights, including the intellectual property rights associated with the business.

 

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