New business start-ups grew at a record pace in the wake of the COVID-19 pandemic. According to the U.S. Chamber of Commerce, new businesses grew in 2021 at a rate of 20 percent higher than pre-COVID—overall a 24.6 percent growth. In Connecticut, the vast majority of these were small businesses.
If you’re thinking of starting a small business—or you currently run one—there are many issues to consider from defining your business to products, to staffing, and so on. It’s a lot.
One area, though, that you should be considering is protecting yourself legally, and that means setting up the legal form of the business and then, where possible, ensuring that you’ve protected your intellectual property.
Since many people will be pouring their own capital into small businesses—as well as their creativity and sweat—you want to set up your company as an entity that will protect your personal assets. In legal terms, you are creating a “veil of protection” around your personal assets. Essentially you are defining what belongs to you versus assets of the company so that in the unfortunate event that you are sued, your personal assets are protected.
The type of entity you create is up to you, and it’s recommended that you talk with a lawyer and financial planner before establishing it. Two of the most recently used entities are corporations and limited liability corporations (LLCs). Both allow you to insulate yourself and your personal assets by creating a veil between your personal assets and the company.
The choice is largely based on how the business will be taxed. A Corporation is a separate entity that has its own filing rules and structures which can result in a so-called “pass-through” of corporate income and losses if there is a timely subchapter S election made. An LLC can also result in a “pass-through” of income and losses to the owners, known as members, and reported on their personal returns. For many small businesses today, LLCs tend to be the most popular because it’s easier for members to take money out of the company in the form of distributions. With a corporation, you have to take a “reasonable salary” before you take any distributions. An accountant or a tax attorney can help you create the best structure for your individual needs, but don’t put it off, particularly in industries where there is a high likelihood of a claim(s) ensuing.
Once you’ve formed the business, you want to protect what you’ve created, i.e., your intellectual property, as well. Such intangible assets include patents, trademarks, and copyrights. While you will have some common law rights to what you create, it’s usually advisable to protect yourself with statutory rights as well. For example, until you register your copyright, you can’t sue if someone violates it. (You could register after someone infringes, you lose the right to seek statutory damages and legal fees.)
Trademarks denote the source of the goods or the services. Think of the Nike swoosh, or the McDonald’s arches. You know immediately when you see those symbols who is providing the product. You apply for trademark protection with the US patent and trademark office (USPTO) by class of goods you’re marketing. For example, if you’re developing stationery items, you apply for a trademark in Class 16. There are other issues to consider, too, whether you should apply for such a registration on the Principal or Supplemental registers which is determined based on whether the trademark has secondary meaning. You’ll definitely want to get expert legal advice on this.
Copyrights cover original works of art. Obviously, this could be written material or drawings, but it can also cover things like computer software (a form of writing in itself), music, architecture, and other original designs. Copyrights are registered with the U.S. Copyright Office at the Library of Congress. It’s relatively inexpensive to file for a copyright.
There’s always a lot to think about with starting a business, but certainly these two areas are critical to protecting your creativity and hard work.
—Tedd S. Levine, Esq.