Are you considering starting your own business? Congratulations.
The entrepreneurial bug has only just begun. There are many steps to complete before you begin making money.
One of the many important things to consider when starting a business is the structure and legal status of the company.
It’s because your chosen legal structure will impact how you run the business in the long run and affect how you’ll pay your taxes.
Another important thing to consider is the trademark, which can be synonymous with your business. Think of the apple shape with a bite taken out that American multinational tech company Apple uses as its logo or the golden arches of McDonald’s.
So, in this article, we’ll explore the ten tips for choosing a trademark vs. LLC for your business. But before we dive into those tips, let’s take a moment to understand what trademarks and LLCs are and their purposes.
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What Is a Trademark and What Is Its Purpose
A trademark is a word, group of words, phrase, sign, symbol, or logo identifying a product or service. Trademarks can be federal or common law trademarks.
Federal trademark protection gives the owner the exclusive right to use the registered trademark in connection with their goods and services throughout the US. The United States Patent and Trademark Office (USPTO) registers the trademarks.
Common law trademarks, on the other hand, are limited only to the geographic area where the mark is used. If another retailer begins to market the product or service bearing a registered trademark in a different state (or even nationwide, except the state where it was registered), there’s no trademark infringement.
Trademark owners can be legal entities, like an LLC, a corporation, or individuals. The best kind of trademark is the federal trademark.
Federal Trademark Application Requirements
Filing a federal trademark isn’t a simple process, but the protection it will provide your company or brand will be worth your effort and time. To register your trademark with the USPTO, you must fill out and submit its initial application form.
You may use the Trademark Electronic Application System (TEAS) for an online trademark filing service or submit a paper application. To ensure your trademark is available, conduct a trademark search.
The owner's name will be the business name if your business is a formal legal entity, such as an LLC. Similarly, an individual can own a trademark. You will also have to choose the type of mark for your trademark.
It could be a standard character format (for words, letters, numbers, or combinations of these characters), a sound mark (for example, a three-note chime) or a special character format (for trademarks with a design element).
Benefits and Limitations of Trademark Protection
Benefits of Trademarks Protection
Exclusive rights and responsibility for the mark regardless of goods or services offered
It makes it easy to obtain a license for an entity or investment
Opportunity to use the federal registration for foreign trademark filing
Builds good and trust
A legal presumption of ownership that fends would-be users
Limitations of Trademarks Protection
No alteration of trademark classes. The class you first choose determines the scope of protection for your trademark.
Difficulty with litigation issues (for example, you believe another entity infringed your trademark)
Renewal every ten years requires you to pay renewal fees for each class you hold. Failure to file renewal may result in the removal of trademarks from trade mark register.
The risk of being genericized is a process where buyers associate the brand of products with the product itself. For instance, Band-Aid has become synonymous with an adhesive bandage and Google for search engine.
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What is an LLC (Limited Liability Company), and What is Its Purpose
LLC is a business structure that combines the pass-through taxation of a sole proprietorship or partnership.
Pass-through taxation refers to businesses that do not pay taxes at the entity level but pass their income to the business owners. These owners pay personal income taxes for their share in that business.
When paying taxes, LLC’s business structure is the opposite of traditional corporations or C-corporations. In these two types of business, the company pays corporate taxes on the corporation’s income and then gets taxed on the owner level, such as through sales of stocks or distributions.
With LLC, business owners are not personally liable for the company’s liabilities or debts. The private assets of investors and owners of an LLC are also not at risk if the company fails.
LLCs take a little more effort to form, wherein members must file an operating agreement with their Secretary, articles of organization, and a filing fee.
Benefits and Limitations of an LLC
Benefits of an LLC
Flexible business structure with various trading options
LLC protects the assets of business owners, investors, and shareholders against litigation cases and business debts
Legal protection from the effects of other’s mistakes
Personal assets are protected
Lower corporate tax rates than income tax rates
The company is independent of its owners so that it can be passed on or sold
Limitations of an LLC
It may place a barrier on the amount of profit that can be retained
Company accounts are made public
Owners don’t have much control as sole traders do
You may need an accountant because accounts are more complicated to handle alone
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10 Tips for Choosing Between Trademark and LLC
1. Research and Planning
Trademarks and LLCs are important business tools that offer different protections and serve different purposes. Should you have to choose only one between the two or choose both but want to prioritize one over the other, do some research and plan.
If protecting your intellectual property (for example, brand or logo) is more important now, opt for a trademark. On the other hand, if protecting your personal assets in case of lawsuits and bankruptcies is more critical, then forming an LLC should be your priority.
Still, most authorities recommend getting an LLC first, then a trademark for the brand. That way, the LLC will own the trademark.
2. Seek Professional Advice
You can form an LLC, but seeking professional advice or hiring a company or team to assist you with the process is your best choice.
They can offer advice based on your circumstances and industry to assist you in discovering any potential concerns. They can even maintain meticulous records in case of an audit or lawsuit and handle all formation paperwork and procedural process.
3. Evaluate Long-Term Business Goals
Evaluating your long-term business goals can help you in many ways. For starters, it provides you with direction.
If one of your goals is to establish a relationship of trust with your customers and enhance the company’s goodwill, you can plan a course of action that gets you to such a destination and registering a trademark is one of your solutions.
Meanwhile, if one of your long-term business goals is to protect your or your investors’ personal liability, forming an LLC should be a priority. In fact, you can form an LLC before registering a trademark, so your LLC will be the trademark owner.
4. Consider the Potential Risks and Liabilities
Running a business involves risks. Some of these may destroy a business, and others may cause time-consuming and costly damage.
Thus, you should identify the potential risks and liabilities that threaten your operations. For instance, one potential risk of an LLC is that poor practices may lead to loss of liability shield.
The court may find grounds to pierce the veil of the LLC and attack personal assets if the company fails to maintain the separation of the members’ assets properly and the company’s business assets by having separate bank accounts. It can also happen if the business fails to comply with state regulations.
For trademark registration, one of its potential risks is that it is the weakest property rights compared to copyright or patent protection. Trademark doesn’t always protect the products, but only the marketing concepts.
5. Review Legal and Financial Implications
Whether your priority is registering a trademark or LLC, it is essential to review the legal and financial implications of the two.
By forming an LLC, for instance, your business will have a perpetual existence unless your articles of organization state differently. This legal implication means that owners may change without dissolving the company.
Meanwhile, protecting your intellectual property is vital for preserving market share and safeguarding brand reputation that will consequently have financial effects on the trademark owner.
6. Compare Costs and Fees
Comparing costs and fees allows the business owner or legal business entities to evaluate their decisions. It helps your business to be more logical and data-driven.
The USPTO sets the costs of registering a trademark, and the filing fees will depend on the number of trademarks you’re filing for. On the other hand, LLC filing fees range from $35 to $500, with an average cost of $132.
7. Review Branding and Intellectual Property Needs
When considering whether to opt for a trademark or form an LLC, you must review your brand and intellectual property needs.
Registering a trademark will offer you legal protection and prevent others from using the same marks, lessening the risk of brand confusion.
Forming a Limited Liability Company offers the owners and company legal protection. Both contribute to the business’s overall strategy and should be carefully considered, depending on one’s legal needs and specific branding.
8. Assess Tax Benefits and Requirements
Trademark registration does not provide direct tax benefits to the trademark owner because it focuses on intellectual property and brand protection. Yet, expenses relating to trademark registration may be deductible as a business expense.
On the other hand, as an LLC owner, you’ll get the simplified pass-through tax structure of a sole proprietorship and the limited liability protection of a corporation.
Consulting a tax professional to evaluate specific tax implications and requirements relating to trademarks and LLCs can make a difference.
Get in touch with us today to see how our accountants in Houston, tx can help.
9. Consider State-Specific Regulations
Consider the state-specific regulations between trademark and LLC. State laws may determine if the mark is already used and influence the trademark registration process.
For LLCs, every state has its own rules governing entities' dissolution, operation, and creation.
These rules comprise the annual reports, filing requirements, and ongoing compliance obligations. Thus, it’s essential to familiarize yourself with these laws to make informed regulations and safeguard your business’ rights and interests.
10. Review Personal and Business Preferences
Lastly, review your personal and business preferences when deciding whether to prioritize trademark registration or establish an LLC.
Reviewing personal preferences entails considering your level of involvement in business operations, risk tolerance, and long-term goals.
Evaluating business preferences involves assessing the need for legal protection, the potential expansion plan of the business entity, and your brand strategies.
By thoroughly reviewing your personal and business preferences, choosing the proper legal structure that best aligns with your objectives, values, and vision and ensures a solid foundation for your venture is easier.
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Importance of Professional Accounting Services for LLC and Trademark Registration
Professional accounting services are essential for LLC and trademark registration. Firstly, they ensure that LLC’s financial records comply with relevant regulations and are maintained accurately.
Their services are crucial for making informed business decisions and legal compliance. Additionally, accountants can assist in setting up proper accounting systems in the company, ensuring all financial reporting requirements are met, and offering valuable advice on tax planning.
Regarding trademark registration, accountants can guide you on the trademark's value and manage the related financial transactions. Accountants recognize that trademarks are assets of a business.
As such, they know how to capitalize fees directly associated with new trademark registration. In terms of selling or purchasing a trademark, an accountant can also guide you on its proper valuation by considering the factors influencing its market value.
Final Thoughts on Trademark and LLC
Trademarks are an excellent marketing and legal tool with wide-reaching benefits.
Choosing an LLC as a business structure also has advantages, especially separating your personal assets from the business and giving you a few options for paying taxes.
TL;DR: A trademark protects the intellectual property of an LLC, so unscrupulous competitors won’t use the registered brand designs. Conversely, an LLC shields its owners from lawsuits and bankruptcies, protecting them financially.
You may need both for your business to start an LLC.
Accounting is likely the most time-consuming part of an LLC. If you’re looking for a trustworthy team of accountants with the same enthusiasm for your business, check out Hall Accounting Company.
We provide accounting, taxation, and CFO services with a personal touch so that you can focus more on your business’s core activities.
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