Legal / Startup Life

Legal Entities, Top Mistakes & Licensing Agreements

1. What is the difference between a sole proprietor and LLC?

A sole proprietor in the eyes of the law makes a person a business.  Any name you give the business is considered as you doing business as that name.  In the distant past the benefit of sole proprietorship over other forms is that business profit is taxed as your personal income; whereas, with a corporation, it is taxed as the corporation’s income and then pays out to you as the owner, who is then taxed again.  Sole proprietorships also do not require any paperwork.  You just start doing business, though you do need to file for an assumed name certificate if you are using another name than your own and will have to deal with appropriate sales tax issues, etc.  The major downside to a sole proprietorship is unlimited personal liability.  If your business has a contract dispute or a tort claim against it, you are liable and your personal assets are reachable.  When you have co-owners or business partners in a sole proprietorship, it becomes a partnership instead, which is an identical form, but more complicated and sometimes more regulated due to the additional owners.

An LLC or Limited Liability Company is a modern form that is almost always what you should choose over a sole proprietorship.  The main benefit is, as the name suggests, limited liability.  Unless someone is able to accomplish the extraordinary legal remedy of piercing the corporate veil, your personal assets are safe when the business is sued.  Only business assets can be seized in a lawsuit against an LLC.  At the same time, in an LLC you are able to have what is called “pass-through taxation”, where you have the single taxation of a sole proprietorship or partnership, as opposed to the double taxation of a corporation.  The paperwork for creating an LLC is usually limited, though you are free to create a constitution, membership agreement, etc. within it and file those documents if you would like.  The cost is also a few hundred dollars or less.  Most states also do not require yearly filings like they do with corporations.

2. What is the top mistake people make legally when it comes to business?

Operating a sole proprietorship when you can operate an LLC.  I harp on this often.  Do not put your personal assets at risk when you can run the business exactly as you do now and shield yourself with limited liability!  Also, please at least talk to an attorney before handling issues on your own.  It is not always necessary to hire an attorney, but when you are doing something that could create consequences or dealing with any type of administrative board, it makes it a lot easier to deal with later.  It costs a lot more to defend a client on a board appeal than to step in and solve it at that level.  It also costs a lot more to clean up a court mess it has already started.  Finally, when you are making a contract, business policy, or even taking an action like terminating someone or severing a partnership–it costs a lot less to invest in preventative review and counseling than to litigate afterward.  That all being said, you don’t need an attorney for everything and attorneys can be expensive–it is a matter of assessing your own tolerance for the risk that legal counsel can help eliminate.

3. How does one go about licensing vintage photography or music to use for your company?

There is no set process.  The first step is to find the rights holder to the intellectual property that you would like to license.  Once you have found them, you negotiate and use your license.  Sometimes it can be difficult to find the rights holder.  Also after a certain amount of time, intellectual property rights dissipate and the photographs and music become “public domain.”  That time period for copyrights is typically the life of the author plus fifty years.

Disclaimer:  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. Being general in nature, the information and materials provided may not apply to any specific factual and/or legal set of circumstances.  No attorney-client relationship is formed nor should any such relationship be implied. Nothing on this blog is intended to substitute for the advice of an attorney licensed in your jurisdiction. If you require legal advice, please consult with a competent attorney licensed to practice in your jurisdiction.


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