Thursday, July 22, 2010

Risky Business? Sole Proprietorship Owns Trademark

Dear Rich: I am starting a small business but have not yet incorporated. I want to register a trademark for the business name as it is available but I eventually want the business to own the mark. I have heard there may be liability issues if the company is sued in the future if the trademark was originally registered by an individual (I.e., the individual may also be sued personally along with the corporation) even if ownership of the trademark is transferred to the business. Is it advisable to initially own the trademark as an individual? Typically, when a sole proprietor converts to a corporation, all debts and obligations of the business are assumed by the corporation and that shields the previous owner. Of course, that's a simple take and in reality someone who sues you can name everybody reasonably related to the problem and force them to prove they're not liable. There's no way to prevent being named in the lawsuit; what matters is the ease with which your attorney can personally extricate you.
Keep it Kool. Make sure that when you incorporate, that the corporation assumes all your sole proprietor debts and obligations, that the corporation is sufficiently capitalized, and that you abide by corporate rules. If you don't take corporate responsibilities seriously -- for example, you mix corporate and personal funds and don't keep records of meetings and shareholders -- a judge may strip away the asset protection feature of the corporation. It's called "piercing the veil."
And don't forget ... There are two other simple ways to avoid personal risk for trademarks. One is to buy insurance -- perhaps a wiser investment than incorporating. A typical Comprehensive General Liability Insurance (CGL) policy may provide the coverage you need. Many courts have held that the advertising injury provision included in many CGL policies covers trademark infringement claims. However, not all CGL policies provide such coverage. You should ask your insurance broker whether your policy provides this coverage. If your CGL policy doesn't cover infringement claims, you may be able to obtain such coverage by purchasing a rider to your policy. A second method of lowering your risk is to ... lower your risk. Don't begin using your trademark until you've engaged in a thorough searchFederal registration will also help lower risk by creating the presumption of trademark rights. 
LLC or corporation. By the way, before incorporating, consider an LLC. Your tax advisor can distinguish the benefits. Nolo -- insert FTC disclaimer -- our employer, offers assistance in forming both types of entities.