Wednesday, April 4, 2012

Should Inventor Incorporate?

Dear Rich: I'm an inventor of a process involving processed food. I expect the patent to be granted within a few months. My attorney told me to think about incorporating and transferring the patent to the corporation. What do you think? As a general rule, we think you should follow your attorney's advice unless your attorney is incompetent, or worse, your attorney is competent but favors unnecessary legal work that tends to drive up the bill (we guess that's a form of incompetence, too). The vast majority of attorneys don't fall into the latter two categories so you probably don't need to worry.
Questions to ask: But if you're concerned, you should ask why your attorney favors incorporation. If he or she can't explain why in a way that you can understand, then get a second opinion. There are really only three reasons to incorporate: (1) it may provide tax or other financial benefits, or (2) it limits your liability, or (3) the corporate governing structure makes it easier to obtain investment. If it's for reason one (taxes), ask about the benefits and make sure you understand the principal of pass-through taxation. If it's for reason two (liability), ask why an LLC (or insurance) won't provide similar benefits. If it's for reason three, ask why the incorporation needs to happen, now. Why not wait until the investment is imminent? To help you learn more, here's an article for inventors who incorporate.