Copyrights

What is a Copyright and Why Do I Need One?

Copyright law protects original works of authorship fixed in "any tangible medium of expression". This means that any work of authorship - literary, musical, dramatic, choreographic, graphic, audiovisual, architectural, or sound recording - once it is memorialized in a sufficiently stable form, copyright protection exists. For example, if you are a songwriter and you came up with lyrics for a new song, copyright protection would attach at the moment you wrote the lyrics down on a piece of paper. Aside from being fixed in a tangible medium of expression, there are no formalities required to secure protection under the law; however, registration of your work provides you with additional rights, including the right to sue for infringement. For this reason, songwriters, producers, artists, film producers, writers, and other creatives should register all of their works with the United States Copyright Office.

In order for a work of authorship to meet the test of originality, it must be wholly original to the author and not a copy of another work.

Protected works of authorship include:

  1. literary works;
  2. musical works, including any accompanying words;
  3. dramatic works, including any accompanying music;
  4. pantomimes and choreographic works;
  5. pictorial, graphic, and sculptural works;
  6. motion pictures and other audiovisual works;
  7. sound recordings; and,
  8. architectural works.
Creators are encouraged to retain as much ownership of their copyrights as possible because the opportunity for residual royalties and extended earning potential is inherent in ownership of the copyright. Artists should obtain copyright protection for musical compositions, sound recordings, album artwork, compilations, motion pictures, scripts and any other original works created in the course of business. Once copyright protection attaches, the owner of the copyright has certain rights with regard to the work, to the exclusion of everyone else.

The owner of a valid copyright enjoys the following exclusive rights (as well as the right to authorize others to):

  1. reproduce the work in copies or phonorecords;
  2. prepare derivative works based upon the work;
  3. distribute copies or phonorecords of the work to the public by sale or other transfer of ownership, or by rental, lease, or lending;
  4. perform the work publicly, in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audio­ visual works;
  5. display the work publicly, in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work; and,
  6. perform the work publicly (in the case of sound recordings) by means of a digital audio transmission.

The Anatomy of a Song

Every song is made up of two copyrights - the copyright in the musical work and the copyright in the sound recordings. The musical work consists of a combination of harmony, melody, rhythm and any associated lyrics. The copyright in the musical work generally belongs to the songwriter or publisher. In some instances, a producer may own the copyright in whole or in part because they created the underlying music for the work. When we're talking about musical works, we are talking about the underlying musical composition and the publishing income that is associated with that. The majority of your publishing income today comes from public performance royalties, followed by synchronization income, and then mechanical royalties. Public performance royalties are generally paid out by your Performance Rights Organizations (PRO's) - ASCAP, BMI, and SESAC. All writers, producers and publishers should be affiliated with one of these (Contact us to purchase E-Book on music monetization). Synchronization income is paid by the various production companies and other entities that wish to use your music in synch with pictures or video. Music is such an integral part of television and film, it only makes sense that the synch licenses make up a big percent of publishing income. Mechanical royalties were once a huge source of publishing income for artists when CDs and tapes were a thing. The mechanical rate is the rate paid by the record label to the publisher, producer or songwriter for every mechanical copy of its work that was made. With music largely being played on digital platforms now, the application of mechanical royalty rates doesn't always apply, which doesn't translate into publishing income for the artist. Harry Fox Agency (HFA) is the organization that administers mechanical rights and collects mechanical royalties. Artists should register with HFA as well.

The sound recording is the work that results from the fixation of musical, spoken or other sounds. It is the actual recording of the musical work notwithstanding the material object in which it is embodied. The sound recording is the masters. The copyright in the sound recording generally belongs to the record label. Sometimes artists of a certain caliber may be the owner of their own masters. Sales of the master amount to record royalties for the artist...eventually. The record label collects the record sale income and distributes to artist based on his royalty share. Sound Exchange is the PRO created for artists to receive public performance of their sound recordings on a digital platform. Performing artists, producers, and labels should be registered with Sound Exchange.

Copyright Registration

Although copyright protection is automatic, registration of your copyright and deposit of your work with the United States Copyright Office (USCO) will afford you even more rights than the six (6) exclusive rights mentioned herein. Registration with the USCO also provides the following benefits:

  1. file suit for copyright infringement;
  2. provides prima facie evidence of validity of copyright (if filed prior to or within 5 years of publication);
  3. allows for plaintiff to sue for statutory damages if acts of infringement occurred after registration or within 3 months after publication of the work; and,
  4. allows copyright owner to make a record with customs and border control to prevent importation of counterfeit goods.
Registration can be done online or by mail. The application can be found on the USCO's website along with all of the most comprehensive and up to date information as it pertains to copyrights. General copyright information can be found at http://www.copyright.gov. The application fee for online applications is $55 and $85 for applications processed by mail. To save on costs, an album can be copyrighted as a collective work using one application and fee as opposed to registering each song as an individual single. To register a sound recording, use Form SR. To register a musical work, use form PA.

Copyright Cheatsheet

Trademark

Trademark Basics

Protect Your Brand

A trademark is a word, phrase, symbol or design, or a combination of words, phrases, symbols or designs ("Mark"), that identifies and distinguishes the source of goods and/or services of one party from those of others. As an artist, you may want to trademark your name, the design or symbol associated with your name, or a slogan associated with your name. As a business owner, you may want to trademark your business name, corresponding logo or the phrase associated with your product or service.

Selecting a Mark

  • To be eligible for a trademark, your mark must not conflict with any other trademarks in the industry in order to surpass the "likelihood of confusion" test used for trademarks.
  • If the same name as your corporate entity is chosen, it must not conflict with any other corporate names registered in your state.
  • If the mark is the name of your publishing company, it should not conflict with other publishing companies registered with any Performing Rights Organizations ("PRO's") so as to avoid loss of performance credits.
  • A thorough search of your proposed mark should be conducted prior to selection. One should search in telephone books, the Internet, trade publications, the United States Patent & Trademark Office ("USPTO"), PRO's, Secretary of State, trademark search organizations and other resources must be consulted prior to selecting a name. Well-known trademark search organizations are Thomson & Thomson and CCH CORSEARCH (www.corsearch.com).
  • In selecting an Artist's name for a mark, you should consult artist unions (AFTRA, AGVA) and Performing Rights Organizations (ASCAP, BMI, SESAC) to inquire about the desired names.
While federal registration is not required to protect a trademark, registration does offer notable benefits, namely:

  1. Provides public notice of claims of ownership;
  2. It creates certain presumptions of ownership, validates the trademark and grants the exclusive right to use the mark in connection with the associated goods or services; and,
  3. Registrants can sue in federal court for infringement and prevent importation of goods that bear an infringing mark.
Please refer to the USPTO website for trademark registration in general, as well as more information regarding fees, associated goods and/or services, and procedures. The website can be accessed at https://www.uspto.gov/trademark.

Overview of Registration Process

Trademark Registration Process

Applications can be filed online or by mail. There are three (3) different types of trademark applications you can file within the Trademark Electronic Application System (TEAS) - TEAS plus, TEAS reduced fee and TEAS regular. Current trademark filing fees with the USPTO are $225, $275, and $400 respectively. The TEAS plus and reduced fee are both filed online, with the TEAS plus having more stringent guidelines to abide by in order to qualify for registration via this method. The TEAS regular is filed by regular mail and allows for more leniency and open communication with the Trademark Examining Attorney once filed. Filing fees are non-refundable.

There are two filing bases for registration: registration that is based on actual use [1(a)] and one is based on intent to use [1(b)]. One of the requirements for registering a trademark is that the mark must be associated with goods and/or services used in commerce. This means that whatever mark you wish to trademark must currently be attached to some goods and/or services, otherwise you cannot obtain federal registration of your mark. Proof of actual use of the mark is required on the application. You can, however, file an Intent to Use (ITU) Application which grants you superior rights of your mark should someone else attempt to register it after you. Once you can show actual use, you may file a Statement of Use with the USPTO (for an additional fee) and after determining that all trademark requirements are met, they will issue a federally registered trademark.

Because trademark law is based in common law, you can assert your rights in your mark prior to gaining federal registration of it with the United States Patent & Trademark Office (USPTO). You can do so by placing a™ after your mark. You may not use the ® until you have received federal registration by the USPTO. The use of ™ is for notification purposes, not for protection purposes; it basically lets people know that you're using that mark in commerce; however, it doesn't ensure you have superior rights against someone else using an identical or confusingly similar mark, and therefore does not offer legal protections for your work.

Once your ITU application is filed, the USPTO will issue a serial number which is associated with your application for registration. Within three (3) to six (6) months, the Trademark Examining Attorneys will review the application and determine whether or not federal law permits registration. If there is no opposition, a Notice of Allowance is issued. This is not a registration. It indicates that a mark can be registered after an acceptable Statement of Use is filed. If, after the Trademark Examining Attorney, reviews your application and finds that all requirements have not been met, it will issue an Office Action, indicating the missing requirements or refusals. A response must be submitted within six (6) months addressing each refusal and requirement, however, it is best to send this response within one to two (1-2) months.

After six (6) months without a response, your application will be deemed abandoned. To cure an abandonment, you will have to file a revival petition within two (2) months of the abandonment date. If after your response to the Office Action, the USPTO still finds fault with your application, they will issue a Final Office Action. Again, you should respond within one to two (1-2) months, no later than six (6) months to avoid abandonment. If discrepancies are cleared, the Notice of Allowance is issued. If not you have the option to appeal to the Trademark Trial and Appeal Board (TTAB).

If you can show present use of the mark, evidenced by sales, advertising, promotions, etc. you can file a regular use based application ([1(a)] which will eliminate the need for further procedures and fees, but if you are more concerned with securing your rights in the mark and cannot yet show actual use, you should file an ITU application [1(b)] to secure your rights in the mark. If the mark complies with federal law, the USPTO will approve its publication of the mark in the Official Gazette. This gives notice to the public that the USPTO plans to issue registration of your mark and allows the public thirty (30) days to oppose its registration.

Marks can be registered on the Principal Register or the Supplemental Register. In order to qualify for registration under the Principal Register, a mark must be "arbitrary" or "fanciful" or inherently distinctive in some other way. An arbitrary mark is a word or term that has literal meaning and significance unrelated to the specific use of the mark or name, but is used to signify something totally unrelated to the product (e.g. Apple for computers, Camel for cigarettes). A fanciful mark is a combination of words, symbols, etc. that are used to signify only the goods or services for which they are associated (e.g. Google, Exxon, Kodak). An inherently distinctive mark is one that is by its very nature and definition, unique. Other marks capable of registration are registered, on the Supplemental Register (e.g. descriptive marks, common names), but they do not qualify for the Principal Register.

Primer on Trademark Infringement

Trademark infringement is covered under state law and federal law. State law covers trademark infringement under unfair competition statutes that penalize:

  1. passing off on the public the goods or business of one person as the goods and business of another;
  2. fraud, where the conduct of a business is conducted in such a manner where there is an express or implied misrepresentation; and,
  3. misappropriation in the absence of fraudulent intent.
Federal law (18 USC §2321) makes it a criminal offense to imitate, counterfeit, or infringe trademarks, and/or sell goods or services under such trademarks. Fraudulent or criminal intent is required to violate the statute. Civil penalties may be available as well. The Federal Anti-Dilution Act offers further protection for trademark owners who can show that similar marks used in commerce have undermined the positive association that consumers have with the trademark and owner of said trademark. To succeed in a dilution claim, the trademark owner must show that its mark is sufficiently "famous" in addition to "likelihood of confusion". Whether or not a mark is "famous" is determined by examining the following factors:

  1. distinctiveness of the mark;
  2. duration and extent of the mark in connection with goods and/or service;
  3. duration and extent of area in which mark is used;
  4. amount of advertising and publicity;
  5. channels of trade;
  6. whether the mark was registered on the Principal Register; and,
  7. degree of recognition of the mark in trading areas.
Where a trademark owner suspects infringement of its trademark by usage of the trademark in a domain name, they may find protection under:

  1. the Anti-Cybersquatting Consumer Protection Act (federal law);
  2. the Uniform Domain Name Dispute Resolution Policy (administrative proceeding adopted by ICANN); or,
  3. state law anti-cybersquatting statutes.
The sooner you trademark your mark, the better. It would suck to spend years creating and developing your brand and writing and performing all of your music under the same name for years, just for somebody else to come out and beat you to the [registration] punch. It's not easy to re-brand yourself once you've established a fan base of people who are used to knowing you by a certain name. And you certainly don't want to be confused with another artist - sending people to check for your music and they steady finding someone else. Don't be that artist.

The same applies for owners of businesses who offer products and/or services under a certain name or brand. Once you've worked to create a correlation in the eyes of the public between your product and/or service and a certain mark, it would be a shame to have to rebrand your business and rebuild that same trust and confidence you'd previously built with your consumers.

6 Reasons to Obtain a Federally Registered Trademark

Estate Planning

What are Some of the Estate Planning Tools Available to Me?

There are a variety of different estate planning tools available to fit any individual or family situation. These tools consider a number of factors, such as finances, medical history, disability, marriage, and personal preferences. Here is a breakdown of the most commonly used estate planning tools:

  • Will - every estate plan should include a will. It's a document that disposes of an individual's probate property at death and it may also appoint guardians for minor children.
  • Trust - a device that creates a special ownership relationship of certain properties between the trustee(s) and the beneficiary(ies). The trustee holds legal title of the property, with the duty and right to manage the property for the benefit of the beneficiary, who holds equitable title to the property, which is the economic interest in the property. There are many different types of trusts which all are used to produce a very specific result.
  • Living Will - every estate plan should include a living will. Living wills, also known as "advance medical directives", indicate the medical instructions and desires to be fulfilled in the event that an individual is unable to make them, due to some medical emergency, like a terminal illness or an irreversible coma.
  • Durable Power of Attorney for Healthcare (Healthcare Proxy) - this document appoints another individual as an agent to make healthcare decisions in the event the principal is unable to do so.
  • Durable Power of Attorney for Finances - document that designates a person to act on your behalf with regard to finances in the event of incapacitation. Document can also go into effect now, if you require assistance with handling your financial affairs

Business Succession Plans

Did you know that business succession planning is a part of estate planning? A business succession plan can be looked at like a retirement plan for entrepreneurs. You don't want to work until the day you die, but you also don't want your business to cease to exist simply because you no longer run it. This is where the business succession plan comes into play. It's a plan that determines who takes over the business and on what terms. This requires proper care, consideration and preparation, and should be planned for in the earlier stages of a business, rather than later.

Business succession plans have a number of benefits, including, but not limited to the following:

  1. Business owners agree upon a predetermined price for the value of their shares of the company, so it eliminates the need for performing a valuation of the company upon death since a fixed price was previously determined;
  2. Succession plans aid in the timely administration of an estate;
  3. Policy benefits are available immediately upon death so that the price for the deceased owner's share is covered, thereby preventing liquidation of remaining business assets to satisfy the cost of deceased owner's interest; and,
  4. Succession plans give the owner control over the outcome of the business, without which, laws, government and attorneys will inevitably make the determination.
Every entrepreneur should consult an attorney to assist them with making a smooth and equitable transition of their business interests.

Estate Plan Tools Download

Estate Plan Packages

Business Law

What is a Business Entity and Why Do I Need to Form One?

While it is possible to conduct business in your personal capacity, in most cases, it is strongly advised to create an entity, separate from yourself, when conducting business. One of the most important reasons to create a separate business entity is to protect yourself from personal liability for the acts of the business. For example, if your company becomes the subject of a personal injury claim and you did not create a separate entity for your business, the plaintiff can come after your personal assets as well as the assets of your business. However, if you created a business entity and properly maintained the distinction between yourself and your business entity, the plaintiff can be restricted to only the assets of the business. Another reason to create a business entity is to simplify management and governance of the business organization. A business that involves more than one owner means there will be ownership shares and rights particular to each person. It is much easier to have an organizational document that stipulates the rights and responsibilities of owners as opposed to having separate and complicated contracts to define the relationships between the parties. Also, entity formation is typically a requirement if your business intends to raise outside capital. The business entity facilitates this by pooling all the business assets and liabilities into the organization instead of dealing with the finances and claims of everyone involved. Lastly, business formation greatly increases your level of professionalism in dealing with the public; it bolsters confidence in your business so that your clients and customers can rely on the stability of your business.

The different types of business entities are sole proprietorship, partnerships, corporations, and limited liability companies.

Sole Proprietorship: This type of business form is the simplest form of business entity. It is run by a single individual for that individual's sole benefit. Sole proprietorships are not separate legal entities and do not exist apart from the owner. The owner is personally liable for all debts and claims of the business. Sole proprietorships are however considered separate entities for accounting purposes so that financial activities of the business must be separately maintained from the proprietor's personal finances unrelated to the business. Sole proprietorships terminate upon the owner's death.

Partnership: A partnership is formed when two or more people associate for the purpose of carrying on a business for a profit. Partnerships can be based on express, implied or oral agreements between the parties. Each partner contributes property, money, labor or skill to the partnership and shares equally in the profits and losses of the business, unless stipulated by agreement. Each partner is also personally liable, individually and severally, for the debts and liabilities of the business. Partners are taxed on their share of the business and profits are filed on their individual tax returns.

Corporations: Corporations are separate legal entities governed by state law. To create a corporation, Articles of Incorporation must be filed with the Secretary of State. Owners of a corporation (shareholders) are shielded from personal liability for corporate acts. The majority of corporations are Subchapter C Corporations (C-Corps), and they are subject to double taxation: corporate profits are taxed first and capital gains are taxed when shareholders receive their dividends. Subchapter S Corporations (S-Corps) are closely held corporations with a small number of owners. S-Corp status is obtained through the Internal Revenue Service (IRS) and where certain IRS requirements are met, these S-Corps are not subject to double taxation and are instead taxed like partnerships. Taxes on the corporate level are eliminated altogether and the individual owners report profits on their individual tax returns, thereby avoiding double taxation.

Limited Liability Company (LLC): Limited Liability Companies are a favored business form for small businesses. They contain qualities of a corporation and a partnership. The management and governance of LLC's has the same flexibility as a partnership, while maintaining the same limited personal liability as a corporation.

There are advantages and disadvantages to each business organization. The choice of business entity is shaped largely by how you intend to finance the business, the likelihood of major profits, and the number of people involved in the business. Other factors to consider are the flexibility of maintaining the business entity and taxation. Consultation with a tax professional is strongly advised.

What is a Fictitious Business Name Statement?

A DBA, "Doing Business As", is a fictitious business name filing, stating the name that the company operates under, when it is different from the legal name of the company. Some states require DBA filings because they are made in order to protect consumers who conduct business with the company. DBA's are common in sole proprietorships or partnerships, to provide a name for your business separate from your own. Some banks require DBA's in order to open and operate a business account. The procedures for filing a DBA vary among the jurisdictions, but it generally requires a visit to your local county clerk's office where you pay a registration fee. Some states require publication in a local paper for a certain period of time as well, to put the public on notice of your intent to do business under your selected business name.

Partnership Basics

A partnership is an association of two or more people carrying on a business for a profit. This is the easiest and cheapest legal entity to set up. Partnerships are created by default whenever two or more people go into business together without setting up a formal legal entity with the Secretary of State. They are created by express, oral or implied terms between the parties. Without a written agreement to the contrary, partners share equally in the management and control of the partnership. Each partner contributes property, time, skill, money or some contribution to the partnership. Partners also share equally in the gains and losses of the partnership, and they are jointly, severally and individually liable for the debts and liabilities of the partnership unless otherwise stipulated in writing. This means that a person suing a partnership, can go after one or more partners and also reach their personal assets outside of the partnership. This entity offers no protection from liability. The Partnership Agreement is the document that governs the partnership, distribution of assets, duties of the partners, and termination of the partnership. The main benefit of a partnership is that it offers pass through taxation whereby the partnership is not taxed and the partners are only taxed on their share of the business, so their profits are filed on their individual tax returns.

Types of Partnerships:

  1. General Partnership - previously described hereinabove.
  2. Limited Partnership - partnerships whereby the personal liability of certain individual partners (limited partner) is limited to the amount of their capital investment; limited partners generally do not have any rights to control or management of the partnership, which is how they maintain their limited liability; most states require filing of Certificate of Limited Partnership with SOS.
  3. Limited Liability Partnership - similar in all respects to a general partnership; shields partners from the negligence of another partner; used most commonly in law and accountant firms; ensures that a grieving client or patient cannot come after the professional's business partners for acts they did not commit.
  4. Limited Liability Limited Partnership - partnership whereby neither the general partners nor the limited partners have personal individual liability for the debts of the partnership during the time period of the LLLP election; most states require filing of Certificate of Limited Liability Limited Partnership with SOS; more costly to form than a Limited Partnership; fairly new entity and not commonly used.
  5. Joint Venture - association between two or more people for the purpose of making a profit, solely for a specified period of time or to carry out a specific goal or project; essentially a General Partnership that is limited in scope and/or duration.

How to Set Up an Entertainment Loan Out Company for Your Entertainment Services

Become acquainted with your state's Secretary of State ("SOS") website. It has a wealth of information to guide you in creating your corporate structure. Most states allow for you to form businesses online by filling out contact information and providing the applicable fee.

Do a name search just to be sure that your business name of choice is available in your state.

Locate the corporations tab on the relevant SOS website and follow the prompts to creating the corporate structure of your choice.

You must have a registered agent in the state of registration of the business. There are entities that provide this service for a yearly fee. If you are filing a business in the state in which you reside, you may be your own registered agent. The registered agent is the individual responsible for receipt of service of process for your business. All this means is that if you are sued and have to be personally served, someone has to be on file as a person authorized to receive summons on behalf of your business. Contact us if you need a registered agent in the state of Georgia.

Wait for confirmation from the SOS that your business entity has been formed.

Draft entity documentation (Operating Agreement for LLC, Bylaws for Corporation, Partnership Agreement for Partnerships, Joint Venture Agreement for Joint Ventures) Contact us for all of your drafting needs.

Apply to the Internal Revenue Service (IRS) for an Employer Identification Number (EIN). The application is fairly simple and straight forward and can be done online at www.irs.gov, or you can file a paper application (Form SS-4) and mail it in to the IRS. More information can be found on the IRS website. An EIN provides the business with an identification number for income tax purposes so that you do not have to use your social security number on financial documents related to your business. You will need this to set up a business bank account.

Open up a business banking account with an accredited financial institution (e.g. Bank of America, Wells Fargo, PNC, Suntrust, etc.). You will need a copy of your organizational documents (i.e. Operating Agreement, Articles of Organization, DBA certificate, etc.) indicating that you are a registered entity and describing people who will be authorized to transact with the bank on your company's behalf. Shop around to different banks to find out their account requirements and associated fees in order to ensure you select an account type that is best suited for your needs.

Manage all business-related operations through your loan out company. This means sign all contracts in the name of your business. Pay yourself a salary from your business account to your personal account - DO NOT just use your business bank account as your personal account. Your business bank account statement should only contain transactions related to your business!

Affiliate with SoundExchange and register all the songs in which you perform as a recording artist on them. Contact us to order our E-Books entitled "Monetize Your Music" and "Music Publishing" for more details.

Should You Incorporate?

Corporations are governed by state law. They are created by filing Articles of Incorporation with your Secretary of State ("SOS") and paying the associated fees. Depending on your state, additional documents may need to be filed with the SOS as well, so be sure to check your state's requirements to be in compliance. Generally, corporations are owned by its shareholders, governed by its Board of Directors and run by its officers. The Shareholder's Agreement is an internal document that governs the corporation and includes information regarding the purpose of the corporation, ownership shares, voting for new members officers and the Board, capital and contribution, allocation of profits and losses, roles and duties of officers, shareholders and the Board, and dissolution. In addition to the Shareholder's Agreement, the corporation must have employment agreements between the corporation and those employed by the corporation.

Corporations are required to maintain corporate formalities as required by the state of its establishment. There is a requisite number of Board members and roles to be held by the Board. Annual meetings of the shareholders must be held in strict compliance with notice and meeting procedures and protocols. Meeting minutes must be taken and kept on file at the principal place of business for a certain period of time. These are just some of the corporate formalities that are uniform across the states, but it is important that you inquire into what your state's corporate requirements are and to do all acts to maintain the separation between you as an individual and you as a business owner.

The main advantage of a corporation is that it offers limited liability to its owners, meaning that the shareholders are not individually responsible for the debts of the company. Where a corporation is sued, the plaintiff may only go after the debts of the corporation and cannot reach the assets of the individual owners of the corporation. Corporations undergo double taxation, meaning that taxes are paid once on the corporate level and again on the personal level when shareholders receive their dividends. Because there are so many corporate formalities (which may vary by state law), corporations are more expensive to set up and maintain. People usually set up their corporations in the state in which they reside or plan to do business, but there is a trend for larger companies to incorporate in Delaware or Nevada due to their low costs and minimal taxes.

Failure to maintain the separation between yourself and your entity will expose you to individual personal liability. Where a party can show that you created a corporation for the sole purpose of avoiding individual personal liability, the corporate veil can be pierced, and you will be subject to personal liability. In laymen's terms, if you create a business and run the business as an extension of yourself, and your business is sued, and the other party can prove that your business is really a sham - as you are just incurring debts and liabilities in the name of a company that does not really exist, then not only can that party come after all of the assets of your business, but it can come after you and all of your personal assets as well. If the business is sued, a grieving party only has rights to what the business has, so if your business has $48 of assets, that's all they're getting. But if the business is sued and corporate formalities were not maintained, and the corporate veil is pierced, a grieving party can come after you, your house, your car, your bank account, and your dog (lol, you get the point).

Types of Corporations

There are three (3) different types of corporations, and they are for profit corporations, non-profit corporations and closely held corporations. Profit Corporations are the ones previously described hereinabove, and they may or may not sell shares in an open market. Non-Profit Corporations typically run to further an ideal or goal and are less centered on making a profit. They usually serve the interests of the public interest. Some non-profits do engage in private sector activities. Closely Held Corporations are corporations with a limited number of shareholders. These are usually family owned business where the owners actually operate the business from day to day. There are limits on the number of shares of stock and strict rules against transferability.

Corporations can additionally be divided into two (2) categories: C-Corporations and S-Corporations. C-Corp's are the ones I've just previously described. The majority of corporations fall into this category. C-corps are subject to double taxation where funds are taxed first at the corporate level and again once dividends are distributed to its owners (shareholders). Then we have S-Corps. S-Corps are not registered with the SOS, instead they are filed with the Internal Revenue Service. S-Corp is a tax designation that can be granted to a corporation or limited liability company. If certain requirements are met, and S-Corp status is granted and maintained, corporations can avoid double taxation and be taxed the same manner as partnerships. The requirements of S-Corp status are:

  1. There must be 100 shareholders (owners) or less (closely held corporations);
  2. All shareholders must be individuals (no corporate entities, trusts, etc.);
  3. The corporation must be domestic (US citizenship for shareholders); and,
  4. The corporation is limited to one class of stock.
The benefits of an S-Corp include:

  • It creates credibility with potential consumers, investors, and employees by showing a commitment to the company;
  • The shareholders may be employees and receive tax-free distributions in relation to their ownership share;
  • The characterization of distributions as salary or dividend may save owners with employment taxes;
  • Federal taxes are not paid at corporate level. They are only paid once distributed to owners who then pay for their individual tax based on their share, which can also be offset by other income on shareholder's taxes; and,
  • Interests in an S-Corp are easily transferable without adverse tax consequences (e.g. change in property basis).
There are some drawbacks to S-Corp status, and they include:

  1. Since it is an IRS designation and the IRS doesn't play about granting benefits, this S-Corp status is under strict IRS scrutiny;
  2. You can lose S-Corp status if there are mistakes in filing, stock ownership, notification, consent, etc.
  3. There are some fees (not excessive, but some) associated with S-Corp including, registration of the corporation or LLC with SOS, annual report fees, state franchise fees, etc.