Introduction
Georgia and Loren have been working collaboratively for a significant period and with good results in terms of product development. Their use of limited resources and the intention of sharing their invention with potential customers necessitates their registration as an official organization. According to research, “registering a startup as a corporation lends more credibility to the business and provides more legal protection” (Cai & Doranz, 2019, p. 3). Therefore, the start-up must be registered as a corporate formation to obtain financial and legal stability and resource protection.
C-Corp
Definition
C-Corp is a type of corporate formation that entails the kind of ownership “where the firm pays corporate taxes as a separate entity and investors pay tax a second time on distributed profits” (Allen et al., 2022, p. 2). In other words, this type of corporate formation relates to taxation where the organization pays income tax, and after that, owners pay personal income taxes.
Pros
The advantages of a C-Corp include the appropriateness of such a formation for working with many shareholders. Indeed, there are no limitations on the number of shareholders applicable to C-Corps (Cai & Doranz, 2019). Thus, this type of corporate formation best applies to start-ups aiming at fast growth and high-level income.
Cons
The disadvantages of C-Corp are related to implied double taxation, which might be avoided when choosing a different formation type (Cai & Doranz, 2019). Moreover, when selecting a C-Corp, Georgia, and Loren might face difficulties with excessive expenses at the registering stage (Allen et al., 2022).
S-Corp
Definition
When defining S-Corp, one should state that it is a corporate formation with a taxation format that entails “pass-through taxation where shareholders file taxes annually and report their losses and profits individually” (Cai & Doranz, 2019, p. 3). It is mostly applicable to small start-up organizations with one class of stock.
Pros
The advantages of an S-Corp include the protection of the owners’ assets. Moreover, the pass-through taxation method might eliminate double taxation if the owners and shareholders are not the same people (Allen et al., 2022).
Cons
One of the most significant disadvantages of S-Corps is the limit on shareholders, the number of which cannot exceed 100 (Cai & Doranz, 2019). Moreover, the shareholders might not be corporations or partnerships.
Limited Liability Company (LLC)
Definition
LLC is a type of corporate formation characterized as a limited liability pass-through entity “with only a single tax assessment at the investor level” (Allen et al., 2022, p. 2).
Pros
The implied limited liability eliminates the risks of personal liabilities in terms of debts, and other excessive payments one of the main benefits of this type of formation. In addition, it is easy to register; LLC owners’ resources and performance are well-protected legally, and a pass-through taxation method minimizes tax expenditures (Allen et al., 2022).
Cons
As for the disadvantages of LLC, one might state that some states impose additional payment for registering as LLC. In addition, profit is regarded as the owners’ income, which might be a limitation in terms of taxation (Allen et al., 2022). However, this limitation is not an issue for Georgia and Loren since they are registering a small venture with two owners and limited resources.
General Partnership
Definition
A general partnership is a type of corporate formation in which the co-owners of a company share all the liabilities, assets, and profits on equal terms.
Pros
The benefits of such a formation include the ability to share both profits and financial risks of the firm between the co-owners (Allen et al., 2022).
Cons
According to Allen et al. (2022), general partnerships do not provide limited liability for the start-up. Therefore, this type of formation might not apply to Georgia and Loren’s case since they seek to protect their assets.
Recommended Corporate Formation for Georgia and Loren
Ultimately, given each reviewed formation’s presented pros and cons, one might suggest that LLC is the best way for the case start-up. It allows for enjoying the benefits of pass-through taxation while avoiding double taxation. Moreover, it provides limited liability protecting the personal assets of the owners. It implies an opportunity for growing into either C-Corp or S-Corp in the future, depending on the scale of business growth.
Proprietary Rights Protection Recommendations for Georgia and Loren
With the development of the new product and its introduction to many industries ranging from military to civil, both public and private, Georgia and Loren will need to protect their intellectual property. They might consider patents or trademarks as options for protecting their invention. A patent is an exclusive right to produce, sell, or decide on a product (Chirico et al., 2020). A trademark is a recognizable sign, image, or name that differentiates the newly invented product from others (Hellstrom, 2019). A patent allows for protecting the innovative solutions integrated into Phoebe; a trademark protects the use of the sign that represents the product and the start-up. Both intellectual property approaches allow inventors to protect their products from unlawful use by other parties (Baker et al., 2017). A patent protects intellectual property for twenty years, while a trademark lasts for ten years with the necessity of renewal (Baker et al., 2017). To acquire a trademark, a firm should be the first one to use it; a firm must use it for commerce and register following a conventional procedure. A company should collaborate with a patent attorney, document the invention process, and apply to register a patent.
References
Allen, E. J., Allen, J. C., Raghavan, S., & Solomon, D. H. (2022). On the tax efficiency of startup firms. Review of Accounting Studies, 1-42.
Baker, D., Jayadev, A., & Stiglitz, J. E. (2017). Innovation, intellectual property, and development: A better set of approaches for the 21st century.
Cai, J., & Doranz, B. (2019). Startup company formation and management. Academic Entrepreneurship for Medical and Health Scientists, 1(2), 1-9.
Chirico, F., Criaco, G., BaĂą, M., Naldi, L., Gomez-Mejia, L. R., & Kotlar, J. (2020). To patent or not to the patent: That is the question. Intellectual property protection in family firms. Entrepreneurship Theory and Practice, 44(2), 339-367.
Hellstrom, A., Nilsson, S., Andersson, M., & Hakanson, U. (2019). Intellectual property for generating value for start-up companies in key enabling technologies. Biotechnology Research and Innovation, 3(1), 80-90.