Incorporation

Should I Incorporate to protect my invention?

This article only touches on some of the details involved in incorporation. We would be pleased to meet with you at any time to discuss your inventions, products or business ideas. We are genuinely interested in and dedicated to helping you bring your product to the marketplace, and to protecting the rights to your product through patents or industrial design applications, as well as protecting your Trade Marks and copyright interests. Please call us if you have any questions.

Should I Incorporate to protect my invention?

We are often asked by our clients whether it is worthwhile for them to incorporate so their new company can hold the rights to their invention. We usually answer this question by presenting the two alternatives:

1. What would happen if the client holds the rights to the invention personally.

2. What would happen if a corporation holds the rights to the invention.

If you as the inventor personally own the invention and apply for a patent in your personal name, any revenue which comes to you through commercial exploitation of the invention or through selling your patent rights or licensing your patent rights to a manufacturer will be taxed personally. Any such revenue will be added to whatever personal income you are making at that time and you will pay tax to Revenue Canada on the total income which you earn in that year. Therefore, the tax paid on revenue generated through your invention and patent would not be the percentage of tax which you now pay on your annual income, but would rather be the percentage of tax which you will be paying on the additional extra income which you enjoy as a result of your invention. This percentage of tax on your income may therefore be substantially more than what you are now paying.

However, if you incorporate a new company and have this new company hold the rights to your invention, any income enjoyed as a result of the invention will be taxed to the company. The company's tax is not dependent on whatever income you may now be enjoying or may enjoy personally in the future or the tax which you pay on that income. Instead, the corporation will pay tax to Revenue Canada based on its net income: the gross revenue received by the company during its fiscal year less all proper deductible expenses or costs of doing business including depreciation on physical assets owned by the corporation. If you license the rights which you hold in your patent and trademark to a manufacturer, the manufacturer will pay any royalties or license fees to your corporation as a result of the use of your patent or the use of your Trade Marks. If you wish, this income can be retained by the corporation, and not paid out personally to yourself. The corporation can then use this income (after paying its corporate tax) to make various investments which the corporation would hold.

By having your personal corporation hold the patent and Trade Mark rights, you will also usually find that you have much more credibility with a manufacturer or potential manufacturer or distributor of your product. A manufacturer or distributor whom you may contact for the purpose of negotiating a distribution or manufacturing agreement will tend to approach you and your product much more differently when your patent and Trade Mark rights are held by a corporation controlled by you, rather than being controlled by you in your personal name.

If you have gone to the trouble of arranging a new company for yourself, the potential manufacturer or distributor usually will assume that you have a certain level of knowledge or expertise in these areas. This can only help you in your negotiations.

By incorporating a company to hold your patent and Trade Mark rights, this also enables you to attract investors. It is usually easier for an investor to agree to invest funds into your project if the investor is receiving some type of stock interest. If you have not incorporated a company, all you can offer is a "piece of the action" in the product or invention. This can be secured by a written agreement between you and the investor, but this type of arrangement can be awkward or cumbersome.

Instead, if you have incorporated a company, you can offer to sell the investor a certain percentage of the shares in your company which holds the rights to the invention and any Trade Marks which you plan to use in promoting the sale of the product. These shares can be "preferred shares" or "common shares." Within these two classes of preferred and common shares, you can organize your company with any number of classes or series of shares. The "classes or series" of shares would be different types of shares holding perhaps different voting rights, different rights with respect to dividends which may be payable on the shares, as well as determining whether the dividends would be payable each year as a fixed liability of the company or would be a liability which the company and its directors could decide upon each year in terms of payment or accrual of the dividend to a later year.

Having a corporation also enables you to invite your investors to become advisors or directors of your corporation. These people have expertise and knowledge in various areas and you can use this to your benefit and to the benefit of your company. Having these people active in your corporation will not only help you to pursue the marketing of your product, it will also help you to obtain financing or additional investment capital since any lender or investor prefers to become involved in a business or company which has experienced and knowledgeable people behind it.

If you should decide to sell your company but wish to retain ownership of the patent and Trade Mark rights, you can do this by holding the patent and Trade Mark rights in your own name and licensing the right to use these to your company. So if you sell your company, by retaining personal ownership of the patent and Trade Mark rights, these rights are kept by you and do not go to the new owner of the company. Or you could incorporate another company to own the patent and Trade Mark rights and have the first company (which you have now sold) pay royalties or license fees to the new company. Again, these royalties and license fees would be taxed in the hands of the new company as corporate income, rather than taxed as personal income.

By incorporating a new company you can also become involved in helping your children financially, through what is known as "estate planning." This enables you to organize the affairs of your corporation to benefit your children and to lessen the tax burden in the event of your death. By issuing shares in the corporation to your children, you effectively provide them with the benefit (during your lifetime) of being part owners of your company. By giving up some of the ownership of the company to your children, you can better plan for your future and the future of the company, rather than owning the company by yourself and giving the company to your children upon your death.

By incorporating a company, you can also take advantage of other tax saving measures such as deferred profit sharing plans which enable you to reduce the corporation's taxable income but not at the same time increasing your own personal taxable income. Paying yourself money as a dividend from the corporation can also be a preferential way of pulling money out of the corporation. Deferred profit sharing plans and payment of dividends can only be used if you have incorporated.

One area which is often overlooked is the licensing of your Trade Mark rights to a manufacturer. If you license the right to produce your product to a manufacturer, you must also make sure that you own the right to the Trade Mark or brand name which the manufacturer is using or plans to use. If the manufacturer wants to use its own selected name for the product, you should not allow the manufacturer to own the rights to that name. If, under your license agreement, the manufacturer loses its right to manufacturer your product (for example, failing to meet a minimum annual sales quota), then you can cancel the license agreement and give the manufacturing rights to another manufacturer. In that event, you must also make sure that the rights to use the Trade Marks which are associated with the product (i.e. brand-names, letters, numbers, combinations of words, letters, numbers, etc., including logos, slogans, jingles and graphic designs) are also canceled and transferred to the new manufacturer. If you are unable to do this because the original manufacturer still owns the Trade Marks, then you and the new manufacturer are at a huge disadvantage since the public knows your product by the original brand name, not by any new name which you may have to select. As far as the public is concerned, the product appears to be new because the Trade Mark names are new. This can cause you enormous loss. Again, the company which you incorporate can earn royalties and other income through licensing or allowing the use of its Trade Marks, rather than having this money paid to you personally.

How much does it typically cost for a patent?

Costs of securing patent protection in foreign countries can vary widely and can depend on the cost of translating your patent application into the foreign language, as well as the custom of the country in which you are attempting to obtain patent protection. Filing for patent protection in such countries as Japan and China can be particularly costly, primarily due to the difficulty of translating concepts or arguments.

How long does a patent last?

In Canada, the period of protection is initially five years and there is one renewal period for an additional five years.

What is the best way to take my product or idea to the market? Is it better to sell my product or idea to a marketing group or is it more profitable to take it to the market myself?

You can either manufacture and sell the product yourself or license it to a manufacturer who is already engaged in that field. Which is more profitable? That depends on your product and the method of distribution and marketing. We can help you assess the options in order to maximize your profits.

Where can I go to get help in marketing?

Many companies exist to help you market your invention and bring it to market. We have connections with numerous companies that specialize in marketing and could potentially be of assistance to you. Please contact us for more details.