When starting a new business, there are many things to consider. Among the most critical decisions is choosing the right legal structure. There are several different types of business structures, but two of the most common are LLCs and trademark registration. This article will compare and contrast these two types of business entity structures.
What is an LLC?
"LLC" stands for "limited liability company." It is a business structure that combines the pass-through taxation of a sole proprietorship or partnership with the limited liability of a corporation. In most states, individuals can form an LLC by filing the appropriate documents with the Secretary of State.
What is a Trademark?
A trademark is a word, phrase, or logo that identifies a product or service; however, a trade name is the company's official name.
Trademarks can be common law trademarks or federal trademarks.
Regarding trademark registration, make sure that your mark satisfies the federal trademark registration requirements for protection before preparing and filing your trademark application. You must respond to any office actions issued by the examiner who reviews your trademark application.
Keep in mind that there are legal defenses to trademark infringement, which you may want to pursue if someone files an opposition or brings suit against you.
LLC Business Name Vs. Trademark
The following are the difference between LLC and trademarks:
The life of an LLC is controlled by state law, which typically establishes a definite date of legal entity termination.
A trademark doesn't have a limited life span, but it does have a legal protection expiration date that arises when the mark is allowed to become "generic" over time.
Unlimited Number of Members
LLCs are flexible entities, meaning they can have unlimited members. Trademarks are also flexible entities and can be owned by individuals, corporations, or other marks.
When the profits of an LLC pass through to its members, they are taxed as ordinary income at higher personal rates (unless the LLC elects to be treated as a corporation, in which case profits are taxed at lower corporate rates). Because trademarks don't generate income directly, they are not subject to taxation.
Limited Liability for Members
When operating an LLC, members enjoy limited liability and legal protection, meaning they cannot be held responsible for the debts of the LLC. This means that creditors can't seize their personal assets to satisfy the LLC's debts. On the other hand, Trademark owners legal protection from personal liability and can be sued if their trademark is infringed.
The filing requirements for an LLC are relatively simple and can usually be handled by a lawyer or online service. The business entity registration requirements for trademarks are more complex and involve several different government agencies.
LLC members have fewer duties than trademark owners and will not be responsible for the actions of their co-owners or managers.
Flexibility in Distribution of Profits/Risk Allocation
An LLC's operating agreement can specify how profits are distributed among its members and how they should allocate the risk of loss. This flexibility is not available with trademarks.
Ease of Formation
The process of forming an LLC is relatively simple and can usually be completed in a few days, even for a single business owner. The trademark registration process can be lengthy and complex, involving multiple government agencies.
Business Name Protection
An LLC will receive priority over other businesses when applying for a business name.
Trademark registration comes on a first-come, first-served basis. Trademarks also can protect your business name from anyone using the same name.
Your trademarked name is similarly protected in the registration state as it is with an LLC business name.
Your federal trademark will be under federal registration by the United States Patent and Trademark Office, meaning no other business can ever use your name.
Tax Treatment of Losses/Profits
LLC members are allowed to deduct their losses from ordinary income. On the other hand, Trademark owners can not claim losses, and profits are generally treated as regular income.
Agreement Between Members
The agreements between LLC members can be tailored to meet their unique needs and are not required to comply with any specific legal provisions (although many states provide model operating agreements). Trademark owners will usually need to follow state law when creating an agreement for use of the mark in question.
Transfer of Ownership Interests
An LLC permits the free transfer of ownership interests between members. Trademark ownership is more restrictive and can be transferred only to a successor, who must obtain approval from the USPTO's Trademark Assignment Services Division.
Duration of Protection
The brand protection of an LLC is limited to the duration specified in its state law. The protection of a trademark is indefinite, so long as it is used in commerce and continues to meet the requirements for registration.
An LLC must regularly renew its state-level business registration to maintain its legal status. The renewal requirements for trademarks are more complex and can involve multiple government agencies.
An LLC's name must be approved by the state in which it is registered. Trademark names are not subject to any approval process, but they must be unique and not used by another business.
The main difference between an LLC and a trademark is that an LLC provides limited liability protection for its owners, while a trademark provides exclusive rights to use the mark in connection with certain goods or services.
Is It Better to Get an LLC Business Name or Trademark?
It depends on the specific needs and goals of your business. More information is available by seeking legal advice from a lawyer specializing in franchises or trademarks.
In conclusion, trademarks are more flexible than LLCs, meaning they can be better suited for certain businesses. LLCs are better for businesses that need more liability protection or have simple filing requirements. When deciding which option is best for you, it is important to consider the specific needs of your business.