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We're often asked if it is worthwhile to incorporate so their new company can hold the rights to their invention. There are many advantages to incorporating, and we've discussed some of them here.
If you 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, 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 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 it 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 have now or 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, they will pay any royalties or license fees to your corporation as a result of the use of your patent or the use of your trademarks. 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 trademark rights, you will also find that you have more credibility with a potential manufacturer or distributor of your product. Those manufacturers and distributors will tend to approach you and your product much more differently when your patent and trademark rights are held by a corporation controlled by you.
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.
Incorporating a company to hold your patent and trademark rights, helps you attract investors. It is 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 trademarks 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 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 different voting rights, or dividends which may be payable on the shares. It also may determine 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. They may have expertise in various areas, and you can use this to your company's benefit. Having these people active in your corporation could not only help you to pursue the marketing of your product, it could 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 trademark rights, you can do this by holding the patent and trademark rights in your own name and licensing the right to use these to your company.
If you sell your company, by retaining personal ownership of the patent and trademark 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 trademark 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 allows 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 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. Deferred profit sharing plans enable you to reduce the corporation's taxable income, but don't increase your own personal taxable income. Paying yourself money as a dividend from the corporation can also be a smarter way of pulling money out of the corporation. Deferred profit sharing plans and payment of dividends can only be used if you have incorporated.