You’ve had your eureka moment and it’s time to make a plan for how to share your idea with the world! Before taking the leap to start your own business, it’s essential to take a moment to decide how to move forward.
Every business and business owner is unique. While it may seem tempting to fill out the first do-it-yourself LLC form you see online, it may not be the best solution for your business. Your plan should suit your personal needs and goals, so take some time to assess what you will contribute to your business and what you would like to achieve. Remember to keep an open mind – you may be surprised by where your business idea takes you!
1. License Your Idea to Others
Many people picture opening a brick-and-mortar location when they think about starting a business. However, if you’ve created a new and innovative product, this option will allow you to profit from your idea without having to quit your day job. Licensing your product to others is a practical option if you aren’t thrilled about changing your current lifestyle to start a new business. Licensing is also a great choice if you are worried about conquering the logistics of bringing a product to market. Obtaining intellectual property protection for your idea is crucial if you plan on licensing it to others. One potential downside of this option is that the process of obtaining intellectual property protection may be costly. Here are two common methods for protecting your product:
Patent
Before filing any type of patent application, you should first search the United States Patent and Trademark Office (USPTO) database to ensure that your product is not covered by an existing patent. If your product is not already covered, you can file a provisional or non-provisional patent application. A provisional application holds your place in line so that you will have priority over anyone who applies for the same patent. You can look for investors, begin marketing, and continue to test and improve your product while your product is patent pending. A non-provisional application starts the formal patent examination process. Keep in mind that you must file a non-provisional application within one year of filing the provisional application. The USPTO offers resources for filing a patent on your own, including a searchable directory of patent attorneys who can help you through the patent application process.
Trade Secret
If your product is made with a secret recipe, formula, or algorithm, your product may qualify for intellectual property protection as a trade secret. Trade secrets are information that is protected without having to go through a formal registration process. However, this protection only lasts as long as you take reasonable steps to keep the trade secret…secret. Nondisclosure or confidentiality agreements are helpful tools for maintaining secrecy and may be used alongside a licensing agreement.
The American Bar Association offers this helpful resource on deciding whether patent or trade secret protection (or both) is appropriate for your product.
2. Turn Your Idea Into a (Lucrative) Hobby
Are you worried about not having enough free time or funding to get your new business off the ground? It may make sense to continue to grow your business as a side project while you keep a steady flow of capital coming in from your day job. Many successful companies, including Spanx, Craiglist, and Yankee Candle, started off as hobbies. Deciding to keep your business idea as a hobby for now doesn’t mean that it has to stay a hobby forever. You can always start a business later on when you feel more comfortable doing so.
It’s important to note the tax implications of turning your business idea into a hobby. Even if you are making a profit from your hobby, you can only deduct your hobby expenses to a net of zero. This differs from business expenses in that business deductions can be carried over into later tax years. However, if you are not spending large amounts of capital on your hobby, this may not be of concern.
3. Form a Business Entity
If you decide to create your own company, the first step is to form a business entity. The most common forms of business entities include sole proprietorships, partnerships, LLCs, and corporations.
Whether you intended to do it or not, you may have already formed a business entity. Partnerships and sole proprietorships are the default forms of business entities. This means that if you are operating a business for profit on your own, you’ve already formed a sole proprietorship. Sole proprietorships operate as if the owner and the business are one entity, so you don’t have to worry about filing any paperwork to create your one-man company. However, as with all other types of business entities, you need to register and trademark your business name to ensure that no one else starts another business under the same name.
If you’re operating a business for profit with at least one other person, you’ve formed a partnership. Your state provides default rules for partnerships that govern the rights and obligations of owners. If you want to change one of the default rules, you can modify it by creating a Partnership Agreement. You should note that not all default rules can be modified. Also, be aware that you are subject to personal liability as the owner of a sole proprietorship or partnership.
If you prefer to create a company that protects you from personal liability, consider forming a corporation or an LLC. To form a limited-liability business entity, you will need to refer to your Secretary of State’s website to determine the filing and operational requirements.
If you’re unsure of what path to take or confused about how to proceed, you may want to consult with an attorney. No matter how you decide to take the leap, bringing a business idea to life is an exciting and rewarding experience. Congratulations!
Sources:
https://ppubs.uspto.gov/pubwebapp/static/pages/landing.html
https://www.uspto.gov/patents/basics/using-legal-services/pro-se-assistance-program
https://oedci.uspto.gov/OEDCI/practitionerSearchEntry
https://www.americanbar.org/groups/intellectual_property_law/publications/landslide/2018-19/july-august/so-you-want-take-trade-secret-patent-fight/
https://www.therichest.com/hobbies/24-hobbies-that-turned-into-a-million-dollar-businesses/
https://www.sba.gov/business-guide/launch-your-business/choose-your-business-name#section-header-0