DON’T SKIMP ON PROTECTING TRADEMARKS

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Ever heard that you don’t actually have to register a trademark?  Perhaps you believe you only have to “use” your trademark in business to have “a right to it.” That’s true to some extent – but beware!

Trademarks are obviously an important aspect of branding and marketing an business.  They are particularly important for start-ups.  One of the key things investors look for is whether a new company has properly secured its trademark rights.

Before investing in a business name, symbol, type of packaging, or any other distinctive representation of your business, it’s worth paying to conduct a trademark search.  The consequences of discovering too late that someone else is already using your idea are serious. Unauthorized use of a trademark can result in a lawsuit, meaning high legal fees, and the results can include destruction of all marketing materials and merchandise, and/or the requirement that a new market plan be initiated.

Recently, a Massachusetts company called Chocolate Therapy discovered this too late, and was forced to rebrand its entire business. The company ended up holding a contest to rename the store (with the winner getting a box of chocolates).

Consider investing in a federal trademark registration. Again, this isn’t absolutely necessary, but it provides significant advantages. It allows the trademark user to claim the trademark nationwide (as opposed to just in the places where business is conducted), and certainly provides a leg up in the event of a court dispute!

SALE OF BUSINESS INTEREST CAN TRIGGER TAX RESULT

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What triggers a “technical termination” of a business for tax purposes according to the IRS?

If more than 50% of the interests in a partnership or a multi-member LLC is transferred within a 12-month period, the entity technically ceases to exist under federal tax law. That’s true even if the business continues to operate as normal for all other intents and purposes.

A technical termination can occur even where partial sales occur in different calendar years. So if 25% of a business’s interests is transferred in September 2014 and another 25% are transferred in July 2015, this would still count as a sale of 50% of the business in a year.

A termination can also occur if a multi-member LLC becomes a single-member LLC – even if less than 50% is transferred. So if an LLC has two members, one with an 80% interest and one with a 20% interest, and the majority owner buys out the other owner, that’s still a termination according to the IRS.

This “technical termination rule” is not the end of the world for a business, but it’s something to be consider and address with proper paperwork. For example, a special tax return is due within a few months after the “termination” occurs. Recently, according to public IRS cases, one family business was hit with more than $12,000 in IRS penalties and interest because the family did not realize they needed to file their “special return.”

The partnership or LLC undergoing a transfer or sale must also make new federal tax elections and start over with new depreciation periods – which can significantly reduce tax write-offs. And if the business operates on a fiscal year, the owners might end up having to report more than 12 months’ worth of taxable income in the year the termination occurs.

So, the obvious lesson here is be sure to consult with your CPA before closing on a sale or transfer of a portion of your business.