Startup: Catalyst Frame Microscope Part2 - The Business of Running a Business

INCORPORATION and GOVERNMENT FILINGS

Now I had to setup all the legal and financial aspects of the business. First I started with setting up the LLC, because it protects your personal assets as long as you don't something deliberately bad and have the 'corporate veil pierced.' Also since it's a single member LLC it functions as a simple pass through tax entity, which makes taxes easier. Basically you don't need to file taxes separately for the company, the LLC income is part of your income, but for the most part you just need to file an additional form to describe your LLC income/expenses.

Overall, you'll need to file paperwork with the state and the city regarding this newly formed company, and look for any permits/more paperwork that need to be filed in particular for the business. In particular, get an EIN from the state which is a tax ID. The EIN is useful if you need to file a W-9 (basically anytime you perform over $600 worth of contract labor for someone) and don't want put down your social security number. In addition, a EIN is required if you're opening a business bank account.

INSURANCE

Then it was getting the business insurance, mainly for general liability and product liability. Make sure to read the fine print on that insurance, understand what's covered, and clarify what vague things can mean like what constitutes an 'event.' Otherwise you'll end up on the hook for a lot of money and been dumping money into a useless feel good insurance.

ACCOUNTING/BOOKKEEPING

Also something I should have been doing from the get go was using some accounting software like quickbooks. It's not really that bad, you mainly just classify the income and expenses under various categories. And a good way to get started is look at what categories the IRS need when you're filling your taxes.

• Income will include (sales, selling equipment/assets, etc)

• Current value of inventory

• Cost of goods from inventory (cost of purchases, labor costs, materials and supplies, and other costs to prepare for sales)

• Expenses (advertising, business travel, commissions, communication, contract labor, insurance payments, interest payments, legal and professional fees, meal and entertainment, office expenses, rental expenses, repairs and maintenance, supplies, taxes and licenses, utilities, other miscellaneous expenses)

• Equipment expenses are counted differently - basically you can deduct from your taxes a certain amount of the equipment expense over time depending on the equipment and current laws in effect

• Mileage expense on a personal vehicle

• Home office expenses.

Those are the main areas until you have employees, which comes with it's own bag of worms.

Also since cloud accounting is popular, keep in mind you can be required to keep your business books for up to 5-10 years, so make sure you have a way to export a spreadsheet backup unless you want to keep paying the subscription for years or risk having to dig all the information back up.

And if you work with an accountant, you are technically still liable for whatever your accountant writes down. Sure if they pulled some really sneaky stuff, it'll be the accountant on the hook. But if they're giving you something beyond what you can reasonably expect, you've been warned.

There we go all that fun stuff.

INTELLECTUAL PROPERTY

BUT WAIT! There's more fun stuff! Patents....

So unfortunately around that time there were a lot of high-profile cases of patent trolls targeting specifically smaller businesses that don't have the resources to defend a lawsuit thereby forcing a settlement. This along with the America Invents Act which changed the patent system to first to file got me worrying about needing to setup a patent for my microscope. Mainly if the microscope saw some level of success without a patent, a troll could patent out the design, and then sue me for patent infringement, even though I was the actual inventor. Open source is nice, but in a first to file system, the only sure-fire way to make it open source is to patent it and then give it away. Software/photos/music/etc are different, those fall under copyright and are automatically protected once it becomes public. That's why software can attach a little MIT or whatever license to it making it open source. Therefore I had to write a provisional patent for the microscope, and I figured spending the time to learn it won't be a waste regardless.

Luckily, the filling fee for a micro-entity is cheap like $100, but that's not where it gets expensive. It's A lot of work to write patent! Step one read this 650 page book on how to write a patent (http://a.co/gnhAKHJ). Honestly this part was pretty interesting. I never knew how the patent system worked, but now I have a general understanding. The main intellectual property types are utility patents, design patents, copyright, trademark, and trade secret. Utility patent is the one relevant for this microscope, and the patentability of a invention is determined by whether it's a patentable subject matter meaning the patent office covers it, novel so it's new, useful is some way, and non-obvious. Non-obvious is where it gets really difficult to determine, since it's basically asking could the average person in the industry have figured this out? If you're invention fails one of these requirements, it's not patentable and you've wasted a lot of time/money. For this microscope, I felt I had met all the criteria, since it falls under the patent office, useful, and involves very novel functional design elements that I haven't seen elsewhere so novel enough to be non-obvious which isn't the best but eh we'll give it a shot :)

Now step two, writing the patent. As you can see........... there's a lot of work. Basically the idea behind it is that you need to document not only how the invention works but how to 'produce' it as well. And this is an important point, because if someone finds a better way of producing the invention and you don't mention that possibility in the patent, they can patent that.

Overall, the whole idea of documenting all this information in a patent is to make it all public, but the inventor gets a limited-time monopoly on that invention which incentives them to share it. The patent also makes it easier to commercialize, because they don't need to worry about keeping it a secret. At the same time, once the patent expires, everyone else has all the information necessary to benefit from the invention.

Now a patent serves you as a company asset, and as an offensive tool rather than a defensive one. A patent gives you the ability to sue someone else for infringing on your patent. But if LargeCorporationX uses your invention, will you win if you're a garage inventor? Maybe and probably not. Even if you gave a lawyer a huge portion of the lawsuit earnings, the good ones actually capable of going toe to toe still might not take the job, because it can take so long that it's not worth it in the end. Unless this invention is absolutely game-changing and worth tons of money $$$$$$$$.

In addition, an offensive tool can act like a defensive one in the sense that it's a deterrent. Unfortunately, the same problems above apply here. Sure, a troll can't patent it out from underneath me, and then sue me, but they might just file a completely frivolous lawsuit and just like before bet on my inability to defend the lawsuit and settle. Although with a sound patent, you might go the distance or some other company might buy out the patent and protect you from the lawsuit to prevent it from falling into trolly hands like here. So it can function as a deterrent.

Either way, you're probably looking at a few weeks of work minimum or the average $15,000 fee for a patent. I choose the former.

Wrap-Up

(Legal Note: Not an exhaustive guide plus I'm not a lawyer or account, just sharing what I found out :)

And there you have it, after reading, researching, analyzing, calculating, drawing, reasoning, deciding, etc, the basic legal and financial aspects are finished. And of course there's ongoing maintenance like keeping up on changing laws, filing taxes, and whatever else needs to be done.

Next: Catalyst Frame Microscope Part 3: Marketing and Public Relations