Trademarks vs. LLC’s… it’s an age old legal question. And whether you are just starting your business, or you have been operating for many years under a given trade name, if you are reading this post then you are probably debating the merits of whether you should form an LLC or apply for a trademark.
In this post, I will explain a number of the differences between trademarks and LLC’s, and I hope to shed some light on which you should form first and why.
My answer might just surprise you…
Let’s start with the fundamental question… what is the difference between a Trademark and an LLC?
Here’s the quick answer – when you register a trademark with the USPTO, you are claiming the legal rights to your business name or branding. You are protecting your business from competitors who may want to, intentionally or not, copy, mimic or outright steal your business name.
On the other hand, an LLC is a legal entity that affords you a number of tax incentives, shields your personal assets from business liabilities and protects your business assets from personal liabilities.
Let’s dig a bit deeper…
What is a Trademark Anyway?
A trademark can be a unique name, logo, slogan, symbol, smell, color or any other items that is associated with your business. Some of the things we recommend that our clients consider trademarking include business names, signature products, slogans, logos, podcast titles, Youtube channel names, and more.
Before we go any further in explaining what a trademark is, you should understand that the mere fact you are using a name in connection with your business means that you have “common law” rights to that trademark. So when we are referring to “trademarking a name”, what we are really referring to is the process of submitting an application for a Federal Trademark to the United States Patent and Trademark Office (USPTO) and obtaining a Federal Registration for your trademark.
Obtaining a Federal Registration, unlike having common law rights, means that you own the exclusive rights to use your trademark in connection with the goods or services you sell throughout the United States.
When you register your trademarks, you are receiving a special type of legal protection that forming an LLC or a DBA does not provide. While you can register your trademarks at the state or Federal level, state level trademarks limit your protection to the state where the trademark was filed while a Federal registration extends your trademark protection to all 50 states, i.e. national protection.
What is an LLC (aka Limited Liability Company)?
Also known as a Limited Liability Company, an LLC is a type of business structure or entity that offers personal liability protection to its owners. In addition, when you form an LLC, you can elect to be taxed in a number of ways that are not available to sole proprietors. LLC’s are one of the most popular business entities for online businesses because of their flexibility and how easy they are to maintain.
The owners of an LLC, if it is operated properly, receive limited liability protection. This means that they are not personally liable for the debts and obligations of the LLC. So if the LLC ever gets sued, or defaults on its obligations, then the creditor or plaintiff cannot come after the personal assets (i.e. house, car, investment accounts) of the owner.
Although each state has its own rules on what a creditor is entitled to if they successfully sue an LLC, their recourse is generally limited to receiving a charging order. This means that they are only able to receive money from the LLC if it were to distribute funds to the owner or owners. For more details on how a charging order works, we recommend you contact a lawyer.
In addition, another significant advantage of an LLC is how it is taxed. An LLC can choose to be taxed as a sole proprietorship, partnership, s-corporation or c-corporation. And if you choose one tax election but decide to change it in future years as the business changes, that is also a possibility.
Why are Trademarks Important for LLC’s (and vice versa)?
To have total legal protection for your business, you must employ a combination of legal strategies. In my LOCK it Down® (legal) Toolkit course, I teach four main strategies to protect your online business:
- Creating a Legal Foundation
- Protecting and Owning your Brand
- Creating rock-solid Contracts for your Relationships
- Keeping your Online Presence protected
Most businesses will form an LLC first, and then that LLC will own their trademarks. While this is not always necessary (or even appropriate), it is a common strategy.
A trademark provides brand protection for your LLC (or sole proprietorship). There are three main issues that can creep up if you fail to claim the legal rights to your brand by registering your trademarks with the USPTO.
The first problem is that you could be “accidentally infringing” on another brand without even knowing it. The first step of a proper trademark registration is to conduct a comprehensive search to make sure nobody else is using your brand. If you never take the time to register your brand then how will you know if you are infringing on someone else?
You won’t. And this can lead to problems later on.
When you are building a business, not only are you educating the public about who you are and what you do, you are building assets in the form of websites, blog posts, videos, podcasts, etc. that are all using your branding and business name. If you later discover (typically through a cease and desist letter) that someone else was previously using your name, then this can cost you tens of thousands of dollars in a potential rebrand for your business.
The second major problem that can arise if you do not register your trademarks is that another company could begin using a name or branding that is likely to cause confusion with your name or branding. They could do this intentionally to attempt to attract your customers, or inadvertently by chance. When you register your trademark, you can prevent this from happening to your business.
Finally, a trademark is a great way to build equity in your business. Have you ever considered selling your brand, licensing it to others or even seeking investors? These will all become much easier with a registered trademark and nearly impossible without one.
Trademarks vs. LLC’s – The Main Differences
There are five main differences between trademarks and LLC’s. And again, when we are talking about trademarks, I’m referring to a federally registered trademark, not asserting common law rights to your trademark, or even registering your trademark at the state level.
What Does a Trademark Protect vs What Does an LLC Protect?
Trademarks and LLC’s protect different components of your business. A trademark protects your branding, including your business or company name, logo, slogan, colors, scents (yes, you can trademark a fragrance), podcast names, Youtube channels, and more. An LLC provides you with limited liability protection so that your business creditors cannot go after your personal assets.
These are two very different types of legal protections.
What is the Difference in the Scope of Legal Protections offered by Trademarks vs. LLC’s?
When you register your trademark at the federal level, you acquire the exclusive right to use that trademark in connection with the goods and services listed on your trademark application in all 50 states. An LLC is formed at and protects you at the state level if you are sued.
Who issues Trademark Registrations vs. LLC’s?
Trademark registrations are issued by the USPTO, which is part of the Federal Government. When you file Articles of Organization to form an LLC, you do so at the state level, typically through the Secretary of State in the state where you live, work and operate your business.
How much does it cost to register a Trademark vs forming an LLC?
If you hire a lawyer to handle your trademark, you would be hard-pressed to get it done for less than $1,000. The filing fees alone for trademarks are $350 per class (if you have 2-3 classes then your fees just to file your application could exceed $1,000). This is more than the LLC filing fees for almost every state. Most filing fees for an LLC are around $100-150.
However, once registered, you must file renewal documents for your Trademark after 5 years, 10 years and then every 10 years thereafter.
Conversely, depending on the state where you file your LLC, you will have to file annual reports every year, every other year, or (if you are lucky), never. You will also have to hire a Registered Agent for your LLC and pay annual fees for that.
Total costs to set up a Trademark, first 5 years (2 classes) = $2,700
Total costs to set up an LLC, first 5 years (hiring a lawyer):
- Lawyer fee = $600
- Registered Agent fees = $795
- Filing Fees = $150
- Annual Fees = $500
- Total fees = $2,045
So when it comes down to it, the investment to register a trademark vs forming an LLC is not that much different in the long run. And the farther out you go, the more expensive an LLC looks in comparison to a trademark as a result of the annual maintenance fees that come with forming an LLC.
How long does it take to Register a Trademark vs Forming an LLC?
The trademark application process (i.e. the time it takes to register your trademark) can take anywhere from 12-18 months. Currently, as of Q3 2022, it is taking on average 8.2 months for the examining attorney to take the first action on a trademark application.
Conversely, setting up an LLC can be immediate in some states and up to 2-3 weeks in other states.
Additional Distinctions You Should Be Aware Of When Comparing Trademarks and LLC’s
We’ve already covered most of the differences between trademarks and LLC’s, but here are a few other distinctions you should be aware of:
- LLC’s are filed at the state level whereas Trademarks are registered with the U.S. Patent and Trademark Office and your protections cross state lines.
- The standard to register one trademark vs another is “likelihood of confusion”. LLC’s on the other hand can have similar names and still be distinctive. It is not unheard of for two LLC's in two different states to have an identical name.
- A Trademark is a valuable asset that can be licensed to others, purchased and sold, and will increase the overall value of your business. An LLC is just a business entity that separates you from your business.
- You can enforce your Trademark rights in Federal Court. LLC’s do not have any “rights” to protect.
- Trademarks are governed by Federal Law whereas LLC’s are a creature of State Law.
- Trademarks are used to protect consumers by identifying the source of the goods or services. The name of LLC’s are frequently unknown to the public and are hidden away in legal documents and contracts.
A Trademark protects your branding and your name. An LLC protects your personal assets.
Should You File Your LLC or Your Trademark First?
As with all things legal, there is no right answer here. Establishing both an LLC and a Trademark for your business should be a priority of all business owners and is the best way to legally protect your business.
However, in today’s internet age where more and more entrepreneurs are forming businesses online that span state and even international borders, having a recognizable brand that is distinct, sets you apart from your competitors, and is legally protected is of utmost importance.
For that reason, I personally believe that you should file a trademark application for your brand name as soon as you can afford to do so. Every day, week and month that goes by, new businesses are popping up that are filing trademark applications. And with every new application is one less name that is available for your business.
The USPTO is a “first to file” system, meaning that even if you have been using your name for years, anyone can jump in and file a trademark application – even if they are a brand new business. The fact that they filed before you will give them priority in the eyes of the attorney examining your trademark application.
So it is probably pretty clear that I believe that small business owners and online entrepreneurs everywhere should file their trademark application as soon as possible – even before you set up your LLC if necessary.
When you decide to form an LLC, you can assign your trademark to the LLC as the new trademark owner.
Not Legal Advice
The hiring of a trademark lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you free written information about our qualifications and experience.
This post does not constitute legal advice. It is for informational purposes only. If you are wondering whether you should form an LLC or apply for a Federal Trademark, feel free to contact trademark attorney James Hart.
If you are interested in registering your trademarks, click here to learn more about how Hawthorn Law can help you.