Trademarks vs. LLC… 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 when it comes to a trademark vs LLC 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
The first two strategies, creating a legal foundation (i.e. LLC) and owning your brand (i.e. Trademark), are just two of the main strategies you need for complete legal protection.
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.
Trademark vs LLC – 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.
Starting Your Business on the Right Foot (legally of course!)
Whether you are starting an online business or buying a local food market, making sure you start things off on the right legal foot is incredibly important.
If you don't think that the legal stuff is important, then you should stop reading right now because I'm not going to be able to help you.
But if you want to make sure:
- Your business is set up correctly;
- Your personal assets are shielded from business debts;
- Your are tax efficient; AND,
- Your brand is protected from infringers…
Then we should talk. You are my type of entrepreneur.
But here is the problem that I see so many of you face on your entrepreneurial journey… you don't know where to start.
As a result, your approach to legal is, simply put, scatter-brained.
Sorry, but it's true.
I talk with so many entrepreneurs who are going about the legal stuff all wrong. They are wasting time and money on things that aren't important, while neglecting the things that ARE important.
Do you see the problem?
So Where Should You Start?
By default, most of you may think, an LLC is the most important first step. So you run off to your Secretary of State's office to file that LLC (well, you go to their website most likely). Perhaps you file the paperwork correctly, or more than likely you don't.
The bottom line is that you can check “formed LLC” off your to-do list and move on to the next thing you think you need to do legally.
Sticking with the theme of this post, you may be thinking about trademarks because you heard some goofy guy on Youtube talk about why they are important.
Or not, maybe you firmly believe that trademarks are only for the “big corporations.”
Before you decide where to start, I want to explain the differences between trademarks and LLCs and which I think you should do first.
Now, mind you, I am not the end-all-be-all. I'm just one person. If you ask 10 lawyers what they think, they will probably give you 10 different opinions. Some of them might agree with me, some probably won't. That's fine.
What you most need to understand is that every situation is different. If you were to sit down with me for a consultation and we talked about your situation, I might tell you something different than what I'm writing in this post.
This is Not Legal Advice
It's important for you to understand that this is not legal advice.
This is my opinion of what I think the most entrepreneurs should do if they are looking to build their business into a recognized brand. This applies regardless of whether you are just getting started or have been in operation for awhile but neglected all the legal stuff up to this point.
But, if the latter describes you, you should probably talk to somebody who can help bring you speed quickly.
Don't feel like reading? Here is my video on this topic.
So first let's review the differences between an LLC and a trademark.
More information on LLC's
An LLC is also know as a limited liability company in the United States. Simply put, an LLC is a legal entity that was designed to shield your personal assets from the debts of your business – hence the term “limited liability.”
In the past, I've recorded lots of videos on LLCs including:
- How to Legally Start a Business – 8 Steps
- You Should Start an LLC if… and
- How to Start an LLC in Three Simple Steps.
Although LLC's were created primarily to protect your personal assets from the debts and obligations of your business, there are many other benefits of operating your business as an LLC.
When you are earning sufficient revenue, you can elect to be taxed as an S-Corporation. Most people think an S-Corporation is a different type of legal entity, but this is not the case. The S-Corp is a special tax status that can save you tens of thousands of dollars in self-employment taxes if handled correctly.
How to Start an LLC?
An LLC is formed by filing Articles of Organization with the Secretary of State in the state where you are operating your business. Typically this will also be the state where you are a resident. Click here for more information on why you should NOT register your LLC in a state other than where you live.
When you file your Articles of Organization, you will have to pay a filing fee and may be required to follow some other legal formalities, including paying annual fees and filing regular reports. You will also need to apply for an EIN number, draft an operating agreement and, as of January 1, 2024, new entities must report their ownership interest to FinCEN.
If this seems like a lot, well it probably is. Here are some ways we can help you set up your LLC, depending on the level of help you need.
1. You can schedule a call with me to set up your LLC using this link.
2. You can set up your LLC using our preferred vendor by using this link (affiliate link).
3. I've created a DIY course that walks you through everything you need to do it on your own – click here.
In general, the LLC is a pretty flexible business entity for most small entrepreneurs who are just starting out.
Now let's talk about trademarks.
More about Trademarks
A trademark is a word, slogan or logo that identifies your business in the marketplace as separate and distinct from every other business that sells the same goods and services that you sell.
Most businesses, whether they like it or not, are using their own trademarks each and every day.
What's important for you to understand is that simply using your trademark is not enough to protect your brand (although it is necessary when it comes time to register your trademark).
To properly protect your trademarks, you must register them with the United States Patent and Trademark Office, a process that can take anywhere from 12-18 months and is deceptively confusing.
Once your trademark is registered, you will own the exclusive right to use that trademark in connection with the goods or services listed on your trademark certificate for as long as you maintain your registration.
Before addressing the main benefits of trademarks, I wanted to cover a few common misconceptions when it comes to protecting your trademarks.
Common Trademark Misconceptions
Here are a few trademark misconceptions or “myths” that you need to be aware of. Most of these are tied to the different ways that people believe they can claim ownership of their brand name. However, the only way to know that you truly own your brand name is to file a trademark at the FEDERAL level.
Misconception #1 – Domain Name Ownership does NOT mean you own the trademark rights
Just because you registered a web domain for a given name does NOT mean you own that name. In fact, ownership of a website for a trademark that is already registered could actually be a form of trademark infringement.
There is actually a Federal Law called the Anticybersquatting Consumer Protection Act (ACPA). Under this law, the owner of a trademark can sue an alleged cybersquatter in court and obtain a court order transferring the domain back to the rightful trademark owner. Money damages can also be ordered.
So the next time someone tells you that because you own the domain name you own the trademark, make sure you point them to this post!
Misconception #2 – The name of your LLC does not give you trademark rights
Like registering a web domain for a certain name, naming your LLC after the brand you are seeking to grow also does not provide you with any trademark rights in that name.
The standard for picking a name for your LLC is that it can't be identical to any other LLC name in the state where you are forming your LLC. On the other hand, when running a search of potential trademark names we are looking to see if any of the results are “likely to cause confusion” with your name. It's a much tougher standard.
So while you could pick the name “Jim's Diner” for your LLC, even if there was already a “Jim's Fancy Diner” in existence, the same would not fly in the trademark world.
Misconception #3 – Filing a DBA in your state does not give you ownership of your name
Just because you file a DBA in your state for a given name doesn't mean you own that name. The analysis here is similar to the situation with an LLC.
Misconception #4 – Filing a STATE trademark does not mean you own the name (outside of your state)
If you file a trademark at the state level, then your trademark protection extends to your state boundaries only. So if you are building a brand in your state, and have no interest in ever extending your business to other states, then a state trademark might work.
However, you must be aware that when you file a state trademark, you do not have any trademark protection outside of your state. In addition, you state level trademark could actually be preempted by a federal trademark that is the same or confusingly similar to your trademark.
Misconception #5 – Common law trademark rights are the same as a Federal Registration
As you may or may not know, trademark rights are tied to “use in commerce”. This means that if you are using your trademark “in commerce” (i.e. If you are using your trademark to sell products and services) then you have “common law” rights to that trademark.
However, common law rights are typically limited geographically, and because you are not registered in the Federal Database, you will have no way to monitor and enforce your intellectual property rights.
Without a registered trademark, there are limitations to what you lawfully own with regards to your business or brand name. By registering your trademarks at the Federal level, you will start to enjoy some concrete, legitimate legal rights to your brand name.
4 Main Benefits of Having a Trademark Registration
There are four main benefits of owning a registered trademark. Let's review them one at a time.
Trademark Benefit #1 – No Accidental Infringement
The first benefit to registering your trademark is you will know, with certainty, that you are not accidentally infringing on the intellectual property of another business.
What does this mean exactly?
If you have not registered your trademark at the Federal level, there is a good chance that you could be using a name you do not and cannot rightfully own. This puts you and your business at risk of legal action being taken against you. Trademark infringement is a serious matter. The sanctions for infringement, even if done accidentally, range from a forced rebrand to going out of business or even having to declare bankruptcy.
Before you choose a name, logo, or slogan for your brand, it is possible that you have conducted a search to make sure that name or slogan was available. Many people, before scheduling a call with me, have already taken this step and believe that their name is available to register.
But many more people conduct this search on their own and then start using their name with the mistaken belief that they are free to use the name they searched for. Whether their search was proper or not is not the issue (it is quite common for people who don't know what to look for to miss potentially problematic registrations). They then begin using their name without taking the additional step of registering their trademark with the USPTO.
This is a problem.
What happens is that somewhere along the line, you discover that the name you chose is problematic. This typically happens when you receive a cease and desist letter from the owner of a brand that DOES have a Federal registration.
In this case, your infringement was “accidental” in that you were not aware of that other registration because you never filed a trademark application with the USPTO. Doing so would have uncovered the problem so you could address it directly before it is too late.
A crucial step in the trademark application process is to perform a comprehensive search for names that are likely to cause confusion with your name. As a trademark lawyer, I am run these searches on almost a daily basis. These searches reveal other pending or already registered names that could cause you problems when you attempt to register your trademark.
In my opinion, it is better to identify potential problems early on in the life of your business so that you can pivot or rebrand on your terms.
The expensive and business crushing alternative is to discover a “trademark surprise” after your company has already begun building brand equity and sales with a loyal client base who knows you for a name that you must stop using.
What I just described is called accidental infringement. You thought you were clear to use your name, and once your brand gets big enough, a bigger brand who already has a trademark registration sends you a letter demanding that you shut down or rebrand. This is an expensive and serious problem to have.
Protection from being marked an accidental infringer and the risk associated with potential infringement makes this the number one benefit of registering your trademark.
Trademark Benefit #2 – Protecting Your Brand
The second major benefit of registering your trademarks is that you don't need to worry about somebody stealing your brand. This is because when you receive a Federal registration, you are putting all other potential businesses in the United States on notice that you own your brand name.
Believe it or not, having a Federal Registration is a serious deterrent to potential copycats and infringers.
You put in the work. You’ve made the investments in building your brand. Your brand is succeeding and you have grown to the point that the public, or at least your niche industry, has taken some notice of your name.
But if you fail to take the important step of filing a trademark application, then your brand is at risk.
Copycats are lurking, just trying to find a business that has built a name without protecting their intellectual property. Nothing stops them from filing their own application with the USPTO, giving them the theoretical rights to the brand awareness resulting from your creativity, effort, and investment.
I once had a potential client who told me, “they are profiting off of all my hard work and brand building”. (Ironically, he was referring to a registered trademark and he was the infringer! We didn't work together after that…) But this is the power of a trademark registration. You can be certain that all the work you put into building your brand will benefit YOUR brand and nobody else.
And if someone tries to piggy-back off your brand, you are able to enforce your trademark rights in a variety of ways legally.
But keep in mind, the USPTO is a “first to file” system. This means that the first person to file an application for a certain trademark will have priority over that name against any later filed applications, EVEN if the later filed application was first to use the trademark in commerce.
This is why it is vitally important to file your trademark application as soon as possible in the life of your business.
The only way to know that your brand identity is properly protected is to obtain a Federal registration.
Trademark Benefit #3 – Increase the Value of Your Business
The third main benefit of a trademark registration is that it will increase the value of your business.
As you are just starting out, you may have visions of selling your business one day. If that sounds like you, then a trademark registration can add tens of thousands of dollars or more of goodwill to that future sale.
When you are ready to sell your business, having official certificates issued and stamped by the USPTO proving that your trademarks are registered and protected is critically important. In conducting their due diligence, you can bet that the purchaser's lawyer is looking for a trademark registration.
If you don’t have your trademarks in order and the lawyer cannot check that box, that will be a HUGE red flag that shave money off the purchase price at best, or torpedo the transaction at worst.
Registering your trademarks is one of the cheapest and highest ROI investments you can make in your business.
Trademark Benefit #4 – Business Opportunities
Having a registered trademark opens up a lot of options to you in terms of growing revenue streams for your business. Whether you are interested in licensing your brand or starting a franchise, securing your intellectual property rights with a Federal trademark registration will greatly expand the choices available to you.
Unfortunately, common law rights just aren't going to cut it if you are starting a franchise.
So… LLC or Trademark?
To properly answer this question depends in large part on you and your personal situation.
It depends on your business goals. It depends on how important the name you've chosen is to you and what you're doing with your business. It depends on how risky of a business you are in. It depends on what state you live in.
It depends on whether your name is even capable of trademark protection.
Whether you prioritize your trademark or LLC first depends on many factors.
Here's my general advice. If you're just getting started and can only afford to do one… I would recommend you do the trademark first.
In most cases, apply for a trademark registration first
I think it's most important to protect your name first. In my opinion, the benefits of protecting your name far outweigh the benefits of starting an LLC early on in your business journey.
You don’t need LLC protection when you are just getting started because you don't have any clients or customers who will sue you. However, your name can be stolen at any point (or you could be building a brand as an accidental infringer), regardless of where you are in the business life cycle.
As we discussed earlier, it is critical that you figure this out as soon as possible so that you can rebrand on your terms (if this is necessary).
Registering your trademark first should be prioritized in most cases when you're just getting started. You can always assign that trademark to your LLC if and when you decide to form an LLC for your business.
Your name, on the other hand, is out there to lose if you don't act fast.
Consider forming an LLC and registering your trademark at the same time(ish)
Forming an LLC and registering your trademark at the same time will cost a little more upfront, but there are many benefits to doing so. You will have all your ducks in a row and can then focus on building your brand.
However, if money is tight and you live in California, New York or Massachusetts, then you may want to give this some though as forming LLC's in those states can be quite expensive.
When you form an LLC in conjunction with your trademark filing, you must handle this in the proper order. You will start by setting up the LLC in your state FIRST. Your LLC must be approved and formed BEFORE you file your trademark application or else your trademark application is void from the moment you hit submit – and the filing fees are non-refundable!
If you do not have paperwork verifying an LLC is formed and active, you cannot list the LLC as the owner of the trademark. That is a problem. So, make sure the LLC is in place before you apply for a trademark IF you can afford to do so.
There you have it. Those are my recommendations. If you can do both the LLC and trademark at the same time, do both. If you can’t, make registering your trademark a priority and set up your LLC later (and then assign the trademark to the LLC).
Instances when it makes sense to apply for an LLC first
The only situations where I would be more likely to recommend that you do the LLC first and hold off on the trademark is if you're doing business under your personal name or a generic name.
Alternatively, if you have a really descriptive name that isn't capable of trademark protection and which other people or businesses may also be using. (I must qualify this by saying that I don't think that's a great branding choice for your business. But, if your name isn't capable of trademark protection, then chances are forming your LLC first would be the smarter choice.
For more information on how to come up with a great brand name, listen to my podcast with branding expert Alexandra Watkins.
On the other hand, if you are like most people, you are using a brand name that you really like and want to protect. Additionally, you want to insure nobody else is using it. In these instances, doing the trademark first is the smarter choice.
Your brand (and your business name) is your identity, especially in an increasingly online world. If you don't have the legal right to that name, or if that name gets taken away from you, there is just too much risk to you and your business and too many bad things can happen. It can cost you a significant amount of money down the road.
If you have more questions about how to set up your trademark properly or mistakes that people make when they're setting up their LLC, be sure to click on the links!
