Business Owners: There may be a better way to protect your IP and increase business value

Small business owners and entrepreneurs invest significant capital – and undertake enormous risk – when starting or growing their business. For many, the investment they make in their intellectual property (IP) assets, from trademarks to patents – represents one of the company’s single biggest expenditures beyond the value of their time and experience. 

Protecting it is paramount to business success. 

There are all the traditional ways a business owner can preserve the value of his or her intellectual property, from filing trademark registrations to lawyering up in the event of infringement. But there’s a lesser-known option available to entrepreneurs and owners that may be of greater long-term value. 

One of those is smart entity structuring. A sophisticated entity structure helps a business owner plan for long-term growth at the startup phase. When it comes to IP assets, founders can form an IP holding company, referred to here as an “IPHC.” And they’re designed specifically for smart owners taking a long view. 

So how does an IPHC help small businesses?

There are five main benefits of holding intangible assets – trademarks, service marks, patents, copyrights, song rights, and more – in a separate entity. The IPHC stands alone as an independent entity, separate from the individual owners or an operating company. This enables limited liability, but also:

1) asset protection;

2) jurisdictional benefits;

3) centralized asset management;

4) tax efficiencies;

5) increased asset valuation. 

Let’s take a closer look at each of these benefits:

Asset Protection: Assets owned by the IP holding company are titled to that company and are separate from the business owner and the operating company. The assets then are insulated from claims by creditors of the operating company or the company’s owners. If an owner files for bankruptcy, an operating company is sued, or something else goes awry, the IP assets remain protected and asset value preserved.

Jurisdictional Benefits: Separate entities allow an owner to take advantage of the benefits offered by various jurisdictions by forming the holding company there, as they aren’t limited to where the operating company is headquartered. For instance, a holding company can be set up somewhere that offers ease of governance and tax benefits, such as Delaware, Wyoming, or Nevada, while the operating company can be located where the founder calls home. Jurisdictional requirements are broad and vary. Seek guidance when deciding upon where to incorporate your business, depending on the advantages to your unique business. 

Centralized Asset Management: The IPHC becomes the owner for all the business’ intellectual property—there is never any question as to who owns the IP. The IPHC then becomes responsible for all management of IP—here is no question of who is responsible of the maintenance filings or for tracking the status of each asset. This enables owners to focus on the growth of the business. And when it comes to an exit strategy, well-managed IP becomes a more attractive asset for eventual sale. 

Tax Efficiencies: In an IPHC, the IPHC licenses the use of the IP assets to the operating business’ owner. Depending on the state, income generated through the license is a royalty and tax exempt. Fees paid as royalties may allow the operating company to claim certain tax deductions. The key with this structure is to show economic substance and valid business purpose for the IPHC to ensure the company is able to legitimately maximize the tax efficiencies provided by this structure. Tax considerations are complex and a skilled tax advisor can help minimize risk and maximize reward.

Increased asset valuation: Licensing and royalty agreements provide real market value for otherwise intangible intellectual property assets that can be reflected on the operating company’s books. This is a significant benefit when an owner wants ito sell and is able to provide tangible value of IP on the bottom line.

IPHC’s offer huge benefits for owners – from startup through exit by– protecting your most value asset and increasing valuation by showing real worth in an intangible resource. But they can be complex and, if not properly managed, there can be tax risks, although often the upside is greater than the downside. Seek qualified counsel when you’re ready to explore whether an IPHC is the right choice for your business. 

About the Author:

Rachael M. Isaacson is an attorney providing representation in intellectual property matters, as well as counsel in the process of structuring new entities. She also counsels clients involved in business litigation and professional liability matters and offers general outside counsel services. From her previous in-house legal experience, Ms. Isaacson offers her clients an in-depth understanding from an in-house counsel’s perspective about balancing legal risk and business strategy and operations.

 

For more information on IPHCs, contact Rachael Isaacson at rachael@apb-law.com.

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BRADFORD, LTD

Bradford LTD specializes in IP protections and maximization for startups and small businesses. We also provide scaled legal services to our clients, including fractional legal counsel and value-based rates. From trademark, copyright and service mark protections to patent protection and outside inside counsel, we help position entrepreneurs and owners for long-term success.

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