Intellectual Property Holding Company: Why You Need One
Intellectual property (IP) assets include patents, copyrights, trademarks, and private data and methods. Depending on the nature of the business, these assets can often be some of the most valuable that a business holds. This is especially the case for various software, specialised product, and other innovative companies. Their IP is what sets them apart from their competitors and gives them that edge to be better than the rest.
IP is a very real asset type that can even be used as collateral when applying for loans, can be added to the balance sheet of the company as equity, and can help secure merger and acquisition deals. It therefore makes sense to protect these valuable assets in the best way possible.
This is where an Intellectual Property Holding Company comes in. In this article, we will explore what exactly an IP holding company is, how it works, and why you should consider using one for your business’ valuable IP.
Table of Contents:
- What Is an Intellectual Property Holding Company?
- How Does an Intellectual Property Holding Company Work?
- Why Do You Need an Intellectual Property Holding Company?
- Benefits of an Intellectual Property Holding Company
- Centralised Management Of IP
- Tax Efficiency
- Other Considerations
What Is an Intellectual Property Holding Company?
An IP holding company is a specially designed corporate entity whose only function is to manage and hold a business’ intellectual property. The IP holding company does not engage in its own day-to-day business activities and serves only as a legal entity for safe-housing intellectual property. The types of IP assets which can be held include patents, trademarks, copyrights, trade secrets, private data, etc.
The main purpose of an IP holding company is to separate a business’ intellectual property from its main operational branch. This provides an additional layer of protection for the valuable IP against legal claims and other risks.
IP holding companies are regularly used where there is a business group of connected yet distinct business entities that share managerial control as well as the use of the same IP. The IP holding company acts as a single entity which safeguards and licenses the use of the IP to the respective business entities.
How Does an Intellectual Property Holding Company Work?
When an affiliate company or business group sets up an IP holding company to hold and manage its intellectual property, it assigns the IP with a certain monetary value, or share interest in the intellectual property holding company. The holding company will provide the affiliate company or group of companies with a license to use the IP in question, and will collect royalties and/or fees in return. If done correctly, this type of exchange can be deemed a tax-free transaction.
The agreement between the operating company and the IP holding company will include terms under which the agreement would be severed. This serves to protect the intellectual property from creditors and legal issues. It is also possible for the IP holding company to license the use of the IP assets to other third parties in exchange for royalties, depending on its nature and objectives of the business.
In other words, the IP holding company is formed by the affiliate operating company but is seen as a separate legal entity. The affiliate company transfers its IP to the holding company, which is assigned a monetary/equity value based on the underlying value of the IP. This means that the IP holding company can issue shares or ownership like any other company based on the underlying value of the IP assets that it holds.
The IP holding company issues a license to use the IP in exchange for fees/royalties. IP holding companies can be formed as either corporations or Limited Liability Companies depending on the specific circumstances and objectives of the owners.
Why Do You Need an Intellectual Property Holding Company?
IP holding companies are an ideal way to safehouse sensitive and valuable intellectual property in a distinct and autonomous business entity. This creates a ring-fence around the intellectual property which prevents sinister actors from claiming access to it in the event of a legal battle or other issues that arises for a business.
IP holding companies are also essential with business groups, where different distinct units are using the same intellectual property. A business group is a group of legally autonomous companies under the same managerial control.
When important IP is shared among these distinct entities, it is extremely important for there to be clear and adequate licensing of IP rights between these connected entities for security, transparency, and clarity. It also provides a safe and easy way to license the use of IP to third parties in exchange for fees/royalties if the business so chooses.
While you can register a holding company and intellectual property by yourself, there are many times where it might make sense. Fielding Law recognizes the importance of getting an attorney, as it gives you a layer of protection and ensures that you are not exposed to to unnecessary risk.
Benefits of an Intellectual Property Holding Company
In addition to the aforementioned reasons for using an IP holding company, they offer the following benefits:
Centralised management of IP
One of the core benefits of using an IP company is that it enables the centralisation of the management of a company’s IP assets which leads to better organisation and effective licensing.
IP holding companies provide a layer of legal separation between operating entities and their intellectual property. This protects the valuable IP in the event of legal claims or insolvency of the operating companies.
Centralising the intellectual property of a business group into a single IP holding company facilitates the securitisation and monetisation of these assets. IP assets can be licensed out in return for fees.
The IP assets will also have their own distinct value which reflects in the valuation of the IP holding company. This effectively enables a company to add IP assets to its balance sheet in an efficient and transparent way.
IP holding companies can help to create more efficient tax structures. Profits related to the IP assets would be generated from the IP holding company itself, which can be incorporated in a tax-friendly offshore jurisdiction.
In addition, the royalty fee that the IP holding company collects from the operating company can be deducted as an expense for tax purposes.
When setting up an IP holding company, it is important to also take the following factors into account:
- Tax structure: The IP holding company should be incorporated in a tax efficient offshore jurisdiction for maximum benefit and an overall reduction of taxes for the business group.
- Type of Entity: When creating an IP holding company, you will need to decide upon the type of entity that best suits your needs. The most common choices are a limited liability company or a corporation. The choice will depend on factors related to your unique situation, and it is therefore best to directly consult with a professional who can guide you.
Intellectual property holding companies are extremely important entities for business groups or individual companies that hold valuable IP assets. They offer an effective way to protect, securitise, and organise IP assets. If your business has valuable IP that it needs to guard and use effectively, consider setting up an IP holding company in a favourable jurisdiction.
It is best to consult with an expert who can help you determine the type of entity, where to incorporate it, and how to structure the IP asset licensing agreements for the most effective use possible.