In the eyes of the law, a properly formed and maintained limited liability business structure is a separate entity or “person” from its owners and employees[1]. This legal benefit allows for the limited liability of individuals who seek to invest, start up, or become a part of the business structure. Consequently, in the event the entity is sued, the personal assets of those who have a stake in the business are often protected from judgment creditors who have prevailed in a court of law, leaving only those assets wholly owned by the company subject to being taken.
A holding company is a prime example of a business organizational structure that may be used to shield investors and owners from personally incurring debts and liabilities as result from the operation of an entity. Holding companies can be defined as a corporation (C-Corp[2] or S-Corp[3]) or limited liability company (LLC) that exists for the sole purpose of owning and/or controlling another company that may also be a corporation or LLC. Holding companies also exist for the purpose of owning and maintaining particular assets of its subsidiary or sister company, such as real estate, stocks and other forms of proprietary information and/or possessions. Intellectual property holding companies are those specifically designed for owning another’s intellectual property – i.e. patents, copyrights, trademarks, service marks, trade secrets, etc. – for the purpose of managing, selling and/or licensing same to third parties for the right to exploit said intellectual property in a given or agreed upon manner.
To envision how an intellectual property holding company can shield intellectual property assets, imagine the following example: you’ve developed a valid and protectable trademark in conjunction with your business – let’s call it “Green Socks Delivery, LLC” – and have also copyrighted materials pursuant to your enterprise. As a result, you have decided to create a separate intellectual property holding company – called “Green Socks Intellectual Holdings, LLC” – to manage your trademarks and copyrights. You now utilize Green Socks Intellectual Holdings, LLC to license your trademark and copyrights to Green Socks Delivery, LLC, or any third party for that matter, which in turn pays licensing fees and/or royalties to Green Socks Intellectual Holdings, LLC. In the event Green Socks Delivery, LLC is sued, because you formed a holding company to serve as a separate entity from your business, the intellectual property will be protected under Green Socks Intellectual Holdings, LLC and should not be subject to Green Socks Delivery, LLC’s creditors.
This separation in business structure is also ideal for those business owners wishing to franchise based on the fact said owners can license their intellectual property thorough their holding company to a third party seeking to open the business in another state. Furthermore, in the event the owner wants to sell his business, he may still reap the benefits of owning intellectual property by continuing to license his trademark or copyrights to the person who bought the business or to any person or entity who wishes to solely use the intellectual property despite the fact there is no longer an actual business in place.
Historically, the most cited to factor for creating an intellectual property holding company was the favorable tax laws. While the tax advantages tax may no longer be in effect in some state jurisdictions, there are still a litany of other factors to consider when determining whether forming an intellectual property holding company is right for you. These factors include: (1) whether you need and/or desire to own an entirely separate business entity in order to manage and exploit your intellectual property; (2) whether you have the adequate resources or funds to own, start up, or run multiple entities; and (3) whether you have any intellectual property worthy of protection in the first place.
Given the relatively low cost required in order to form a business entity in the state of Florida[4], the formation of a holding company to manage and maintain one’s intellectual property is a step more business owners should look into pursuing. For questions regarding the incorporation process of a holding company or the level of protection afforded by same, do not hesitate to contact Heitner Legal, P.L.L.C.
[1] This legal theory does not apply to sole proprietorships or general partnerships.
[2] A C Corporation refers to any corporation that is taxed separately from is owners under United States federal income tax law.
[3] A S Corporation refers to any corporation that elects to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. Generally speaking, S corporations do not pay federal income taxes and the corporation’s income and/or losses are divided among and passed through the corporation’s shareholders who must report the income on their personal tax returns.
[4] Costs to form a corporation or limited liability company in Florida can be found at: https://www.incorporate.com/florida.html