The logistics of setting up an IP holding company. To create a successful business you need two things: an idea, and execution. The IP holding company holds the right to monetize the successful idea of the business, while allowing some other entity to execute monetizing it. It also protects the valuable intellectual property from creditors in the event that the founding business is incapable of monetizing the idea and gets into trouble doing so.
Read Part I here: WHY USE AN INTELLECTUAL PROPERTY HOLDING COMPANY PART 1
What Are We Doing Here?
The main concept is that all of the valuable intellectual property of a business is held in a separate entity – a corporation or limited liability company. The entity which owns the IP has no other purpose than to own the IP and allow other entities to monetize its use. It’s called a “holding” company because it “holds” only one asset or a class of assets, and generally conducts no other business.
How Do We Do This?
It’s a pretty simple idea. Some person or persons, or some business, owns intellectual property. The IP can be a trademark (like a sports team logo); technology and patents (like a computer program or a design of a tool of some sort); a copyright (such as music, a book, a painting); or even a process or trade secret (a unique way to do something that can be legally protected).
Ownership of IP rights includes the right to exclusively control the use of the IP, either by the entity that owns it, or by letting some other entity use it. The right to monetize the IP can be passed around for others to use, and IP rights can be bought and sold.
In the scenario we’re talking about here, the holding company owns the intellectual property rights, and somehow lets other businesses use them to generate money. Some of that money is paid to the holding company for allowing the use of the IP. That’s it. That’s all the IP holding company does, and that’s how it makes money.
Pretty simple.
Let’s Set Up A Hypothetical IP Holding Company
You and your buddy invent a new garden tool that can dig up tree roots in five seconds and one push of a lever. It’s a great invention, and you guys get it patented. But neither of you have the experience or knowledge, or any money, to create a manufacturing plant from scratch to make the tool; set up a sales network to advertise and sell it to people; or set up a distribution network to get the tool in people’s hands.
So you and your buddy create a legal entity (for protection of the IP, tax and liability purposes mostly … beyond the scope) called “TreeTool Inc.” You also register the name “TreeTool” and a cool logo as trademarks with the U.S. Patent and Trademark Office.
The patent, name and logo are transferred to TreeTool Inc., a company owned by you and your buddy, after getting some good legal advice from me. That company, TreeTool Inc., now owns the patent, trademark and logo, and therefore the right to use that IP to manufacture and sell the product and thus collect revenue and profits.
But we already said you and your buddy don’t have the wherewithal to do that.
Along comes Ace Tool Manufacturing Inc., a business that makes, markets and distributes garden tools. After some negotiation, TreeTool Inc. and Ace Tool Manufacturing Inc. agree that TreeTool will let Ace Tool manufacture the tree removal tool, and sell it nationwide, using the patent, trademark and logo.
Ace Tool Manufacturing in return agrees to pay $4.00 per unit sold to TreeTool. That’s it. That’s how a holding company works.
Hendersonville and WNC
Is It Really That Simple?
Sort of. Generally it is said that the IP holding company owns *and manages* the use of the intellectual property. So the holding company will need a mechanism to monitor the authorized use of the IP, such as having someone keep an eye on Ace Tool to make sure the manufactured tool conforms to standard.
It will need a way to collect the revenue from licensing the IP, which involves accounting and auditing the user of the IP. And last, it will need to somehow protect the IP from infringement by unauthorized users (although this can be delegated to the user of the IP – complicated stuff).
Are There Other Ways to Use an IP Holding Company?
Yes, but I wanted to just give the basic idea here. The concept, as discussed in my prior blog post, is that valuable IP can be placed in its own little protective nest, to be shared with others. However you can imagine sharing it is how many ways an IP holding company can be used.
Did You Use an AI to Write This Great Post on IP?
No. I sat at my kitchen table and typed it out based on my 30+ years of practice as a business lawyer. If you want this kind of help for your business, contact me at (312) 671-6453 or better yet palermo@palermolaw.com to talk about how we can work together to make your business profitable.
Listen to my podcasts on business law here: BIZRADIO BUSINESS LAW PODCAST
Be sure to check out some other blog posts I’ve written on business law topics, such as Asset Protection Through Use of a Holding Company – Cost