WHY USE AN INTELLECTUAL PROPERTY HOLDING COMPANY PART 1

Why use an intellectual property holding company? To create a successful business you need two things: an idea, and execution. Often, the same person or entity is not qualified or doesn’t want to engage in the execution portion of running a business. Where there is a valuable idea – the intellectual property of the business – a founder can monetize that idea by allowing some other entity to execute the running of the business.

The IP holding company holds the right to monetize the successful idea of the business, while allowing some other entity to implement 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.

Scenarios for Using the Intellectual Property Holding Company

Now, this can come up in few ways. One scenario is when the founders create valuable IP with the intent of implementing it themselves. Another scenario is when the intellectual property is created solely for the purpose of letting other entities use it. A third is where a business intends to share the IP with several related entities, usually subsidiaries but it could also be with joint ventures (that is, where two businesses partner to implement an idea). All three are good business plans.

But notice that word “plan” in the phrase “business plan”. If a business intends to monetize its idea – the IP – often times it should plan well in advance to create an intellectual property holding company.

When to Use an Intellectual Property Holding Company?

Good question, glad you asked. I only recommend creating an IP holding company when the value of the IP is worth doing so. Lawyer answer, huh? It’s up to the client to decide, based on the factors I’ll discuss in a minute.

IP holding companies are separate, legitimate businesses, with all that entails. The administrative costs include accounting, enforcement of the IP rights, protecting the IP, taxes, licensing agreements with other entities and monitoring them, and so on.

Scenario #1: The Flailing Founders

Two buddies come up with an incredible idea: a social network and marketplace geared toward people who collect and trade teddy bears. A million dollar idea. The buddies are computer programmers, so they sit down and type out this great website with algorithms, video chats, the whole shebang. But they stink at business. Thinking they have a million dollar idea, they hire fifteen sales people, lease a sweet office space for $20k a month, and contract to purchase tens of thousands of dollars of promotional materials.

But because they stink at business, after six months they have to close shop. They owe rent, unpaid wages, taxes, and they haven’t paid for all the promo materials. In the inevitable bankruptcy, all the business assets are sold off, including this incredible teddy bear website / program.

They’ve lost the right to monetize their million dollar idea by not protecting it by putting the IP into a separate business where creditors to the “operating” portion of their business could not access it.

Scenario #2: Let Someone Else Do It

Two buddies come up with an incredible idea: a service that lets locals to a city or town network online, hosts in-person events, a “social media” type website, and a barter exchange for businesses. Because each “network” is local to an area, it would be cost-prohibitive for them to set up employees, locations, coordinate events, for each anticipated local “chapter”.

The two buddies create an intellectual property holding company that has the sole function of allowing people to “purchase” the use of the IP for their locality and implement the networking and such in each local area.

Some dude comes in from Nowheretown, USA and says, “that’s cool, I’d like to do that here in Nowheretown.” The holding company licenses access to the technology (including things like using the logo, the name of the service, and so on). The two buddies sit back, monitor and improve the technology, and collect licensing fees. If one local branch of the service goes out of business, that’s the local branch’s problem to solve, not the holding company.

Conclusion

The intellectual property holding company can be a good way to monetize valuable IP without the creators having to “run” the day to day business; and to protect the IP from creditors. In Part II I’ll talk more about setting up the IP holding company – what it looks like.

If you’re starting a new business in western North Carolina, call me at (312) 671-6453 or email me at palermo@palermolaw.com for guidance in getting it done.

Listen to my podcasts on business law here: BIZRADIO BUSINESS LAW PODCAST

Check out some related blog posts here: SET UP YOUR BUSINESS BEFORE YOU CALL ME? and Holding Company / Operating Company: Do You Need Both?

And here’s a link to my LinkedIn profile because SEO says to have outbound links: MY LINKEDIN PROFILE