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Intellectual property (IP) comprises valuable assets that can be surprisingly vulnerable, but you can ensure it is protected even in the event your business goes under. Separating liability is a good way to do this. Regarding your business’ IP, it is important to consider how you intend to own it. There are various ways to structure your business, and it is crucial to consider how your IP factors into this when separating your assets from liability. This article will explain how different business structures can help with separating liability regarding your IP assets, and the advantages and disadvantages of those structures.

Structuring Your Company

Certain types of company structures can provide better protection for your IP. Some structures to consider include:

Dual Company Structure

This involves setting up a holding company that owns 100% of the shares in a subsidiary operating company. The operating company or trading company enters into contractual arrangements with clients, suppliers and employees. The holding company can own the IP as well as holding any recently raised capital. This protects the assets if another party sues the trading company when it enters into any legal relationships. 

A dual company structure requires the incorporation of an additional company that is costlier. There are also some limited instances where the holding company may be responsible for an operating company’s action or inaction, such as fraud or other improper conduct, or if the companies are found not to be under separate management in the event of liquidation.

Trusts

A trust is a legal relationship where a trustee holds assets to benefit one or more other parties (referred to as the beneficiaries). A discretionary trust (otherwise known as a family trust) is a trust where the trustee can decide which beneficiaries benefit from the trust. Owning assets through a trust structure rather than in the beneficiaries’ own names offers some protection. This can also be more tax-efficient than owning shares personally.

When setting up a discretionary trust, you will need to appoint an individual or a corporate trustee. A corporate trustee will allow for additional protection. However, it requires the incorporation of an additional company. Trusts are generally recommended when distributing assets to beneficiaries, as trusts can hold IP. However, a dual company structure is generally more advantageous. Every business is different, so consider the structure that is best for your business.

Benefits of Separating IP From Your Operating Company

Protects Assets From Insolvency

The primary reason why you would want to use a holding company is to protect assets in the event of insolvency. These assets include IP. Placing IP under the ownership of a non-trading holding company limits liability by protecting it from claims by third parties, employees, clients, creditors, and suppliers. This is because the holding company is a separate entity from the trading company and means that assets owned by the holding company will not be affected by any issues that arise with the trading company.

Administrative Efficiency

Think of holding companies like a vault for all of your important assets. This type of structure will allow you to sell off or licence IP easily.

Security and Commercialisation

IP vested in a holding company can be used as security or sold more easily.

Minimising Tax

Delegating IP licence revenue between the company group can minimise tax.

Attracting Investment

A holding company structure looks better and more organised. For this reason, a sophisticated structure may lead to more investment opportunities.

Disadvantages

You should note that vesting all IP into a holding company comes with some disadvantages, specifically for patents. In the event that you successfully sue a third party for patent infringement, recovering damages may be difficult. This is because an operating company or subsidiary of a company group that is a licensee is non-exclusive. Therefore, only the holder, exclusive licensee or an assignee of rights would be able to claim damages for patent infringement.

Transferring Ownership/Licensing

Suppose you vest ownership of your IP in a separate entity (i.e. a holding company). In that case, you will need to licence the use of your IP to the operating company. This may seem unnecessary, but potential liabilities arise from incorporating and operating under this structure.

If one entity owns IP that another party is using, the owner is technically not using their IP. This potentially opens up for third parties to oppose or challenge your use and registration (if applicable). You can limit this risk by licensing your IP from the holding company to the trading company. This creates a legal connection between the two entities so that if a third party contests your use, you can demonstrate this legal relationship.

Intercompany IP Assignments

If you incorporate a new company, such as a holding company, that you intend to hold assets such as IP, you will need to undertake an intercompany assignment. This is to ensure that all the IP is properly held in the holding company.

An assignment is different from a licence as the previous owner will not be interested in the assets assigned to the new company. An IP professional can assist you in drafting an appropriate deed of IP assignment.

Key Takeaways

Keep in mind the different ways you or your business can own your IP. When structuring your company, it is important to consider putting your IP in a holding company so that it is less vulnerable. Additionally, If you vest your IP into a holding company, you will need to prepare licensing agreements with the related entity that intends to use it. If you need any assistance with separating liability regarding your IP assets, our experienced IP lawyers can assist. You can reach them on 1300 544 755 or by filling out the form on this page.

Frequently Asked Questions

Why is it important to separate liability with my business’ intellectual property?

Separating liability is important, as it protects your business’ valuable intellectual property in the event that your business is sued or goes out of business.

Which structures should my business consider to protect my intellectual property?

Two business structures to consider are establishing a dual company structure, or establishing a discretionary trust.

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