Holding companies separate their assets from operational liabilities. Holding companies typically exist for the purpose of owning and maintaining particular assets. This can be real estate, stocks, and other forms of proprietary information. Intellectual property is often used because it can be extremely valuable and carries very little risk. This is why putting intellectual property into its own company is a great idea. It can then be licensed or leased to clients, or another company, in order to protect that investment.
How an IP Holding Company Works?
Intellectual property holding companies are specifically designed for owning another’s intellectual property. It is always for the purpose of managing, selling, or licensing to third parties for the right to use said intellectual property. Assets typically placed places in an IP Holding Company include:
- Service marks
- Trade secrets
Benefits of an IP Holding Company
There are various benefits of holding IP assets. First off, they allow you new ways to generate revenue. Other benefits include reducing tax liability, and securing company financing. IP holding companies are also their own separate entity, which is why you can place assets into said company and have them protected from the liability of any other businesses.
IP holding companies are able to create efficient tax structures because the profits are taxed in their country of incorporation. Additionally, all of the costs associated with the royalty fees can be deducted from a trading company’s income tax base stated as operating costs. This is then the result of a tax structure that properly recognizes and accounts for the presence of critical intellectual property in a business.
Another one of the IP holding company Benefits is that it shields your assets from litigation should something happen to your operating company. If your business is sued, your intellectual property is still protected from creditor claims. This allows you to keep the intellectual property intact and continue to generate licensing revenues.
There are a few states in the United States that are intellectual property holding company friendly. Depending on where you set up your company, your royalty income is lightly taxed or not taxed at all. IP holding companies allow you to collect royalties while separating any chance of liability from your other entities.
Starting an IP Holding Company
Forming an IP holding company is similar to that of any other holding company. An IP Holding Company can initially be formed by selecting an existing business entity or forming an entirely new business entity. Then you can assign all of your business's IP to the subsidiary, and license it back to your operating company. The operating company will then have the legal right to use them in the business.
Following the formation of the new company, which will be known as the IP holding company, they will not engage in any business. They will also not assume any liability. The only action the IP holding company will take part in will be leasing or licensing the IP to the original operating company.
Steps to Start an IP Holding Company
After deciding to create an IP holding company there are a few steps that are similar to opening a standard holding company.
Type of Business Entity
Decide what type of business entity you want to use. This may be a corporation, LLC, or another entity type. This will depend on your management style, how you want to split financials, and how you wish to be taxed.
One of the main advantages of a holding company is choosing your taxation. You will have two choices, whether you wish it to be a separate taxable entity or a pass-through entity.
Holding companies can be formed in any state, and the holding company and its subsidiaries do not have to be formed in the same state. In making this decision it is important to remember that each company doing business in a state other than its formation state, will be required to qualify to do business in that foreign state.
The name of your new IP holding company must be unique, and not have certain words within it as stated by the state laws where the company was formed. You may also need to include certain words that indicate the entity type, such as LLC.
The choice of a Registered Agent is important. This is the person who will receive service of process and any official communications. You will be able to choose anyone who has a physical presence in the state of operations. This can be an employee, owner or lawyer, or a professional Registered Agent.
Where to Start an IP Holding Company
For a long time IP holding companies were set up by those looking to avoid taxation. Although this has been somewhat stopped to prevent tax avoidance, there are still countries in which many holding company owners choose to form in. This is typically to benefit from the laws of those countries. Common countries to form an IP holding company include:
- Hong Kong
- Bermuda, the Cayman Islands, BVI, and other British Overseas Territories and Crown Dependencies
Who IP Holding Companies are best for
If you own trademarks or other intellectual property and wish to keep it separate from your other ventures, then you may consider starting an IP holding company. If you only have a small business, you may consider simply forming an LLC which also offers limited liability protection.