A holding company is a parent corporation, limited liability company or limited partnership that owns enough voting stock in another company to control its policies and management.
A holding company exists for the sole purpose of controlling another company, which might also be a corporation, limited partnership or limited liability company, rather than for the purpose of producing its own goods or services. Holding companies also exist for the purpose of owning property such as real estate, patents, trademarks, stocks and other assets. If a business is 100% owned by a holding company, it is called a wholly owned subsidiary.
Mergers & Acquisitions
The Overlooked & Costly Holding Company
by Jean-Que M. Dar, Partner
Intellectual property holding companies have been historically created in states or foreign jurisdictions with favorable tax laws. They are also a commonly overlooked method of strategic innovation development during the formation of a new business or enterprise.
In the context of tax strategy, the use of intellectual property holding companies has come under scrutiny by several jurisdictions / states, including the state of New York. However, it still remains that intellectual property holding companies in such jurisdictions remain essential in such a high risk corporation states.
The American Bar Association list favorable tax states and foreign jurisdictions in their publication: Risky Business – Pitfalls of IP Holding Companies.
Below we identify why. Contact us today to form your holding company and click the below to innovate.
The Purpose of An Intellectual Property Holding Company
A holding company is a business corporation which can either be a corporation( C-Corp or S-Corp) or a limited liability company (LLC). The holding company is specifically designed to own and control another company that may also be a corporation or LLC. This includes owning and maintaining particular assets of its subsidiary or sister company, such as stocks, bonds, certificate deposits, real estate, homes, cars and other proprietary assets or possessions. The general notion of a holding company is to shield investors and owners from personally incurring debts and liabilities as a result of the operation of an entity.
A limited liability company is formed to act as a separate entity or “person” or “business” from its owners and employees; this is not applicable to businesses that operate as sole proprietors or general partnerships. This is known as a legal benefit to the owners and limits the liability of individuals who seek to invest, start up, or become a part of the business structure. Should the business corporation be subject to a civil suit for any issues, the assets (personal or business related) of those who have an entity-stake in the corporate venture are protected from a potential judgment from the prevailing party.
Only the assets owned by the corporate venture are subject to be taken as a result of judgment. Hence the strong primary prerequisite for the formation of an entity to be properly formed with the correct legal structure and corporate governing operating documents.
INTELLECTUAL PROPERTY HOLDING COMPANY
Intellectual property holding companies are those specifically designed to own and control the intellectual property of another entity – i.e. provisional patents, utility patents, design patents, all types of trademarks and copyrights, trade secrets and other forms of intellectual property. An Intellectual property holding company provides the owner the peace of mind and stability to form, manage, sell and license its property to second/third parties for the right to utilize and exploit the intellectual property in any given or agreed upon the manner in private circumstances or open public forums.
A plausible case scenario includes the following steps:
Bob invents a new gaming software called GAMERS UNITED. He calls IP Precise to properly develop the innovation.
IP Precise creates an entity called GAMERS UNITED LLC to own GAMERS UNITED and drafts the necessary documents to assure the entity fully owns the innovation.
IP Precise then forms an intellectual property holding company for GAMERS UNITED LLC called GAMERS UNITED IP LLC.
IP Precise Files a Patent Application owned by GAMERS UNITED IP LLC
IP Precise files a Trademark Application owned by GAMERS UNITED IP LLC
IP Precise files a Copyright Application owned by GAMERS UNITED IP LLC.
IP Precise then utilize GAMERS UNITED IP LLC to license the Patent, Trademark, and Copyright to GAMERS UNITED LLC and any other potential third parties that may be interested in either the whole of the intellectual property or a component of the intellectual property for the use and distribution.
As time goes on the company GAMERS UNITED LLC has a net value of $10,000 while the IP of GAMERS UNITED is worth more than the company itself with an estimated net value of US $300,000,000. If GAMERS UNITED LLC is sued (for example, an employee sexual harassment claim or personal injury slip and fall claim), the intellectual property will be protected under GAMERS UNITED IP LLC and is not subject to potential judgment or creditors of GAMERS UNITED LLC.
This may also be the case should Bob want to franchise GAMERS UNITED. Bob might also want to sell GAMERS UNITED LLC. Bob e may still reap the benefits of owning the intellectual property by continuing to license his patents, trademarks or copyrights to the new business owner or to any business (entity or person) who desires only to utilize and operate with the intellectual property even though there is no actual business in place.
We call this a multi-entity stacking. Multi-entity formation brings an owner to question several other factors in managing and operating these multiple entities which include the purpose for each entity and your ability to pay taxes for each entity. We should note some states have favorable intellectual property tax advantages for IP holding entities.