IP issues in structuring your business intangible rights like intellectual property (IP) can be difficult for businesses to come to grips with – but if a business can successfully do this, it can be a very important asset. It is critical to start thinking about this issue early on as the possible repercussions of, for example, not properly structuring the business can have expensive consequences further down the track. Indeed, structuring your business properly is vital in protecting your IP and optimising performance.
The typical structure
Prior to receiving legal or accounting advice, businesses commonly operate everything through one entity, be that an individual, trust or corporation, so the structure is:
This structure may have a number of issues, including:
- If the IP is owned by the operating entity (OE), it is exposed if the OE enters into insolvency.
- The OE is contracting directly with the customers – so if one of the customers was to sue it then the IP would be at risk.
- If the IP is valuable, and in a company, then if the IP is sold there may be no capital gains tax advantages.
- If the IP is transferred out of the OE, then this may give rise to tax.
More preferred structures
One way that some of the issues with the typical structure can be addressed is through the use of an IP holding entity. Here, the IP has been developed by the holding entity or assigned from the OE or another entity. Usually the IP holding entity licences the OE to use the IP, so the structure could be:
The advantages of these structures include:
- If the OE enters insolvency, the IP holding entity may not be insolvent and still own a – potentially valuable – asset.
- The IP is quarantined from directly dealing with customers, as the customers are still contracting or licensing directly with the OE rather than the IP owner. This is common in franchise and distribution models. This means that it is more likely to be protected if a customer sues the OE.
- There may be tax advantages in selling the IP from a holding company rather than an OE.
However, the way that IP is held and dealt with is usually tailored to suit each individual business – so it is important to seek both accounting and legal advice in order to find a structure that works best for you.