A holding company is designed to hold assets and conduct no other activities as a business. A holding company can hold a number of different assets which include shares, patents, trademarks and copyrights. The holding company is created in a number of ways but always with the same purpose, protecting assets. The Federal Reserve notes that a, “bank holding company may elect to be a financial holding company (FHC)” as laid out by the Bank Holding Company Act.
The UK-US Trade and Investment Working Group has produced a concise resource on intellectual property. In this document they state that the World Intellectual Property Organization (WIPO), defines “intellectual property” as “creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.” The US has established a number of types of intellectual property, “which include patents, trade marks, copyrights, and trade secrets.”
Each of these types of intellectual property provide a different function. Patents let the creator of an invention decide who is authorized to produce, use or market that invention. Trademarks facilitate their owners ability to communicate the origin of a product to consumers. Copyrights provide an owner the right to determine who is allowed to produce, perform, distribute and create derivatives based on their work. Trade secrets are vital information for a business’s operation that need to be protected through confidentiality.
Intellectual property holding companies provide owners of intellectual property a means of protecting their valuable assets. IP holding companies function exclusively to hold IP assets and lease these assets back to the companies who use them. This allows the IP asset to be protected from the operational liabilities of the companies who use the asset for their operations. IP assets are typically very low risk investments to own. The risk arises when the IP is attached to a company as the company has higher risk than the IP. That is why many companies use an IP Holding company to protect their assets.
The Purpose of an IP Holding Company
Companies which own valuable and essential IP will often use this IP in a number of business entities. A holding company can lease the IP to all the business entities which use it to operate. This prevents a scenario that is referred to as cross-contamination when subsidiary business entities alter the IP. A subsidiary can file an application for a patent or trademark on IP which they have altered. This undesirable situation can be avoided by a specific license that sets out the terms a company must meet to use the IP. There are many additional reasons for forming an IP holding company such as:
Asset Protection
As previously mentioned one of the main reasons for establishing an IP holding company is to protect IP assets. This protection extends to protecting the IP from competitors and any parties who wish to use the IP for economic gain. A holding company makes it more difficult for third parties to make a claim against the IP owner in a legal sense. Creditors of a subsidiary business entity will not be able to access the valuable IP assets the holding company owns. This protects companies from losing their IP if one of their subsidiaries falls into debt or bankruptcy. Additionally an IP Holding company can prevent legal adversaries from being able to access the IP assets.
Central Management
An IP holding company provides a business with the capability to centrally manage all of the IP assets which the business owns. This allows businesses to provide their IP assets the focus they require. This includes certain responsibilities such as auditing the asset regularly and creating circumstances for its use in subsidiary companies.
Tax Benefits
Creating an IP holding company in a favorable tax jurisdiction can allow business owners to generate more revenue. New Mexico is a very business friendly state with low tax for businesses. That is why it is a common choice for business owners looking to establish a business entity in a low tax jurisdiction. Cindy’s New Mexico LLC has prepared a detailed resource on IP Companies – this is worth reading.
Market Value Recognition
IP holding companies allow businesses to gain recognition for the market value of the IP assets which the business owns. This helps business owners as there is a frequent issue of businesses not correctly reflecting their IP assets on the financial statements. Through an IP holding company, business owners can create an arrangement in which their subsidiary companies lease the asset from the holding company for a certain rate. This process attaches value to IP which can then be accurately transcribed on a businesses balance sheet. This level of transparency around the value of an IP asset incentivises new funding and additional investment. Investors can see that an IP asset is generating tangible returns and will likely lead to growth.
Final Thoughts: IP is Worth Protecting
Every business which operates most likely owns at least one type of intellectual property and this is irrespective of whether the business protects their IP or not. In most cases larger companies who generate profit from their IP put the greatest level of time and effort into safeguarding their IP assets. Any business which owns IP can reap rewards from protecting their intellectual property.
When a business protects its IP it gains a number of advantages over the competition in a legal, commercial and financial sense. The ability to exclude anyone from being able to profit from a business’s IP is a helpful tool for a business. This can be used for gaining the upper hand in negotiating or expanding a business into markets which it had previously not targeted. Exclusivity around IP is a potential means of attracting new consumers to a business as the consumer has no alternative. IP can also be used as a driver of innovation in the business because of the manner in which it rewards innovative problem solving. An IP holding company is one of the best tools that any company or IP owner can have in their arsenal.
