A holding company is created to hold something, and it’s a business decision that depends on your preferences.
In the Intellectual Property world, these companies (LLC or Corporation) own patents, trademarks, and copyrights. The holding company owns legal monopoly rights. A third party pays the holding company for the rights to practice those monopolies, or the third party can buy the assets outright.
Holding Company Advantages
- Asset Protection: If your operating company is commercializing the rights of the IP and is sued for infringement, the IP is held safely by your holding company. To own the IP is not an infringement. Likewise, if a defective product suit is the alleged reason for a lawsuit, the owner of the IP is not typically a party to the negligence claim. Additionally, the holding company’s assets are shielded from the operating company’s creditors.
- Centralized Licensing: If your holding company owns multiple intellectual properties licensed with third parties, it collects all milestones and royalties in one place. This can reduce the paperwork for licensors/licensees.
- Succession and Sale: Most of the time, it is easier to sell one or more intellectual properties when they are owned by a holding company. Without a clear title, most sales never occur; having the holding company as the sole owner is one of the easiest ways to maintain that clear title. The same principle works when the holding company itself is acquired.
- Tax Efficiency: I am not a tax attorney, but according to my understanding, in select jurisdictions, a holding company can provide tax advantages.
Holding Company Disadvantages
- Maintaining the Corporate Veil: This must be done or the advantages, such as shielding from personal liability, are lost. You need clear and distinct business operations and documents for each company. Separate officers or managing members must sign for the company and not for themselves. Not doing so can cause massive heartache.
- Administrative Overhead: There are more books and more government filings. You are now managing two sets of books, two sets of tax filings, and formal “inter-company” licensing agreements.
- Government Fees & Forms: Corporations and LLCs are a matter of state law. Each state has its annual fees, forms, and taxes; some states are much more expensive than others. For example, Delaware requires the use of Delaware law firms or organizations to file documents with the state government. For startups, these costs can trump the immediate benefits.
- The “Arm’s Length” Requirement: Do not commingle the holding company’s and the operating company’s accounts, business agreements, capital, or other funds. The IRS may disregard the entities and “dump” it all into your lap—a mess that is difficult, if not impossible, to fix. Further, in an adversarial proceeding, opposing counsel will want to pierce the corporate veil so that all of your assets are available for judgment.
- Initial Complexity: Setting this up correctly requires tight coordination between your patent attorney and your tax advisor. A poorly drafted license agreement between your own companies can lead to legal headaches down the road.
Whether to “hold ‘em or fold ‘em” is dependent on your risk-reward tolerance.
Ask Us Anything… about Intellectual Property!
Business Patent Law, PLLC is headquartered between Louisville and Lexington, Kentucky, serving a diverse range of clients—from innovative startups to successful clients of several decades whose business interests cause BPL’s practice to span across seventeen time zones.
If you have a topic or question you would like the editorial staff to address, please send us an email.
Business Patent Law, PLLC provides intellectual property and business counsel. If you need assistance, please contact us today.
Stay up-to-date with news that impacts your business and intellectual property—sign up for Business Patent Law’s Monthly Mailer™ newsletter.
Prepared by the Business Patent Law, PLLC, editorial staff.
Counseling the Creative®