Creating a separate entity, solely for the purpose of owning your intellectual property, can be one of the best way to protect, manage and exploit an IP. Intellectual Property Holding Companies typically handle important IP functions such as filings, assignments, marketing and licensing business opportunities. These types of activities are sometimes better managed in an entity which is not part of the main operating business, especially if there are a significant number of intellectual properties to manage.
The structure of an IPHC is fairly simple. An IP owner forms a corporation (parent company) and creates another subsidiary corporation (the IPHC). The IP is created by or transferred to the IPHC. The IPHC enters into license agreements with the parent company and/or other non-related companies who agree to pay the IPHC royalties in exchange for an exclusive or non-exclusive right to use the intellectual property.
The two biggest benefits of IPHC’s are tax related and protection from liability claims. There are a number of states (Nevada and Delaware are two examples) and countries (i.e. Switzerland, Holland and Ireland) that are tax havens for intangible income (i.e. royalty revenues generated by an IP). In the case of the US, if the IPHC is set up in one of these states, the income from the IP is not subject to state taxes. The second benefit is to shield your intellectual property (assets) from litigation or a financial disaster that impacts your operating company.
Here’s a quick example of how an IPHC might work. You invented a new widget and created a new business entity, “XYZ Widgets Marketing LLC” to make and sell the widgets. You then form a second company, XYZ Intellectual Holdings, LLC” ( in Nevada or Delaware), that owns your IP assets. Royalties are paid to XYZ IPHC who receives the tax benefits. If litigation is filed against the XYZ Widgets Marketing LLC and it goes bankrupt, the IPHC enables you to keep your IP intact and continue to benefit from the ongoing licensing revenues.
Keep in mind that, in the US, state and federal government is looking for ways to increase tax revenue, and one of the initiatives underway in many states is closing this tax benefit. Whether the Intellectual Property Holding Company is right for you will depend on your situation, and consulting with qualified legal or accounting professionals is the best way to make that decision.