A “holding company” is a business organizational structure that is set up as a corporation or limited liability company for the sole purpose of owning and maintaining particular assets. It is common to set up holding companies to manage and license intellectual property (IP) assets, i.e., patents, trademarks, copyrights, and trade secrets.
IP holding companies may be attractive due to tax advantages. Additionally, an IP holding company may function as a structural shield to protect valuable assets. Legally, a holding company is considered a wholly separate entity from its parent corporation (or other affiliated companies). In the event the parent company is sued, the IP assets owned by the holding company are protected from creditors and such creditor would only be able to recover from the assets wholly owned by the parent company.
Consider the following hypothetical:
Company ABC Inc. is a cannabis dispensary and owns valuable intellectual property rights in the trademark “ABC” including a federal registration for ancillary services, a California state registration for ancillary services, and common law (unregistered) rights for the ABC mark in connection with the dispensary and its own line of cannabis products. (The trademark registrations are for ancillary services because the federal and California state trademark offices will not issue registrations for marks in connection with goods/services that “touch the plant.”) ABC Inc. elects to form an IP holding company called ABC Holdings LLC to own and license its trademarks. ABC Inc. then assigns all its trademark rights, both statutory and common law, to ABC Holdings LLC.
Subsequently, the IRS challenges ABC Inc. for failing to properly report income and the court determines ABC Inc. owes $1,000,000 in taxes. Because ABC Holdings LLC is considered a separate entity, the trademark assets held by ABC Holdings LLC are shielded from ABC, Inc.’s debts. Therefore, the IRS can only recover from ABC Inc.’s assets, and the trademarks and any income ABC Holdings LLC received from licensing is protected.
However, there are costs to consider in determining whether to establish a holding company. To start, in order to form a holding company, you will need the services of a corporate attorney to draft articles of incorporation, bylaws, and shareholder agreements. Plus, there are official state registration fees and annual taxes as well.
Once the “holding company” is established, intracompany license(s) are necessary between the IP holding company and other companies using the mark, e.g., operating companies, management companies, etc. In the hypothetical above, after ABC Holdings LLC has ownership to all the ABC trademark rights, any other party desiring to use the ABC marks must enter into a license with ABC Holdings LLC that specifies consideration, quality control, and other requirements. Even the parent company must have an intracompany license with ABC Holdings in order to use the ABC marks.
When authorizing any other entity to use the holding company’s marks, a licensor must exercise adequate quality control over a licensee’s use of the licensed mark(s). Absent appropriate quality control, there is “naked licensing,” which could lead to the trademark being considered abandoned. Having a thorough and proper license, between the holding company and any third party licensee, is essential to properly protecting IP assets. Therefore, in considering whether to create an IP holding company, it is also necessary to determine whether you have sufficient funds to seek professional assistance in drafting IP licenses.
Nevertheless, these costs are pretty minimal in the grand scheme of a business’s life. Creating an IP holding company is an option to consider, especially for those operating in risky industries.
Contact Evoke Law to discuss the care and stewardship of your intellectual property. We encourage you to share this posting with your professional network.