So set your business structure up so that a separate company controls your IP. Both the trading entity and the operating entity can still be under common ownership or control.
Doing this works because of the doctrine of limited liability. The courts will only rarely lift the corporate veil and look behind the affairs of a limited liability company. If you have a company that goes bust, and you've set things up right, receivers and liquidators won't be able to get at your IP assets.
Here are some things you need to do:
- Get tax advice. If you are thinking about shifting IP assets from one entity to another, don't think you can get by on a $1 transfer. If you sell an asset for less than its true value you may find the IRD demanding you pay gift duty on the amount of the discount. You can't gift more than $27,000 a year without paying gift duty. And also be aware that transactions between associated parties have the potential to cause all sorts of tax issues for those concerned. And another thing: if you sell a patent to your IP holding company, the sale proceeds are likely to attract income tax. My best piece of advice is to get a good tax accountant. And make sure your accountant and lawyer talk to each other.
- Do it early. A lot of the tax problems I mentioned above can be solved if your business isn't yet trading. The more successful you are, the more valuable your IP becomes. The more valuable your IP becomes the harder it becomes to shift that IP around while avoiding tax difficulties. This can be a challenge for startup businesses who don't have a lot of money to spend on lawyers and accountants. But they may end up paying much much more later to get the job done.
- Get your IP chain of title sorted out. It may seem obvious that you can't put IP into a holding company if you don't own it, and yet I am frequently called upon to unravel complex and challenging ownership situations, where a client suddenly realises the IP they thought they owned is in fact held by someone else. The ownership rules are different for copyright, patent rights and designs. Often an inventor or author will end up retaining legal title to the IP he or she created, even where the contract says someone else owns it - simply because someone forgot to get an assignment of legal title. Work out who created the IP, then make sure they assign their rights in that IP to you. If in doubt, get legal advice.
- Be realistic. Your bank isn't going to suddenly let go of its choker-hold on your life. Your IP company may end up being separated from the trading operations of your business, but if the IP is your most valuable asset, your bank will want security over it. Live with it.
- Don't mix things up. Running separate companies only works so long as you keep the two completely separate. Take steps to make sure your holding company doesn't accidently issue or pay invoices. Don't send correspondences out on the wrong company's letterhead.
- Put a licence in place. The IP holding company needs to grant to the trading company a licence to use and exploit the IP. Make sure the licence can be terminated in the event of an insolvency event occurring in relation to the trading company.
- Get your constitutions and shareholders agreements sorted out if there is more than one shareholder. I have seen many a good company completely destroyed because the shareholders couldn't agree on how to run the business. Work out how you'll deal with critical business decisions, and think about how an exit will be managed. A shareholders agreement is similar to a prenuptial - you hope you never need it, but if you do it had better be comprehensive.
- Consider a limited partnership structure. Limited partnerships give the partners all the tax benefits of a partnership, while preserving limited liability. LPs are good structures to put in place if you expect to make losses for the first few years of the business.
By the way, this is free advice. If you want me to be liable for the advice I give, then you must pay me. That's the way the whole free advice thing works.
(How else can I justify looking at by blog during work hours, unless I occasionally post something that shamelessly promotes my job?)
