Question on a Holding company. I want to set up a holding company to hold my IP, copyrights, trade name, trade mark, etc.

Asked over 2 years ago - Bush, LA

If I set this up in my home state, and create the license agreement to allow my LLC to use the IP, copyrights, etc that is held within the holding company, in the event of a civil suit will someone add the holding company to the suit? My name will show as owner this is why I am asking. If my LLC does have a problem, and some looks to the state for the agent address, and finds the trade name and trade mark under the holding company will they add them holding company to the law suit? OR am I worrying for nothing?

Attorney answers (3)

  1. Daniel Nathan Ballard

    Contributor Level 20

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    Answered . It is not common for small businesses to set up an IP Holding Co. that owns the intellectual property used by [read that, licensed by] an Operating Co.-- though that makes a lot of sense in some situations [like when the Operating Co. does not need outside capital to do business].

    Big business does this ALL the time and is THE reason why big business ends up paying very little U.S. corporate tax. The Operating Co. deducts the IP licensing costs paid to its related IP Holding Co. and so the Operating Co.'s taxable net income is dramatically reduced -- a consequence of which is that literally trillions of dollars sits in the overseas accounts of the IP Holding Co.'s until Congress next "repatriation" tax holiday that permits the IP Holding Co. to bring the money back here at a tax rate much lower than the normal 35% corporate rate]. But I digress.

    Q: " ... in the event of a civil suit will someone add the holding company to the suit?"

    R: Maybe. If the suit is filed because your IP Holding Co. is licensing your Operating Co. a trademark or copyright or patent that someone believes infringes its trademark or copyright or patent rights then, of course, your IP Holding Co. will be sued because it owns the alleging infringing property and is licensing it out for use [your Operating Co. will likely be sued in that situation as well because it is the one in the marketplace doing the infringing].

    Another situation where your IP Holding Co. can be sued for something done by your Operating Co. is when the two companies are "alter egos" of each other -- that is, if the two companies are not being operated as two separate companies then someone wronged by either can sue both and a court can disregard the fiction that the two companies are separate.

    There are two main reasons for a small business to do business as an IP Holding Co. and an Operating Co.: (1) When the risk is high that the Operating Co. will be sued in the normal course of doing business then having the IP it uses in another company protects it from a judgment creditor, and (2) When the IP is created by one or a very small group of people the IP Holding Co. can be owned and controlled solely by them while the ownership of the Operating Co. can be split innumerable ways [for financing or incentivizing purposes perhaps]. Another reason that is becoming less important is that some states exclude from the definition of "income" for tax purposes the revenue a company receives from its intellectual property licenses. Incorporating an IP Holding Co. in one of those states can have significant tax advantages, therefore, just like the big business scheme describe above. However, states where the licensees reside are now reaching out to the IP Holding Co.'s in those tax-favorable states and demanding that they pay taxes on the license revenue received from their state's licensees.

    There is NO way anyone can set up an IP Holding Co. and Operating Co. business arrangement without particularized advice from an intellectual property attorney and an accountant who both have real world experience doing just that. Good luck.

    The above is general information ONLY and is not legal advice, does not form an attorney-client relationship, and... more
  2. Maurice N Ross

    Pro

    Contributor Level 20

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    Answered . From the perspective of the plaintiff in a civil suit, every potentially liable entity and individual will be named as a defendant. No matter how you structure ownership of IP rights, you cannot prevent a plaintiff from suing every affiliated entity and person. Nonetheless, there are many reasons that you might want to place IP rights in a holding company, including efforts to minimize tax liability and limit exposure to liability in litigation. The details of what you should do require close examination of many facts and circumstances---this ordinarily requires a team involving corporate counsel and accountants. And there are issues of state law, federal law, and potentially laws of many different countries that need to be taken int account in working through these issues. The bottom line is this---the general advice you receive on this web-site is no substitute for retaining your own team of lawyers and accountants to work through these issues for you.

  3. Bruce E. Burdick

    Pro

    Contributor Level 20

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    Lawyer agrees

    Answered . Yes, they almost certainly will. If you were sing someone who was trying to evade responsibility for their actions by the ruse of a holding company would you name the holding company as a second defendant? Of course you would!

    So far, this is free to you. Until you pay a fee, I am not your lawyer and you are not my client, so you take any... more

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