Intellectual property (IP) is essential to any business, especially if you’re a startup. They can create new revenue streams, minimise tax and secure investments for the company. For these reasons, exploring the best practices to protect your IP assets is crucial. This includes setting up a holding company and having a dual company structure, a strategy many Australian businesses use.
What is a holding company?
A holding company is created specifically for purchasing and holding shares of other companies. Rather than providing services or creating and selling products to customers, a holding company holds intellectual property assets (including patents, trade marks, copyrights and designs) and controls the subsidiary companies.
A holding company is often non operational. Instead, day to day business – including agreements with customers, employees and suppliers – is facilitated by an operating company. This limits liability and ensures IP assets are protected from the commercial activities of the operating company.
Should I create a holding company for my startup?
Many business owners opt to set up holding companies to provide structure to their enterprise and reap risk protection benefits. If you’re thinking of having one for your startup, here are some advantages of an IP holding company:
Safeguard assets.
When placed in a holding company, IP assets are protected from liabilities that subsidiary companies may incur, such as litigation or financial disasters. Your IP is protected from any creditor claims if your startup is sued.
Minimise risk.
Australian holding companies, in general, cannot be legally pursued for the responsibility of their subsidiaries. This substantially minimises the risk of asset loss if the subsidiary becomes insolvent or underperforms, as the IP is separated from the main corporate entity.
Lower taxes.
An IP holding company can reduce the tax it needs to pay, as well as its subsidiaries. Both entities can be structured explicitly for effective tax strategy. In some cases, these entities can be established in countries that offer lower tax rates.
Centralise assets.
With an IP holding company, maintaining trade marks and monitoring their use is much simpler. It also becomes easier to license trade marks to other companies. Having an IP holding company shows how valuable your brand is, as all licensing information is accessible in one place.
Holding your IP assets in one place also allows you to diversify your company without worrying about putting your assets at risk. Operating companies can safely invest in or exit ventures quickly and efficiently.
Fund deals.
IP holding companies can serve as a vehicle for IP funding arrangements. You maintain ownership and control over your IP, and the funding deal may encompass the entirety or a portion of your IP assets. The IP holding company functions as a special purpose vehicle (SPV) that holds the IP assets, handles royalty collections and oversees disbursement to investors or lenders.
What are the disadvantages of an IP holding company?
While IP holding companies present many advantages, there are also drawbacks to operating one. These include:
Additional Fees and Costs
Establishing a holding company means you will need to incorporate an additional company. This comes with different setup and maintenance costs, including fees for setting up and maintaining license agreements between the holding and operating companies.
The annual Australian Securities and Investments Commission (ASIC) fees payable for each company falls at around $263. The cost of licensing arrangements will vary depending on your specific requirements. In addition, a holding company and its subsidiaries are considered one entity. For reporting purposes with the ASIC, you will have to prepare consolidated financial statements and corporate tax returns
Trade Mark Maintenance
Maintaining an IP holding company can be challenging. If you’re a startup or a small business, adding another corporate entity to your company structure may cause unnecessary difficulties, especially in terms of reporting requirements for a company.
Trade Mark Enforcement
When an IP holding company owns your trade mark, a licensing agreement is required for trade mark usage. However, Australian courts have encountered challenges awarding damages to licensees for trademark infringement, especially if you are not the exclusive licensee. If you intend to engage in licensing agreements without having exclusive rights to your trade mark, careful consideration is required.
Liability
While a holding company can be advantageous because it offers asset separation and protection, there are still instances when it can be held accountable for the actions of its operating company. Thus, relying solely on your holding company may not always be the answer to safeguarding your business assets.
Whether an IP holding company is suitable for your startup will depend on various factors, including the nature of your IP, how you will utilise it, and your company’s market reach. Thus, it would be helpful to think about the following:
Timing.
Explore your options and ask yourself, is it the right time to set up a holding company? Initiating the process too early may result in unnecessary fees, while delaying it can lead to issues, such as potential tax obligations for transferring intellectual property ownership to another company.
Licensing arrangements.
Do your subsidiaries have the right to use the IP held by the holding company? Are there clear and legally binding arrangements in place that define the scope, terms and conditions of their right to access and use the IP assets? When setting up a holding company, it’s crucial to consider such agreements, including any restrictions and potential implications for the subsidiaries’ operations and business activities.
Tax.
What are the tax implications and benefits of having a dual company structure with an IP holding company? Will the lowered tax be worth it?
As a startup owner, deciding to set up a holding company is ultimately up to you. However, it’s best to consult with qualified and experienced IP lawyers on the most effective ways to protect your assets and your brand.
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