If you’re running your own small business, and you don’t have a holding company for your intellectual property, you should make an appointment to have your head examined. Creating a separate entity, solely for the purpose of owning your IP, is the quickest, easiest, and cheapest way to insure the goodwill associated with your business.
I realize that the subject matter of this post is a bit drier than what you may have grown to expect from Tactical IP, but I’m hoping that at least a few of our readers are here for free tips on how to make their intellectual property work for them. With that in mind, I’ll try to keep this light and painless.
Liability protection is the name of the game when it comes to creating business entities. Think of it like an insurance policy. If you do it right, assets can be protected from creditors, including judgment creditors who may have prevailed in a lawsuit. As far as the law is concerned, a properly created and maintained business entity is a separate “person” from its owners and employees. The benefit of that treatment is that, if the property created and maintained business entity incurs debts or gets sued, its assets are the only things that may be taken — not the assets of its owners. Let’s look at an example to really hammer this point home.
In our example, you own and run your own courier service. You have a couple of employees and a corresponding number of pickup/delivery vans. You’ve been extremely successful, turning a good profit, and you’ve been able to afford all of the toys and accoutrement that success should provide. In our first variation, let’s say that you are operating as a sole proprietor, using a DBA (“doing business as”) name — “Black Hat Couriers.” You own everything in your own name, or using your DBA name — the vans, all of your office equipment, etc. Now suppose one day, while making a delivery run, one of your employees is driving a little carelessly and, as a result, is involved in a collision where several people are injured. You are insured, so you’re not too worried — that is until you get sued and the jury comes back with an award that goes well beyond your policy limits. Guess what happens now. All of those toys and accoutrement, your summer house with the pool, your boat, your Porsche — kiss ‘em goodbye.
Now let’s look at an alternative scenario. You listened to your buddy, who happens to be an attorney, and you formed your business as a Limited Liability Company (LLC). This time, you’re calling the business “Black Hat Couriers, LLC.” Now, you are a Managing Member of the LLC, and the business has its own assets that do not belong to you. The vans are titled in the name of the business. You used the LLC’s credit card to purchase that office equipment, and you pay the bill out of the LLC’s checking account. You do everything possible to treat the LLC as if it was a separate entity from you. The boat, the summer house, the Porsche — all of these things you purchased with your own money, which was paid out to you as income from the LLC. Now, when the LLC’s insurance policy is insufficient to cover the jury award in that vehicular negligence suit, you get to keep your stuff. The LLC is the only party responsible for paying the judgment. Now that we understand a little bit about how a business entity provides a liability shield for assets, let’s take it a step further.
Say you’ve developed a really strong brand in running your courier service. You have a website, which is reachable through a domain name that incorporates your business name. You’ve registered for a state trademark, and you’ve started doing pickups and deliveries across the closest state line, so you have registered the federal trademark too. You’ve learned your lesson about listening to your attorney friend, so you have even registered copyrights in the colorful fliers and advertisements that you have developed. Life is good. All of that branding, however, comprises intellectual property assets that may be in danger when that driver starts texting his girlfriend about after-work dinner plans doing 60mph on the highway. How do we protect them? Here’s a hint — check the title of this post.
If you create a new business entity — lets call it “Black Hat Intellectual Holdings, LLC” — and let the new entity own all of those intellectual property assets, when that plaintiff’s attorney starts selling off the assets of “Black Hat Couriers, LLC” to collect his contingency fee, you can rest assured that you won’t lose the benefit of your branding efforts. Since “Black Hat Couriers, LLC” was only licensing the IP from “Black Hat Intellectual Holdings, LLC,” you can always create a new LLC and license the same IP to the new company, if “Black Hat Couriers, LLC” becomes bankrupt after paying the judgment.
Wanna franchise? No problem. “Black Hat Intellectual Holdings, LLC” can license the trademarks and copyrights to your brother-in-law who wants to open up shop two states away.
Decided to sell the business? No problem. You may even decide that you want to keep “Black Hat Intellectual Holdings, LLC” for ongoing licensing revenue paid by the guy who bought “Black Hat Couriers, LLC.” Otherwise, if you decide to transfer the IP as well, there’s no break in the continuity of ownership for your domain registry. Your trademarks all maintain a consistent priority, and the new owner enjoys all the benefits of your prior use.
Given the relatively low cost and effort in creating a business entity, it’s hard to understand why more small business owners don’t take advantage of the powerful asset protections that can be had therefrom. I guess most people look at it as an expense they can skip, but it’s pretty clear that those are the corners you really can’t afford to cut — penny wise and pound foolish, as they say.