IP Holding Companies, Part III

by Mark Malek

In parts I and II of this series, we discussed the importance of setting up an IP holding company where all of your IP is held.  We also provided some pretty good examples of the kinds of things that could happen if your IP is not properly titled in your IP holding company, or if you comingle your IP holding company with other assets.  That leads us to this post – a brief overview of the requirements that MUST be followed in order to properly protect your IP and shield it from other liabilities.

As we recommended in our previous post, you should set up an LLC that has the purpose of holding your IP and licensing the IP for use by others.  This can actually be a rather simple process here in Florida.  The website for the Florida Department of State Division of Corporations is sunbiz.org.  The filing forms for setting up your LLC are available for printing or, if you have an account set up already, you can simply electronically file the forms.  As noted, this can be a simple process, but one that is somewhat easy to do improperly as well. When all else fails, seek the advice of an attorney.

It is especially important to seek some advice of an attorney when starting an LLC that has multiple members.  For example, suppose you have an investor and part of the “deal” is that you will give the investor some percentage of the IP.  The best way to accomplish that is to form an LLC in which both you and the investor are members.  The “deal” will be outlined by the operating agreement that you will enter into when the LLC is formed.  Operating agreements can be somewhat simple, but if they do not address many of the issues that you may encounter in the future, then you can almost always guarantee one certainty – you will be paying a great deal of money to an attorney at a later time in order to sort out ownership, for example, of your IP.  Translation – you will likely be litigating a contractual issue if some dispute arises as to the “deal” and the operating agreement of the LLC doesn’t address how that dispute should be resolved.

After the LLC is set up, it is essential that you open a bank account in the name of the LLC, and be sure that all of the liabilities of the LLC are paid from that bank account… and only from that bank account.  A common mistake of some individuals is to set up the LLC, but still pay for the IP with personal funds, or with the funds of another company.  That leaves the door open to an argument that the corporate veil should be pierced.  In other words, if the corporate requirements are not properly followed, then all your work can be for naught, i.e., a court could find that your IP is not solely held by the company and that your personal liability is co-mingled with any liability created by your IP (see examples in previous post – IP Holding Companies, Part II).

It is also important to hold annual meetings, take minutes, and keep up with the mandatory annual reports necessary to maintain your LLC.  It is not uncommon for us to hear that people did not hold an annual meeting because they are a single member LLC – “what am I going to do, meet with myself?”  YES!  The meeting minutes will read something like “a meeting of the officers was held and no action was taken.”  Simple enough, right.  A good reference of the corporate requirements can be found Chapter 600 of the Florida Statutes.  When all else fails, call an attorney and make sure you are going down the right path.  A consultation fee on the front end can often times save you litigation fees on the back end.