Asset Protection and Intellectual Property: A No-Lose Situation, Ideally

So, you want to make money from your intellectual property? First, read this article by Mark Malek here. Now that you’re primed like a lawnmower, I’m sure you’d agree that making money is more likely to happen if you’re not losing money, no? Stay with me. If you get sued, the best you can usually hope for is breaking even, and, usually, legal fees and the time you waste will result in a net loss, even if you win. If you lose, and judgment is entered against you, or you decide it is in your best interests to settle, cash is still flowing the wrong way. One of the considerations in deciding upon a settlement amount is the potential net loss. If you have no assets, you have less to lose. If you have assets (intellectual property among them, and possibly the most valuable), you have much to lose, and the other party(ies) knows this. Therefore, each and every one of you should educate yourselves on protection your assets, especially if  they are valuable.

The area in and around Melbourne, Florida and Brevard County, Florida, where I practice law, are densely packed with technology and media companies, for whom intellectual property is often the substance of their business. Many of these companies know that patents, trademarks, copyrights, and trade secrets are their primary income source, without which they could not thrive or even survive. The most obvious, common, and often cheapest way to protect your IP is to properly transfer it to a separate limited liability company (LLC). For example, your company could create a business structured as follows. The founder of a company create a holding company structured as corporation. The corporation then two LLCs, one which owns and holds the IP, and one which has contact with the public.

Or, you could do without the holding company and just have the operating company lease the IP from the IP holding LLC See a lawyer for this. There are no ifs ands or buts; it is not hard to mess up the formalities which make possible the asset protection in the first place. There might even be tax advantages to such an arrangement, see a lawyer or accountant on that.

Of course, NastyCo sues your holding company, you lose big, and the holding company decides to file bankruptcy. With the asset protection structure we set up, it will probably be much more difficult for creditors (i.e. the people you owe money to) to reach your IP. As long as everything is done correctly, the LLC’s assets are reachable only by charging order — meaning the creditor gets any distributions otherwise allocated to members, but doesn’t actually control the assets. Even better, if the LLC allocates profits without distributing them , the creditor must pay taxes on those profits, even though he/she can’t touch them! Fun stuff.

There are other advantages to separating your IP assets from your operating company. You may retain more control over the assets if your company loses control to a private equity firm who lent you money. Again, more leverage. The corporate veil is tough, and expensive, to pierce, but, for experienced attorneys, relatively easy and inexpensive to create. In Florida, you can check out sunbiz.org for the basics of creating LLCs and other business entities, but to realize the full benefit of these entities, contact an attorney.