Protecting your intellectual property from trading risks

Running a business has its risks – the ultimate consequence being the entity going out of business and having to shut up shop. The recent recession increased such a risk for many businesses with some being unable to cope with the economic pressures and becoming insolvent.

When a business becomes insolvent and is subsequently liquidated, the assets of the entity are seized and sold with the view to pay creditors. Intellectual property assets are no exception and assets such as domain names, trademarks and copyright as well as concepts relating to branding are often lost in the process as well. More often than not, such intellectual property assets are irreplaceable. It is therefore important that time and effort is invested in protecting such assets from the consequences of liquidation.

Separating assets into two or more legal entities as a means of protection has been common practice for some time, with business owners transferring their houses and other personal assets into trusts. The separation of assets through the use of limited liability companies is a more suitable vehicle for the purposes of intellectual property asset protection. Separate ownership using companies requires the establishment of two or more registered companies where one company, Company A, owns the intellectual property and the other company, Company B, is the operating company and acquires a licence from Company A to use the intellectual property in its business operations.

All ownership of the intellectual property assets are vested in Company A, and Company B at no stage actually owns the intellectual property. Provided that the licence agreement is properly drafted, in the event that Company B becomes insolvent, its creditors cannot lay claim to the intellectual property assets as the licence between Company A and Company B should terminate at that time.

This separation between ownership of intellectual property and the business risk of the operating company can be tailored to suit most business genres.

Although appropriate insurance policies are worthy components of risk management, many policies do not guard against insolvency of a company or bankruptcy.  They also cannot guard against the loss of unique irreplaceable intellectual property. As a consequence, while some effort may be required in setting up an appropriate structure, separating valuable intellectual property could be well worth the time and money.