Running a business has its risks – the worst case being the entity going out of business and having to shut down.
The recent recession increased such a risk for many businesses with some being unable to cope with the economic pressures and consequently becoming insolvent.
When a business becomes insolvent and is subsequently liquidated, the assets of the business are seized and sold to pay creditors. Intellectual property assets are no exception and assets such as domain names, trademarks and copyrights 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 in the event that a company is put into 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. However with intellectual property, while it is possible to register legal ownership rights in a trust (provided that ownership is recorded in the joint names of the trustees and not in the name of the trust itself) problems can arise relating to sub-licensing due to consent issues from co-owners. Additionally, the Intellectual Property Office of New Zealand is adopting a stricter interpretation of intellectual property laws that prohibits trusts from owning intellectual property.
The separation of intellectual property assets using limited liability companies is therefore a more appropriate 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, acquires a licence from Company A to sub-licence the intellectual property to clients.
All ownership of the intellectual property assets are vested in Company A, and Company B at no stage actually owns the intellectual property. In the event that Company B becomes insolvent, its creditors are not able to lay claim to the intellectual property assets by virtue of it being owned by a separate legal entity, Company A.
This model is particularly suited to software companies as they license products by granting a customer non-exclusive rights to use the software rather than selling them, so the actual software remains the property of the original owner. The separate-ownership model can also be tailored to suit most business genres.
Although appropriate licences and insurance policies are worthy components of risk management, many policies do not guard against insolvency of a company or bankruptcy. As a consequence, while some effort may be required in setting up an appropriate structure, separating valuable intellectual property assets could be well worth the time and money.
Please contact Jane Min if you have any queries regarding this article.
“I have used Turner Hopkins for my legal services for over eight years. I have always found their level of service excellent and their work to a very high standard. I have used various lawyers at their firm for various businesses I have been involved with and have always had very positive experiences. I would highly recommend them.”
“Joy, we cannot thank you enough for your help with our purchase! You have been wonderful to deal with and so proactive (and patient with my numerous emails). We will be visiting NZ in April so will make sure we drop in to thank you in person.”
“I can't speak highly enough of Jenny. She got everything done in a timely manner and when my ex-husband threw a spanner in the works at the eleventh hour she got the required documentation to his lawyers and settlement back on track.”
“To Michael Robinson – I wanted to thank you and your colleagues for many years of excellent service to the Bank. You have an outstanding business that has proved to be one of the most reliable and ethical businesses that Collections have dealt with in the almost 9 years I was with the Bank.”
“I have struggled with different legal firms over the years, but over the past few years I have engaged with Turner Hopkins with various requirements from personal relating to wills, family trust, property settlements and contracts through to commercial engagements including employment advice, commercial lease agreements and general legal advice. I have engaged with a number of the people in the firm and always found them professional, punctual in their responses and very sound in the advice provided.”