Typically, the company that creates the trademark and applies it to their products or services is the company that owns the trademark and any resulting trademark registrations. If the ABC Company starts selling a new gadget it created and manufactured called the PsySpinner, then the ABC Company would be the likely owner of the PsySpinner trademark.
However, for a number of different reasons, a separate company may be created for the sole purpose of managing intangible property and that includes trademarks. This is known as a “holding company” and trademark owners should know the benefits and potential pitfalls of having a holding company own trademark assets.
Keep in mind that this article deals with the narrow issue of how holding companies can own trademarks, in general. There any many different factors to analyze, so to decide whether a holding company is right for your business, contact a business attorney in your state.
How Do Holding Companies Work?
A holding company is a corporate entity, such as a corporation or LLC, thats sole purpose is to own “intangible” items and manage just those intangible items. This sometimes includes trademarks, which, while they cannot be touched or held, are still valuable assets belonging to the company that created and developed the value of them. Holding companies do not operate the business – they have a narrow focus (that may shift depending on the needs of the business.)
For example: the ABC Company is growing. It creates the ABC IP Holding Company, a Delaware Corporation thats sole purpose is to own ABC Company’s trademark portfolio. ABC IP Holding Company has identical owners to the ABC Company (a Florida Corporation.) ABC IP Holding Company is just that – a holding company.
It is important to note that legally, these are two separate companies.
Why Have a Holding Company Own a Trademark Registration?
The question of why to start a holding company involves different answers depending on the type of holding company.
For trademarks, a holding company may:
Protect trademarks held in a company that is facing bankruptcy or insolvency. It varies from state to state and company to company, but let’s say the company is having trouble with cashflow or is facing bankruptcy. In some situations, a holding company may protect the intellectual property from the issues plaguing one or more related companies.
Help value the market price for a trademark. A holding company’s purpose would be to license the mark to the operating company and if the money gained from licensing that trademark is going through the holding company, it is easier to show third-parties how much a brand is worth for purposes of valuation and sales.
Save on taxes. In some states, income generated through the royalties in a licensing agreement is exempt. This means that your holding company could help reduce your tax liability to the operating company (please always contact a tax professional for tax advice).
For other types of property or assets, a holding company may serve a different purpose, so always consult with a professional on what is best for your company.
Licensing Considerations if the Operating Entity Is Not the Owner of Your Trademark.
If anyone other than the operating company owns a trademark, then the trademark must be licensed through a trademark licensing agreement. This is more than just a simple grant of the ability to use the trademark. At all times, the owner of the trademark must maintain adequate control over the brand. This means that the licensing agreement must have mechanisms that allow the trademark owner to control the quality of the goods and/or services being offered under the trademark.
It is important to consult with an experienced trademark attorney to draft the licensing agreement, otherwise, as seen below, there could be a naked licensing or chain-of-title issues that would invalidate a trademark and trademark registration.
Disadvantages/Pitfalls of Using a Holding Company to Own a Trademark.
Holding companies are not a one-size-fits-all entity. Further, not every company can or should set up a holding company. There are many different potential issues that could come up, but here are a few of the most pressing:
Maintenance. The holding company is a corporate entity and will be held to the same corporate standards as any other corporate entity. If you miss corporate filings, file taxes incorrectly, or any other requirement for maintaining a corporate entity, that entity could be in danger of dissolving or otherwise becoming inactive. Any trademarks or registrations owned by the company, if not taken care of appropriately, may be lost.
Specialized Knowledge. The structure of the company’s IP ownership is particularly important when it comes to pitching new investors, seeking loans from a bank, and any public reporting of assets. If everyone within the leadership of the company does not have a strong grasp on the complexities of what company actually owns a trademark, it could lead to major issues.
Naked Licensing. Naked licensing means that the owner of a trademark did not maintain proper control over the trademark when licensing it to others, effectively losing/splintering rights to the trademark. This can be avoided through a properly drafted (and executed) licensing agreement.
While trademark law is a nationwide, federal law, business and tax laws vary from state to state. Holding companies are complex and you should consult not only a trademark attorney, but also a business attorney in your area that can provide detailed information on how the law applies to your specific company in your specific state.
However, holding companies may be another way to help protect your trademarks and provide a boost to your growing business.