David Walker, Grid Law founder and Business Advice expert, returns to shed light on where intellectual property ownership should lie, from its creation to what happens after the sale of a company.
When my clients create intellectual property (IP), they always want to know who should own it. Is it best for them to own it personally, or should their company own it?
There are no right or wrong answers here, it very much depends on your own personal circumstances. Most clients have a preconceived idea that they should own the intellectual property personally, but on balance, I usually find that company ownership is preferable. In this article, I’ll explain why.
As with all legal questions, before answering it’s important to understand my clients’ underlying concerns. In this case, their primary objective is usually to protect their intellectual property.
They know it’s likely to be their most valuable asset and worry that it’s at risk if it’s owned by their company due to start-ups having such a high failure rate. They know that if the company fails and is wound up, they could lose all of their rights.
These concerns are completely understandable, but owning the intellectual personally doesn’t entirely solve this issue. It can also add some problems of its own.
Before I explain further, I need to make it clear that this advice doesn’t apply to sole traders and partnerships. If you’re a sole trader or a partner in a partnership you are the business. The business doesn’t have a separate legal personality like a company does, so there’s no option for the business to own the intellectual property.
So, why is ownership by a limited company usually the best option?
The owner of the intellectual property has ultimate control over it. In the early days, the company may be owned and controlled by the same person, so from this perspective it doesn’t matter whether the IP is owned by the individual or the company.
However, as the company grows, it will probably have an experienced board of directors. Their expertise will enable the company to make better decisions about the development and exploitation of the intellectual property, making it even more valuable.
If you own the intellectual property personally, decision making can be delegated to the company by way of a licence. How much control you delegate is a matter of choice. It could be complete control or partial control with some decisions reserved to the owner.
If done properly, this licence arrangement has an advantage if the company is wound up, or even just goes into administration. These can be trigger events to terminate the licence, severing all links to the company and protecting the intellectual property.
However, the biggest problem with a licence arrangement is that very few business owners actually make the effort to enter into a proper, legally binding agreement. Instead, they have a very informal relationship with the company and simply let the company use the IP. This could cause problems later, if the arrangement was ever challenged during legal proceedings.
Starting or defending legal action
If the intellectual property rights are infringed by someone else, the owner may need to take legal action to protect them.
As you can imagine, intellectual property claims can be expensive. So, you must ask yourself whether you’re you prepared to take legal action personally, to protect them. If there’s a risk of losing and the court making a costs order against you, you could lose your personal property and this is a risk most of my clients are not prepared to take.
If the company owns the intellectual property, the company will be responsible for taking the legal action and will accept the possible consequences of losing. This is one of the advantages of running a business through a limited company. All of your personal assets are protected.
Again, a licence arrangement can be useful here. If you own the intellectual property personally, you could grant the company an exclusive licensee with the right (or obligation) to take legal action to protect the intellectual property. This means that your personal assets are protected.
For this to be possible, you must have a proper licence in place. Simply allowing the company the right to use the intellectual property and it taking legal action on your behalf is not sufficient.
Creation and development of the intellectual property
If you have an idea for a new product, or a brand and create the intellectual property before the company is incorporated you will own it personally. If you have co-founders of the business and you were each working on the project prior to incorporation, you may each own individual elements of the intellectual property. Alternatively, you may be joint owners of it.
When you incorporate the company, you all have a choice. You can continue to own it personally, you can assign it to the company so the company becomes the owner, or each individual can licence their intellectual property to the company.
If you create the intellectual property after incorporation and you’re an employee as well as a shareholder of the company, the intellectual property will automatically be owned by the company. Likewise, if other employees create any intellectual property as part of their normal employment duties, the IP they create will automatically be owned by the company.
If freelancers create any intellectual property on behalf of the company, they will own it personally until it’s specifically assigned to the company. In most cases this will happen automatically in accordance with their standard terms and conditions of business. If you have just a verbal agreement with them, it won’t.
As you can imagine, these different scenarios, could lead to a complicated situation where some intellectual property is owned by individuals and some is owned by the company.
Multiple ownership of intellectual property is never ideal as it can make decision making very difficult. The owners may have different priorities and tolerances for risk, especially when it comes to legal action and protecting the intellectual property. If the owners are not all in agreement about what should be done to protect the IP, it is vulnerable to attack.
Sale of the business
Multiple ownership of intellectual property can also adversely affect the value of the business. Even if the licences have been properly drafted and are legally binding, individuals can be unpredictable and difficult to deal with. As a result, a prospective purchaser of the business will naturally be very cautious about the idea of dealing with multiple licensors of the intellectual property.
Purchasing a company that owns all of the intellectual property outright is a far more attractive option and makes the company far more valuable.
Even if the company isn’t sold as a whole, one or more of the intellectual property owners may want to leave. If they were able to prevent the company from using a vital piece of intellectual property or even worse, took it to a competitor it would be devastating for the company.
This can be prevented by the company owning all of the intellectual property and for this reason alone, I always recommend that the company owns all of the IP.
If you are still undecided about whether to own intellectual property personally or through a company, feel free to email me with any questions to firstname.lastname@example.org and I’ll happily answer them for you.
Read back over David’s other articles covering intellectual property ownership:
- A guide to using other peoples’ intellectual property
- Intellectual property rights: Our legal expert answers your questions
- Making money from intellectual property
- How to defend intellectual property rights as a small business owner
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