Intellectual property ownership: Who should own what you create?
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, Ill 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 doesnt 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 doesnt apply to sole traders and partnerships. If you’re a sole trader or a partner in a partnership you are the business. The business doesnt 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 doesnt 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.
David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry, advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.
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