If you have developed intellectual property, chances are you own the intellectual property in your personal capacity.
However, there are number of ways that you can own intellectual property rights (including as a partnership, in a private company or in a trust), each of which provide various advantages and disadvantages when it comes to intellectual property ownership.
Owning intellectual property as a sole trader
A sole trader is an individual who has legal responsibility for all aspects of a business. A sole trader is often the simplest and least expensive business structure when it comes to owning intellectual property.
However, owning intellectual property as a sole trader can have its disadvantages. For instance, sole traders:
- do not permit multiple entities to share ownership or control of intellectual property;
- have unlimited liability, meaning a sole trader’s personal assets are at risk if the business fails;
- cannot share business profits or losses in order to take advantage of arrangements that allow a reduction in tax payable.
Owning intellectual property in partnership
A partnership is a business structure in which two or more people (or entities) carry on a business together.
A partnership allows multiple entities to share in the ownership and control of intellectual property. However, partnerships still face the disadvantages, namely, partnerships still:
- have unlimited liability, meaning each of the partners are liable for partnership debts, including their share of the partnership tax obligations and their personal assets are still at risk if the business fails;
- cannot share business profits or losses in order to take advantage of arrangements that allow a reduction in tax payable.
For these reasons, owning intellectual property in partnership may be attractive for intellectual property ventures only at the pre-commercialisation stage.
Owning intellectual property in a private company
A private company is a legal entity with at least one person as a director and one entity as a shareholder.
Unlike a sole trader or a partnership, a private company:
- can have numerous directors and shareholders which ensures that multiple entities can share in the ownership and control of intellectual property; and
- is a separate entity from its directors and shareholders which means the directors and shareholders have limited liability and are not liable for the company’s debts if the business fails.
In addition to the above, where a shareholder of a private companies is a trust as opposed to an individual, the tax-related disadvantage set out above can be alleviated in the company.
While a private company is relatively complex and expensive to establish and maintain, it is highly practical and flexible for intellectual property ventures.
Owning intellectual property in a trust
A trust is a business structure in which a legal obligation exists on a person or company, known as a ‘trustee’, to hold assets for the benefit of others, known as ‘beneficiaries’.
Where the trustee of a trust is a private company, the trust operates like a private company (subject to the terms of the trust deed) and the beneficial features of a private company mentioned above can be achieved.
In addition to the above, trusts have an additional legal advantage, being that they enable the trustee to split the income of the trust to each of the beneficiaries in its sole and absolute discretion. This ensures that the income of the trust can be distributed to a number of beneficiaries so as to reduce tax which would otherwise be payable on the income of the trust.
This advantage is a significant consideration at the very beginning of a commercialisation venture.
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