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Intellectual Property Recommended Phases & Structures:

Having intellectual property is one of the best ways to produce passive income! The challenge is protecting that IP so that even in a lawsuit no one can get to the assets you created.    

 

Because of this, companies that rely on the use of IP for income, or for tools and processes that enable income to take place, use a multiple entity structure for business to help segregate and protect their IP. 

 

We have analyzed the best corporate structure for an IP business, and have identified the four different and distinct phases of corporate growth specific to IP companies. 

 

Next, you will read about the different phases, and we will show you based on your current position what phase you are in, and then we are going to outline the corporate structure recommendations that will afford you the most asset protection and tax reduction - while keeping in mind your goals and the phase you are in presently.

  1. LLC "S" Election

  1. LLC "S" Election

  2. LLC "S" Election

  1. LLC "S" Election

  2. LLC "S" Election

  3. LLC "C" Election

  1. LLC "S" Election

  2. LLC "S" Election

  3. LLC "C" Election

If you have one of the following (Phase 1):

  • You will be entering into contracts with your IP

  • Your Intellectual Property is about to, or already has started making money,

        or 

  • You have high liability

If you have one of the following (Phase 2):

  • Your intellectual is making money

If you have one of the following (Phase 3):

  • You don't need all of the income personally, and you're

  • Expanding Your Business, or

  • Investing in high value or dangerous assets

If you have one of the following (Phase 4):

  • You're putting funds into the business or investments

  • Desire additional asset protection, or

  • Desire for additional tax savings

Then Phase 1 applies:

Phase 1 is to set up an:

  • "S" Elected LLC or Corp, and

  • use it as an operating company to deal with the general public 

Then Phase 2 applies:

Phase 2 is to set up another:

  • "S" Elected LLC, 

       and

  • use it as a holding company for your intellectual property

Then Phase 3 applies:

Phase 3 is to set up a:

  • "C" Elected LLC or Corp and

  • use it as a management company for your operating & holding company(s)

Then Phase 4 applies:

Phase 4 is to set up a:

  • Utilize the already set up "C" Elected LLC or Corp as a lending company.

Intellectual Property Structure - Phase One
 

Intellectual Property - Phase One

 

The first step in an Intellectual Property ("IP") structure is to set up an operating company and license the IP rights from you as an individual to that operating company.

 

Some believe that the first step would be to put their IP into an LLC to hold the IP. The problem with this is when there is a contract to sell or produce the IP, or to enter into a joint venture ("JV"), the only company available to sign these agreements would be the company that owns your IP. When a company deals directly with the public or another third party company (a company that you do not own), then the company opens itself to lawsuits from the general public or third parties.

 

If a company is directly sued, the owner and the owner's assets are protected, but what the company owns directly is not protected. If you have the IP in a company that, once again, deals directly with the public, then your intellectual property is not protected. 

 

When you set up the IP operating company,  the best type of company for this is an LLC with an "S" election. Payments for the use of IP are passive by nature (which means that you do not have to pay employment taxes on the income - which is 15.3%). Also, because the income is passive and because of the "S" election, you will be able to take advantage of the new income tax deduction called the qualified business income ("QBI") deduction. This deduction allows a 20% reduction against income.

 

The "S" elected LLC will have a licensing agreement with you as an individual, and will enter into contracts with any other organizations and or sell directly to the general public. If in the future one of your marketing partners or customers tries to sue your operating company, because the company owns nothing and has no money accumulated in it - the party suing you will get nothing. In fact, if they win a lawsuit, because of a law called a "charging order" (a legal remedy imposed by the court in a lawsuit) not only will they get nothing, they have to pay the taxes on all income to the business they are suing. So, not only do they get nothing, but they also have to pay taxes on income they didn't receive!

 

Why "S" Elected?

 

"S" elected means that the profit or loss flows down to you as an individual (so its taxable to your "S"elf). While this might not sound ideal, you will be able to save self employment taxes - and this amount is 15.3% of your income. You will see the estimated amount that this election will save you in a couple of pages.

 

Why Not "C" Elected:

 

The other option for taxation is "C" elected taxation. This means that the business taxes are calculated at a flat 21% (so its taxed at the "C"orporate level). The problems with a "C" elected IP company are that 1) any of the profits after tax need to be spent on company expenses or expansion, and 2) if there ever is a lawsuit all of the funds that are in the company are available to satisfy a judgement. That means all the money that accumulated in the company can be seized to fulfill a judgement if the company lost a lawsuit. So leaving money in the company is not ideal, and therefore "S" elected taxation is preferred for IP companies given their exposure.

 

In Phase Two we discuss contributing your IP to a new LLC once the IP is creating income through the operating company, as well as how to accumulate other assets.

 

In Phase Three we discuss how to introduce a "C" elected management company for tax reduction purposes - and in Phase Four how to lend money from said management company to holding and operating companies.

 

What Documentation:

 

Phase One of an IP Company Structure includes:

     

     - Resolution Authorizing IP Agreement

     - IP Agreement

 

Monthly Activities:

 

     - Review sales from Operating Company 

     - Pay yourself as individual from Operating Company

     - Complete company books

     - Maintain minutes and resolutions

Intellectual Property - Phase Two (Business Assets)

 

ASSET PROTECTION: Separating You from Business & Protecting Intellectual Property:

 

Once your operating company is established and generating income, it is time to set up an IP Holding Company, or "Asset Company". 

 

Many individuals have holding companies that hold assets and lease those assets back to their operating companies. For example, you may have created IP  that your operating company uses for standard operating procedures, complete presentations, or perhaps you have generated IP in the form of products that are sold through your operating company's efforts. If this is the case it is best to set up a Limited Liability Company ("LLC") to hold your IP. 

 

Intellectual property is considered a "safe asset". A safe asset is an asset that cannot bring a lawsuit to you, because it is inherently safe. This is different than "dangerous assets" such as real estate or vehicles ( the liabilities of which can bring a lawsuit to the owner of the asset). 

 

By creating an LLC that holds your IP, and licenses the IP to your operating company, you can use the operating company as a shield to protect the IP. For example, lets say that you have an asset company that has licensed the rights of the IP to the operating company. Then the operating company gets sued. The only items the suing party can receive would be assets or cash that is owned by the operating company. This means that because the IP was owned by the Asset Company and NOT the operating company - the IP cannot be touched or seized. 

 

If the operating company was sued, that very same day you could set up a new operating company, license the IP rights from your asset company to your new operating company and move on like nothing happened. How's that for asset protection!

 

ASSET PROTECTION: Holding Other Safe Assets:

 

Additionally, with the same Asset Company, you can hold other safe assets and lease them to your operating company as well.

 

If the company wants to acquire small assets with little or no value and you can easily replace them then feel free to have the operating company acquire them.

 

If on the other hand you're acquiring $10,000 worth of business presentation equipment or a $25,000 copy machine - you should use your Asset Company to hold these assets and lease them back to the operating business. 

 

The Asset Company should be located in the state that you are in, or that the operating business is located in. 

 

From an asset protection standpoint, by employing this strategy, you have completed protected all of the business assets. For example, lets say that you had $100,000 in IP, business furniture, computer equipment, and machinery in an LLC. That Asset Company leases the equipment to your Operating Company - and lets say that someone wins a lawsuit against your operating business. What would they get? 

 

Nothing. 

 

Because the Operating Company is "S" elected it does not have any retained earnings, nor does the business own any assets (IP or otherwise) - so there are no assets to seize. In fact, if you think about it, if there is no money and no assets, why would they sue? Or even better, if they do win - they get nothing, and the next day you set up a new operating company, complete a new IP licensing agreement, and a lease agreement for the equipment, and you are up and running and ready to do business again!

 

That was simple. 

 

Oh, and because of what is called a "charging order", a legal remedy imposed by the court in a lawsuit, not only will they not get anything, but if they win the suit they will also be liable for your taxes. That's right, they are liable to pay taxes due from the company they sued - your company. It's simply amazing!

 

What Documentation:

 

Phase two of an Intellectual Property Structure includes:

 

     - Resolution Authorizing IP Licensing 

     - IP Licensing agreement (for IP Licensing from Asset Company)

     - Resolution Authorizing Lease of Furniture / Equipment 

     - Lease agreement (for lease of assets from Asset Company)

   

Monthly Activities:

 

     - Receive invoices and create bills

     - Complete company books

     - Maintain minutes and resolutions

    

1st of the Month Activities:

 

 

Asset Company:       

 

1. Send out invoice from Asset Company to Operating Company for licensed IP

2. Receive payment for IP license agreement (or accrue)

3. Send out Invoice from Asset Company to Operating Company for leased furniture or equipment

4. Receive payment for leased furniture (or accrue)

 

Operating Company:

 

1. Receive invoice from Asset Company for IP licensing - create bill 

2. Pay IP licensing bill (pay to Asset Company)

3. Receive invoice from Asset Company for leased furniture or equipment - create bill 

4. Pay leased furniture and equipment bill (pay to Asset Company)

 
Intellectual Property Structure - Phase Two

Intellectual Property - Phase Three (Management Co)

 

YOU DON'T NEED ALL OF THE MONEY

 

The largest factor of reaching Intellectual Property - Phase Three is that you no longer personally need all of the funds being made. 

 

Basically, Intellectual Property - Phase Three is used once you reach the point where there are extra funds available in the business that you would like to use to 1) further business operations, or 2) to invest into other business scenarios. 

 

In this Phase we introduce a Management Investment Company ("MI Company") to manage your "S" elected operating company. The MI Company provides services like management, sales management and goals, corporate compliance, accounting, and accountability, sales training, CEO and or CFO services, etc. 

 

This MI Company is a "C" elected LLC. Since you have an "S" elected operating company we recommend a "C" elected MI Company for complete asset protection and enhanced tax reduction capabilities.

 

This company only deals with companies that you own 51% or more, or where you are a partner and there is an indemnification agreement or clause documented. The reason for this is that we would like to isolate and limited the amount of companies that could have any "standing" to sue this business directly. This MI Company will accumulate all overflow or unneeded funds from all of your business scenarios, and in essence will become your main holding and investment company. If a company or individual could sue it directly, they would be able to get to the assets of the company (i.e.; funds accumulated in the company).

 

This MI Company can manage any of your companies from any of your business scenarios - so you need only one MI Company. The MI Company's purpose is to flow money into one key entity. Once the money is in this entity it can be lent to any companies or individuals that you would like - having full investment capabilities. 

 

Switching Gears - Tax Reduction

 

The beautiful thing about a "C" elected entity is that it has a flat tax of 21%. This means hypothetically that if your personal tax rate is 38% (federal and state combined), and the MI Company is a 21% taxpayer, you would save 17% on any money that flows from your Operating Company to your MI Company. 

 

If you selected "Save Money in Business" in the questionnaire, the program will actually outline the estimated amount that you will save utilizing a management company given your income and the state that you live and operate in.

 

What State should I set up the Management Company?

 

At the end of the day, the goal is to have your management company set up in a state that has no corporate state income tax.

 

In the recommendations section, the report will compare having the management company in your home-state vs having the company in Nevada. 

 

What Documentation:

 

In Phase Three of an IP Structure include:

 

     - Resolution Authorizing IP Licensing 

     - IP Licensing Agreement (for IP Licensing from Asset Company)

     - Resolution Authorizing Lease of Furniture / Equipment 

     - Lease agreement (for lease of assets from Asset Company)

     - Resolution Authorizing Management Agreement

     - Management Agreement 

 

Monthly Activities:

 

     - Receive invoices and create bills

     - Complete company books

     - Maintain minutes and resolutions

    

1st of the Month Activities:

 

 

Asset Company:       

 

1. Send out Invoice from Asset Company to Operating Company for licensed IP

2. Receive payment for IP License Agreement (or accrue)

3. Send out Invoice from Asset Company to Operating Company for leased furniture or equipment

4. Receive payment for leased furniture (or accrue)

5. Receive MI Company invoice and create bill (if applicable)

6. Pay MI Company bill (pay to MI Company if there is a management agreement with Asset Company) 

 

MI Company:       

 

1. Send out invoice from MI Company to Operating Company for monthly services

2. Send out invoice from MI Company to Asset Company for monthly services (if there is a management agreement with Asset Co)

 

Operating Co:

 

1. Receive invoice from Asset Company for IP Licensing - create bill 

2. Pay IP Licensing bill (pay to Asset Company)

3. Receive invoice from Asset Company for leased furniture or equipment - create bill 

4. Pay leased furniture and equipment bill (pay to Asset Company)

5. Receive invoice from MI Company for monthly services - create bill

6. Pay MI Company bill (pay to MI Company)

 
Intellectual Property Structure - Phase Three

Intellectual Property - Phase Four (Lending Money Between Entities)

 

LENDING MONEY BETWEEN ENTITIES 

 

Asset Protection

 

Intellectual Property - Phase Four is about utilizing the entities at your disposal

. There are a number of things that your MI Company can do.

 

Let's say that you find yourself wanting to purchase a new item for the business, but all of the excess cash is in your MI Company. Well, this is exactly why your structure was designed to be versatile. Your MI Company would loan money to your Operating Company or Asset Company (depending on the type and amount of asset).

 

Let's say that the asset was purchased for the Operating Company and the Operating Company was sued. There would then be a loan in place from the MI Company and potentially a UCC1 or Deed of Trust filed that would give the MI company first right and standing (so the assets would already have an encumbrance  - by a company you own or control).

 

If the loan was to the Asset Company, then the Operating Company does not own the asset. Because Asset Company does not do business with third party companies it has no exposure. This means everything is completely protected. 

 

 

Switching Gears - Tax Reduction

 

When lending funds, the interest rate would flow to the MI company which would be taxed at a rate of 21%.

 

What Documentation:

 

Phase Four of an IP Asset Structure includes:

 

     - Resolution Authorizing IP Licensing 

     - IP Licensing agreement (for IP Licensing from Asset Company)

     - Resolution Authorizing Lease of Furniture / Equipment 

     - Lease agreement (for lease of assets from Asset Company)

     - Resolution Authorizing Management Agreement

     - Management Agreement 

     - Resolution Approving Lending of Funds

     - Resolution Approving the Borrowing of Funds

     - Loan agreement or Line of Credit from MI Company

     - UCC1 / Deed of Trust Filing

 

Monthly Activities:

 

     - Receive invoices and create bills

     - Complete company books

     - Maintain minutes and resolutions

 

1st of the Month Activities:

 

 

Asset Company:       

 

1. Send out Invoice from Asset Company to Operating Company for licensed IP

2. Receive payment for IP License Agreement (or accrue)

3. Send out Invoice from Asset Company to Operating Company for leased furniture or equipment

4. Receive payment for leased furniture (or accrue)

5. Receive MI Company invoice and create bill (if applicable)

6. Pay MI Company bill (pay to MI Company if there is a management agreement with Asset Company) 

7. Make payment on loan payable / line of credit as required

 

MI Company:       

 

1. Send out invoice from MI Company to Operating Company for monthly services

2. Send out invoice from MI Company to asset company for monthly services (if there is a management agreement with Asset Company)

3. Send out invoice for loan payable or line of credit

4. Receive interest income from loan or accrue loan payable / line of credit

 

Operating Co:

 

1. Receive invoice from Asset Company for IP Licensing - create bill 

2. Pay IP Licensing bill (pay to Asset Company)

3. Receive invoice from Asset Company for leased furniture or equipment - create bill 

4. Pay leased furniture & equipment bill (pay to Asset Company)

5. Receive invoice from MI Company for monthly services - create bill

6. Pay MI Company bill (pay to MI Company)

7. Make payment on loan payable / line of credit as required

 
Intellectual Property Structure - Phase Four