Separating your 'Brand and IP' from your 'Operations'.

Most business owners think of their business as a single entity or operation.  This is especially true for small business owners and professionals, such as doctors, dentists and even lawyers and accountants. But in reality your business is comprised of several different and distinct assets and even operations. For some businesses there could be even more areas, but for the purpose of this article, we will focus on just three:

BUSINESS OPERATIONS

The most straightforward is the main business operation itself.  The selling of widgets or the straightening of teeth, etc. This area is the one every business owner is most intimately familiar with.  This is your day to day operations and if your business has been successful, then you have already figured out how to do this.

EQUIPMENT LEASING

Less obvious is the ownership, maintenance and 'leasing' of any real estate or equipment which the main operating business needs to function. One obvious example is the case in which you own your own building.  In years past it was very common for the entity which operated the business to also own the building directly.  In recent years, most business owners have already put their business real estate into a separate LLC. This allows the operating entity to then lease it from the RE holding LLC.  Equipment may also be treated this way if your business is equipment heavy.  This works really well for trucking companies or other industries where equipment is a major part of the operations.

The advantage of doing this is both increased asset protection and tax treatment. We will expand more on both areas below.

BRAND MANAGEMENT AND LICENSING

Even less obvious, but likely even more important, is the management and licensing of your "Brand" and other intellectual property. Virtually every business ends up creating value in the 'brand' of the business.  Think of a dentist who has been in an area for 15 years.  Likely that dentist's name is well-known and they have served thousands of residents of the area over that time.  This results in repeat business and referrals, which has a very distinct value to the business.  For a dentist, that would be their "Brand".  This is also true for virtually every type of business we can name. Over time, the business builds value in their brand.

For most businesses, there are also hard-earned lessons on the best way to do things.  Over the years, the business develops standard operating procedures which help the business function more smoothly.  In many cases, the business has spent time and money developing digital assets as well. This may include a website, database, or even custom software. 

All of this "Intellectual Property' or 'IP' can be valued and in appropriate circumstances, just like removing the building from the business, we can remove the IP assets into its own LLC. The advantages of doing this are:

1. The IP assets have increased protection from the claims and liabilities of the underlying business.  The licensing agreement can also have provisions which allow it to be pulled form the operating business in the event that the underlying business has serious legal troubles.  This allows the brand, and all the IP to be re-licensed to a new operating entity and moved away from the tainted company.
2. The IP can be licensed back to the business and royalty income can be paid to the new LLC.  This may convert the active business income into passive income. This passive income can be offset with RE depreciation losses.  
3. The IP LLC, in some case, may also be sold or transferred to children or others and that income passed through lower tax-bracket income tax payers.
4. If the business is sold, the IP could remain and royalties continue to be paid to the present business owners.

While moving IP out of the business can be a powerful tool, it is not right for every business.  The decision should be one made after consultation with both your asset protection attorney, as well as you tax counsel. However, in cases where it is appropriate, it can provide a real benefit both from and asset protection and a tax standpoint.

There are considerations beyond the scope of this article and if you have any questions about your specific structure, please contact Lodmell & Lodmell directly at [e-mail], or 602-230-2014.