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Corporate Structuring: Are You Parking Your Bright Idea in the Right Spot?

Michael McDonald | January 11th, 2016

Most entrepreneurs are acutely aware that innovation and creativity are vital in today’s market. However, many are unaware of the importance of identifying the right structure to manage and commercialise their intellectual property (IP) assets. This is despite IP assets being widely recognised as the most valuable asset for businesses.

The first step in the process is to ensure that you have an appropriate corporate structure set-up, taking into account your business, goals, risk profile and assets generally. A large part of this is ensuring your IP assets are held in the right entity. Further, due to the potential tax implications of transferring assets between entities, it is important to get it right the first time.

Mdp Director Michael McDonald and Trainee Janice Yew look at some of the key reasons to carefully consider the corporate structure of your business.

Risk Minimisation

Great ideas often flow from existing businesses. This does not mean that those great ideas should be owned by those same existing businesses. One advantage of a robust corporate structure is the ability to minimise risk.

For example, imagine that you’ve developed a portfolio of valid and registrable patents and trade marks in relation to your business. Your business operates under Trading Pty Ltd but the assets (including IP assets) are owned by Holding Pty Ltd. Holding Pty Ltd then licences the IP to Trading Pty Ltd for a fee.

Trading Pty Ltd is now free to engage in commercialisation activities. In the event that Trading Pty Ltd is sued, your assets will be protected and insulated from any creditors as it is held by a separate legal entity, Holding Pty Ltd.

Tax Planning

Effective tax planning can help to reduce a company’s effective tax rate, thus enhance shareholder value significantly. For example, one strategy is to shift ownership of IP assets to a more favourable entity or tax jurisdiction.

To illustrate, a common vehicle for tax planning is the discretionary trust. IP assets are held in the trust, from which the income from those assets can be distributed to the beneficiaries of the trust each year, at the discretion of the trustee, depending on the tax rates of each beneficiary.

Investment Ready

When an investor is looking to make an investment, they are generally looking for a business with an “investment ready” structure. That is, a business that has established a structure capable of accepting an offer of investment will be much more attractive to investors. There are rules in the Corporations Act 2001 (Cth) that regulate capital raising by companies.

Further, investors are more likely to invest in a ‘fresh’ company that does not have a long history of other business ventures (whether successful or not) and stakeholders. Raising capital through a company that has previous businesses is unattractive due to the possibility of the investment funds being exposed to claims from previous creditors and stakeholders.

Finally, businesses inherently grow, adapt and mature over time, so don’t forget to review your corporate structure from time to time to ensure continued relevance and suitability.

The team at mdp have extensive experience in assisting clients in every stage of their business, both locally and internationally.

Michael McDonald

Michael McDonald

Director, BA LL.B at mdp
Michael is a highly respected and pre-eminent lawyer, commercial advisor and businessman with a career spanning more than 35 years across corporate, commercial and intellectual property law. He has specialist expertise in, and passion for, commercialising and growing Australian businesses both in Australia and internationally.
Michael McDonald

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