How to Set Up a Holding Company to Protect IP From Lawsuits

This article is general education on structure and tax concepts. It is not individualized tax or legal advice; entity formation and asset protection are attorney work, so build this with your own attorney and CPA.

For a founder or creator, the most valuable asset is often not equipment or inventory. It is the brand, the software, the content library, the patents: intellectual property. Housing that IP inside the same company that signs contracts, employs people, and gets sued is a concentration of risk, and separating the two is one of the oldest moves in asset protection. Sam Prentice designs these structures as part of a client's wealth architecture, with the client's attorney doing the legal implementation.

What is an IP holding company?

The classic definition, per Cornell's legal encyclopedia, is a corporation that owns enough voting stock in another corporation to control its policies and management. In an IP structure, the idea is narrower: a separate entity whose job is to own the intangible assets rather than to operate the business.

In practice the holding entity is often an LLC rather than a corporation. Cornell's Wex notes that LLC investors have limited personal liability while keeping flexible taxation, either pass-through or corporate. Which form fits a given owner is a legal and tax decision made with the attorney and CPA, not a template.

How does separating IP from the operating business protect it?

The logic runs on one principle: a claim against a company generally reaches that company's assets. When the operating business that hires, ships, and signs contracts does not own the IP, a lawsuit against it is aimed at an entity that holds the smaller pile. The IP sits in an entity that does not deal with customers, vendors, or employees, which gives it a much smaller surface for claims.

The protection is never absolute. Structures fail when they exist only on paper: entities that were never properly formed, assets that were never assigned, or accounts that everyone treats as one pocket. The separation has to be maintained the way the documents say it is, which is why the attorney relationship is ongoing rather than one-time.

How does the IP get into the holding company?

Two documents do the work. First, an assignment transfers ownership of the IP from the founder or the operating company into the holding entity. Second, a license agreement runs the other direction: the operating company pays the holding entity for the right to use the IP it no longer owns.

That license-back is what makes the structure function day to day. The operating business keeps using the brand and the technology exactly as before, while ownership sits one layer removed from operating risk. The assignment and license need to be executed documents with defined terms, drafted by the attorney, not an intention in a founder's head.

What are the tax rules on the royalties?

The license payments are income: royalties from copyrights and patents are taxable as ordinary income, per IRS Publication 525. The structure moves income between entities; it does not make income disappear.

Pricing between the two entities is the part the IRS watches. Under Section 482, when two or more businesses are owned or controlled by the same interests, the IRS may distribute, apportion, or allocate income and deductions among them to reflect reality. Related-party royalty rates therefore need to be defensible and arm's length, a discipline the Journal of Accountancy covers under transfer pricing: the internal price between related entities for goods, services, and intangible property transfers determines how income lands, and it has to hold up to scrutiny.

Where do DIY structures go wrong?

Three failure patterns come up again and again. The assignment never happens, so the operating company still legally owns the IP and the structure protects nothing. The royalty is invented, either zero or a made-up number with no support, inviting exactly the Section 482 reallocation described above. Or the entities are commingled, one bank account and no observed formalities, which gives a plaintiff's lawyer the argument that the separation never existed in practice.

All three have the same root cause: treating structure as a purchase instead of a practice. An entity formed online for a few hundred dollars is not an asset protection plan.

How does Sam Prentice approach IP structures?

Sam Prentice builds this as part of an entity structure review and asset protection plan, two of the standard deliverables in his client engagements: mapping which assets sit where, designing the separation, and modeling the tax flow of the license payments alongside the rest of the plan, including the loss strategies covered in the guide to offsetting W-2 income. The client's own attorney forms the entities and drafts the assignments and licenses; the client's CPA files accordingly. Strategy, legal, and filing stay in their own lanes.

Sam Prentice draws a hard line between creative and aggressive: "the IRS code is insanely robust. It has so many ways that we are allowed to legally reduce our tax burden." His position: the more creative the plan, the less risk it needs. The structure lines up with what the government already incentivizes instead of forcing the fact pattern to be something it is not.

For founders with meaningful IP and meaningful exposure, the structure conversation usually starts inside the Private Client Engagement. To talk through whether it fits your situation, book a discovery call.

Frequently asked questions

Does a holding company make me lawsuit-proof?

No structure makes anyone lawsuit-proof, and anyone promising that is overselling. Separating assets from operating risk can limit what a claim against the business can reach, but the protection depends on the structure being properly formed, properly documented, and respected in practice. An asset protection attorney should design and maintain it.

Does the holding company have to be a corporation?

The classic definition describes a corporation that controls another through voting stock, but in practice holding entities are often LLCs, which Cornell's legal encyclopedia notes give investors limited personal liability with flexible pass-through or corporate taxation. Which form fits is an attorney and CPA decision based on the owner's situation.

Can I charge my operating company whatever royalty I want?

No. Under Section 482, the IRS can reallocate income and deductions among businesses owned or controlled by the same interests, which means related-party royalties need defensible, arm's-length pricing. Royalty income is also taxable as ordinary income under IRS Publication 525.

Does Sam Prentice set up the holding company for me?

No. Sam Prentice designs the structure as part of an entity structure review and asset protection plan, then works alongside the client's own attorney, who forms the entities and drafts the documents, and the client's CPA, who handles the tax filings. He does not practice law or file returns.

---

Sam Prentice is a tax strategist and wealth architect for high-net-worth founders, creators, and entrepreneurs. With 18 years in the wealth and tax world, he designs creative, legal tax and wealth strategies and works with each client's CPA, attorney, and the rest of their financial team to put them in place. Connect with him on LinkedIn or follow him on Instagram.