Not having provisions about control of your business’ intellectual property in your business operating documents is a grave mistake in intellectual property protection.
When one of the owners of a business dies, their ownership share is handled by their estate planning documents and the business’ operating documents, such as an LLC’s operating agreement or a corporation’s bylaws and shareholder agreement.
Why does it matter what the operating documents say about the ownership interest that gets inherited? If the documents aren’t clear that only financial interests and not voting or management interests are inherited, or insist that the heirs to the interest sell the interest back to the business, serious trouble with business management, including management of the business’ intellectual property, can occur.
If voting or management rights transfer to the heirs, they can be, essentially, zombie co-owners, whose lack of participation or refusal to cooperate with the other owners can completely hamstring the business when it comes to handling its intellectual property.
The Horror is that the remaining owners can't make key decisions, like licensing a patent or selling the brand, because the new, often inexperienced co-owner has to agree.
The Solution is to have one of two provisions in place:
1. A mandatory Buy-Sell Clause that compels the company to purchase the deceased member's ownership share (often funded by life insurance).
2. A Silent Partner Clause that says that upon the death of an owner/member/shareholder, only economic interests transfer, not voting rights or management rights, making the heir able to receive the financial benefit of ownership but not allowing them to interfere with the operation of the business.
These provisions ensure the management of the business’ intellectual property continues smoothly after you’ve gone.
Intellectual property is one of the most terrifyingly useful tools you have. If you're a creator or other entrepreneur ready to build a frighteningly powerful brand, you need to know how to use it.
You don't have to face the darkness alone. To learn more about protecting your creations, your name, your business, and your legacy, you can book a consultation with me at kingpatentlaw.com. I help entrepreneurs across the U.S. make smart, legally sound decisions about their intellectual property. I'm an attorney in Champaign-Urbana, Illinois, and I serve intellectual property clients nationwide.
You can find all of my other frighteningly good content on the King Patent Law website, at "Know Your Rights: Your IP and Business Law Playbook" on all major podcast platforms, and at @kingpatentlaw on most social media.
The information provided in this episode is for educational purposes only and does not constitute legal advice or form an attorney-client relationship. You should not act on any information presented here without first seeking the counsel of a licensed attorney for your specific legal needs.
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