Document Type
Research Memorandum
Publication Date
2026
Abstract
(Excerpt)
There are various ways in which the founders of a company may structure their business. While a key focus of corporate planning is how to maximize revenue and operate efficiently, minimizing the risk associated with financial distress is an equally important consideration. A corporation’s structure is made during a time of stability, but it must account for the ultimate financial distress—bankruptcy. Asset allocation is a critical step in the planning stage of a business enterprise, especially when considering creditors the company is going to take on. Companies’ intellectual property ("IP") may be highly valuable assets that must be considered in this allocation. One way to organize is to place the IP in a separate subsidiary. However, placing IP in a separate subsidiary may not be enough to shield the IP from creditors in the event of a bankruptcy petition of the operating company. This article suggests that, despite its appeal, the IP holding subsidiary structure remains vulnerable to creditor claims through several established legal doctrines. Restrictive covenants in a debtor’s loan agreements and the doctrines of substantive consolidation, fraudulent transfer, and piercing the corporate veil are all tools at a creditor’s disposal to recover on these assets to satisfy the operating company’s debts.
An IP holding structure is common practice as a tax strategy. The operating company places the IP subsidiary in a low-tax (often foreign) jurisdiction. The high-tax-jurisdiction subsidiaries then have to license the IP from the holding company. The royalty deduction in the high-tax jurisdiction will offset a portion of the income tax. Then tax is paid in the home country of the IP holding subsidiary at a low-tax rate. Therefore, a benefit is created. However this structure is useful for more than just a tax strategy; an operating company can place the IP in a separate subsidiary in an attempt to have it be bypassed by creditors in the event of an operating company bankruptcy. This shield is useful because many large companies have IP assets that make its overall enterprises more valuable. If the IP does not enter the bankruptcy estate, the subsidiary may then retain the ownership of these core assets and erase the risk that the IP can be seized to satisfy unrelated debts. But there can be some risks with this type of structure such that it may not withstand a bankruptcy filing.