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Using San Diego Affiliated Companies to Protect Intellectual Property
Under some circumstances, there is value to using or creating an affiliated company to protect intellectual property from risks associated with other parts of an ongoing business. Under California law, the same group of individuals or entities can own more than one corporation. If the companies are kept separate and the corporate formalities are maintained, the corporate structures may shield each company from liabilities that are incurred by the other. If you are considering forming an affiliated company, you will need a good corporate lawyer to help. Here is a quick primer on forming affiliated companies in California.
San Diego Corporate Law: Affiliated Companies
Under California law, affiliated companies that are owned by the same individuals or entities are permissible. In general, the purpose of affiliated companies is to split various parts of a business and assets, like intellectual property, and divide them up into separate affiliated companies. The larger purpose is to provide an extra layer of protection for various assets.
In California, it is well-established that affiliated companies ordinarily cannot be held liable for the acts or debts of another affiliated company unless there is some reason to pierce the corporate veil. In general, to permit veil piercing, there must be some misconduct or injustice like a fraudulent or deceptive intent with respect to creditors, lenders, shareholders or others. See, for example, Sonora Diamond Co. v. Superior Court, 99 Cal.Rptr.2d 824 (2000).
As an example, assume your business is running music concerts/exhibitions. Part of the business is creating new music to be played at the concerts. The music, a key draw for the patrons, is copyrighted, and generates a stream of royalties. Under these circumstances, it may be advantageous to “spin off” the music writing and copyright part of the business into a separate company. Exhibitions and concerts can be risky — a slip and fall, an accident, some breach of a vendor contract, customer complaints, permit violations, etc. If there is litigation, then the royalties and the music/intellectual property assets are potentially at risk to pay any judgment. By contrast, if those assets are sealed off in an affiliated corporation, then those assets are shielded.
San Diego Corporate Law: How is an Affiliated Company Formed and Operated?
An affiliated company is formed in the same manner as a normal company. Indeed, the new company is just like any other corporation or limited liability company. The affiliated company operates in the normal manner, too.
However, it is crucial that the owners of the affiliated companies strictly maintain the separation of the companies. Since the owners are often the same, there is a natural tendency to take short cuts. But, a common set of owners is one fact that the courts use to evaluate whether veil piercing is permissible. Thus, it is important to avoid any actions that could be interpreted to comingle the two companies. For example, there should be separate bank accounts, separate tax ID numbers, funds should never be commingled, separate offices should be established if possible, a varied board of directors should be elected, dedicated employees should be hired for the separate companies, if possible, etc.
Contact San Diego Corporate Law
For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to help you form an affiliated San Diego corporation or LLC, can draft your bylaws or operating agreement and can provide advice and guidance on how to properly maintain the separation between the corporate entities. Mr. Leonard can also assist with other business-related and intellectual property matters. Contact Mr. Leonard by email or by calling (858) 483-9200.
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