Holding Companies and Ownership Structure for eCommerce Brands

By Paul S. Rafelson, Founder, Rafelson Law PLLC

Why do eCommerce owners use holding companies?

• Separating the brand from operations. A company that owns the trademarks, designs and domain names can license them to the company that sells, which can help keep valuable assets apart from operating claims.
• Several businesses under one owner. A parent can own multiple operating companies, one per brand or channel.
• Cleaner transactions. A buyer or investor can take the brand company or an operating company without untangling everything else.
• Owner planning. Owners hold their interests directly or through a company or trust, subject to tax and estate-planning advice. An S election limits who owns the shares, so a holding company for S corporation owners needs a specific design, such as a parent S corporation with qualified subsidiaries. We check the election before any ownership moves.

How does an IP-holding company work in practice?

The IP company owns the marks and licenses them to the operating company in a written license that sets the scope, term and quality-control standards. The quality-control terms matter: a licensor that does not control the quality of licensed goods risks losing the mark as abandoned, and use by a controlled related company inures to the benefit of the owner of the mark (15 U.S.C. § 1055). Moving a trademark between companies requires a written assignment carrying the goodwill of the business with it. An assignment of the registration alone is void. Most intra-group assignments get this wrong, and a buyer’s lawyer finds it in diligence. An intent-to-use application generally cannot be assigned before use is shown except to a successor to the business (15 U.S.C. § 1060(a)(1)). Do the assignment of any pending application carefully, and update the owner on record, including in Brand Registry.

What keeps the companies legally separate?

• Separate bank accounts, books and signatures for each company.
• Written intercompany agreements (license, services, loans) that are followed in practice.
• Each company adequately capitalized for its own business.
• Correct names on contracts, listings and invoices.

Courts can disregard a company’s separateness when the owners treat it as an extension of themselves, so the structure only helps if it is run as the paper says.

What does an ownership restructuring involve?

1. The target structure and the reasons for it.
2. Tax review with the owners’ tax adviser, because moving assets, adding or removing owners and converting entities can have tax consequences.
3. Contract review. Supplier agreements, loans, leases and licenses may restrict assignment or need consent.
4. Marketplace accounts. Amazon has a process to move a seller account to a new legal entity. We handle these transfers in sales and restructurings. Plan the move before you restructure, because it shapes the structure. Amazon treats the account as belonging to the business, and a restructuring moving the business to a new entity needs the account updated with it. Done out of order, the update can trigger a verification hold that stops disbursements. We sequence the entity change, the account update and the bank and tax records to limit the risk of an account interruption during the move. See our M&A pages for how the same work runs at closing.
5. The documents: assignments, new owners’ agreements, resolutions and updated records.

What about foreign owners and cross-border brands?

A brand owned partly from outside the United States needs coordinated U.S. and home-country advice on tax, reporting and where the brand and IP sit. Do not assume that a structure that works for U.S. owners works for non-U.S. owners. See LLC and company formation and entity structure and S-corp strategy.

How does the structure affect a sale?

Buyers of eCommerce businesses review who owns the brand, whether the IP is in the right company and whether the accounts can move. A structure set up well in advance usually gives the owner more options. See selling an eCommerce business.

How do I get started?

Contact us. Tell us the businesses, the owners and what you want to separate or move, and we will tell you whether we can help.

Paul Rafelson is admitted in Florida and New Jersey. Katie Dariano is admitted in New York. For a matter governed by another state’s law, or in another state’s courts, we bring in local counsel or seek admission as the rules require.

Frequently asked questions

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Sources and notes

• 15 U.S.C. §§ 1055, 1060(a)(1), 1060(a)(4); state entity statutes.