The Zombie Co-Owner: When Intellectual Property Ownership is Split

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.