Intellectual Property Blog

How to Structure NIL the Right Way from the Start

In the ever-changing landscape of college and youth athletics, athletes need to make sure they have a structure in place to both protect and easily monetize their most important and valuable asset: themselves. In the Name, Image, and Likeness (“NIL”) era, athletes have never had more power as it relates to compensation for who they are and what they can do. However, with that power likewise comes pitfalls and risks that each athlete needs to consider before they sign any deal. Before any athlete signs any NIL contract, they need to have a structure in place that properly protects them, their brand, and their rights while also allowing enough flexibility to quickly and efficiently capitalize on opportunities when their value is perceived to be at the highest.

Choice of Entity Considerations

When an athlete is looking at establishing a legal entity from which he or she will conduct their business, the main considerations will always be: (i) liability protection, (ii) operational flexibility, and (iii) tax treatment. In the modern legal landscape, there is one entity in particular that serves business owners the best: the limited liability company or LLC. LLCs are relatively new entities but have become the predominant business type formed across the country because of the three reasons listed above. LLCs offer owners the maximum amount of liability protection under the law, allow owners certain flexibilities in how they are run and operated, and can elect different tax treatments depending on the needs of the owner.

For the purposes of NIL, the LLC is the perfect vehicle for capturing and monetizing their various revenue streams and opportunities. The athlete can protect their other personal assets by housing them in the LLC and shielding the other assets from potential liability. The athlete can also choose whether they want to follow other corporate formalities or not. For example, the athlete doesn’t need to conduct annual meetings or have officers and a board of directors if they don’t so desire, as would be required if they chose a corporation as his or her business entity. Finally, an LLC can be treated, for tax purposes, as a partnership, a c-corp, or an s-corp, all of which have various benefits and drawbacks and can depend on what the athlete and their team of professionals decide is best for their particular situation.

Intellectual Property Considerations

For star athletes, intellectual property protection as it relates to their personal brands and image are paramount, especially in today’s NIL landscape. Any logos, trademarks, copyrights, or right of publicity rights need to be properly registered and protected in order to control how and who can legally exploit these rights. However, an underappreciated consideration for athletes is how they can effectively exploit these themselves.

Because of the numerous possibilities of revenue-producing streams that are out there for athletes, from product endorsements and speaking opportunities to potential investment and co-branding or joint venture opportunities, an athlete needs to make sure that they can efficiently and legally use these different types of intellectual property while also protecting themselves and their other assets.

Athletes need to make sure that when they create a brand, logo, or other protectable intellectual property, that they register such property with the US Patent and Trademark office. So long as the intellectual property isn’t already registered and doesn’t infringe on another party’s established rights, such a registration gives the owner national protection over the use of such property.

Corporate Structuring

As for the corporate structuring considerations, athletes should look at employing a holding company structure. This type of structure would involve a single parent company, or “holding company,” which would be the legal owner and holder of all intellectual property registrations and rights of the various types of intellectual property created and associated with the athlete. The holding company has the ownership rights to these pieces of intellectual property, but also has the right to allow others to use the property, accomplished by way of a license. The holding company would also own other subsidiary companies whose purposes relate to the different types of opportunities or revenue streams that the athlete could exploit. For example, one subsidiary company could be responsible for all speaking engagements, another subsidiary company could be responsible for any product branding, and another subsidiary company could be related to all marketing and advertising. With all subsidiary companies established, the holding company would grant a license to the applicable subsidiary for any and all intellectual property that such subsidiary would need for its purpose. That subsidiary can then later on enter into contracts, agreements, or documents and properly represent that it has a valid right to use that intellectual property.

By putting each of these revenue streams into their own subsidiary company (likely an LLC as well), the athlete can contain both the reward and potential liability of such opportunities into their own distinct entities while also keeping their other assets protected in the event of some legal claim. Athletes and their teams of professionals need to likewise be conscious of maintaining separate records and bank accounts for each entity and not co-mingling assets of the assets. Doing so maintains liability protection under the applicable state laws, or else they run the risk of losing liability protection altogether in some extreme circumstances. Additionally, athletes and their teams need to know the various state laws about business ownership so as to make sure they are complying with all corporate laws in each jurisdiction in which an athlete is conducting business.

Conclusion

The old adage of “the best offense is a good defense” is applicable to both sports and legal representation. The proper legal structure for an athlete and his or her intellectual property and intellectual property rights allows them to both capitalize on their current value but also make sure they are protected from any unforeseen and/or future risks. If an athlete can get the right legal structure put in place and has the right group of professionals around him or her, that athlete can spend less time worrying about their legal worries and more time developing their athletic traits and becoming the best at their sport.

Jameson M. Seiffert is a Member of McBrayer PLLC who practices in the business and corporate law group, with experience spanning tax credit equity financing, contract drafting and review, entity formation, economic development, and representing businesses in merger and acquisition transactions. He can be reached at jseiffert@mcbrayerfirm.com and (502) 327-5400.

Services may be performed by others. This article does not constitute legal advice.