If you’ve already got your head around holding company structures, you might be wondering whether to take things a step further – separating your software IP into its own dedicated entity. It’s a move that can offer real protection and tax advantages, but the timing matters more than most founders realise.

Here’s what you need to know before you make the call.

What Is an IPCo and How Does It Fit In?

An IPCo (IP company) sits alongside your operating company (OpCo), with both owned by a holding company (TopCo) above them. If you’ve read our guide to dot, line and triangle structures, you’ll know this is what we call the triangle.

In this structure:

• IPCo owns the software – the code, the product, the brand
• OpCo runs the business – staff, contracts, revenue, commercial risk
• IPCo licences the software back to OpCo in exchange for a royalty

The result is that your most valuable asset sits one step removed from the entity carrying all the trading exposure. If OpCo ever faces a serious legal or financial problem, the IP isn’t caught up in it.

Why Founders Consider Moving IP to a Separate Entity

Asset protection

OpCo carries the day-to-day risk – customer contracts, employment obligations, supplier relationships. Keeping the IP in a separate entity means it isn’t exposed to those liabilities. For a software business where the product is the value, that separation matters.

Cleaner due diligence for investors and acquirers

Sophisticated investors want to see where the IP lives before they write a cheque. Clean IP ownership in a dedicated entity makes due diligence faster and deal structures simpler. It signals that you’ve thought about your structure, not just your product.

Tax efficiency

Royalties paid from OpCo to IPCo are deductible. Provided the arrangement is commercially genuine, consistently maintained and properly documented, this can create meaningful tax efficiencies as the business scales.

The Timing Problem Most Founders Get Wrong

This is where it gets nuanced – and where getting the wrong advice can cost you.

Moving too early

Before you have meaningful revenue, the compliance overhead is hard to justify. You need a properly drafted IP licence agreement, a commercially defensible royalty arrangement, intercompany loan documentation if the transfer involves deferred consideration, and ongoing bookkeeping to manage the flows. Realistically you’re looking at several thousand dollars to set up, plus real ongoing compliance costs every year. If the software is still changing rapidly and its value hasn’t been established, that’s a lot of cost to protect something uncertain.

Moving too late

Here’s the catch. When you transfer IP between related entities, the ATO requires it to happen at arm’s length – meaning the price must reflect what an unrelated buyer would pay. In the early stages, before the software generates meaningful revenue, that value is modest. The transfer is straightforward and the CGT exposure is low.

As the business scales, the embedded value of the software rises with it. By the time you have material ARR and a growing customer base, transferring the IP may crystallise a significant capital gains tax liability and require an independent valuation. What was a clean exercise at year one becomes an expensive and complex one at year four.

The practical sweet spot

For most software founders, the right window sits somewhere between first meaningful recurring revenue and the point where the software becomes clearly central to the business’s value.

Watch for these triggers:

• You’re approaching a capital raise and investors will scrutinise the structure
• You’re about to invest heavily in a new version or product line and want that development to sit in IPCo from the start
• You’re considering licensing the software to a third party or expanding offshore
• OpCo is starting to carry real commercial risk and the software is worth protecting from it

If none of those apply yet, staying as a dot or line and revisiting in 12 months is a perfectly reasonable call.

What the Transfer Actually Involves

OpCo assigns the software IP to IPCo by written deed of assignment. Before you get there, you need to confirm you actually own what you’re transferring.

The most common problem founders run into is code built by contractors without proper IP assignment clauses in their agreements. If that’s your situation, clean it up first – otherwise you’re trying to transfer something you don’t fully own.

What “software IP” typically covers:

• Source code and applications
• APIs and integration frameworks
• Data models
• Product documentation
• UI/UX designs
• Trademarks over the product name and brand

Is the Triangle Right for You?

The triangle is a genuinely useful structure for a software business of real scale. It’s not the right answer on day one – and it’s not free to maintain.

The question worth asking isn’t just “should I do this?” It’s “what does the transfer cost me today versus what does the risk exposure cost me if I wait?” That’s a modelling exercise worth doing properly before you commit either way.