It Takes Two to Incorporate: The Role of Patent Co-Ownership in Inventor Choice of Business Form

The literature on the theory of the firm and the reasons why entrepreneurs choose one type of business organization over another is massive. However, few empirical studies have been conducted to test the importance of the various proposed determinants of choice of legal form of organization in real-world industries. This paper helps fill that gap through an econometric investigation of the differences in the characteristics of two groups of independent inventors engaged in the business of patent monetization: inventors operating as sole proprietors and those operating through business organizations, almost always LLCs or close corporations. The results suggest that commonly proposed rationales for “incorporating,” including deferred taxation and limited liability, might play a role in inventors choosing to monetize and litigate their patent rights through a business organization rather than as individuals.

However, I find that the key determinant of legal form of organization for inventors is the presence of coowners of the patents. Strikingly, 75% of independent inventors who have taken their monetization business to court through a business organization share their patent rights with other owners. The same is true of only 15% of independent inventors who litigate as natural persons. This is far and away the largest difference in the traits of these two inventor groups, and I argue it provides strong evidence for the transaction costs theory of the firm, whereby the costs of making business decisions and negotiating profit shares outside of a firm increase with the number of stakeholders.

I thus conclude that independent inventors who share ownership of their patents frequently utilize business organizations in order to pre-commit to cooperation in conducting their licensing business.