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Licensing Fee: Definition & Overview

Updated: November 25, 2022

Any money paid by a third party (licensee) to an owner (licensor) in exchange for authorization to use a right, property, or asset while the licensor retains ownership is referred to as a typical licensing fee.

But how exactly do licensing fees work? And what are the pros and cons of a license fee?

Read on as we take you through all you need to know. 

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    KEY TAKEAWAYS

    • A licensing fee is capital that is paid for the ability or right to use a property or asset. 
    • Things that can be licensed include patents, software, and copyrighted works. 
    • Other types of fees include those that are needed to practice in a certain profession. Such as doctors needing a medical license. 

    What Is a Licensing Fee?

    The term licensing fee is most commonly used when describing an amount of money that is paid to an entity for a certain ability or right. Realistically, the term can be used for a wide range of reasons. 

    A licensing fee could be an amount of money that is paid by a business or individual to a government agency for the purpose of performing a certain service. Or potentially for engaging in a specified line of business. 

    Licensing fees can also be paid for copyright, patents, and trademarks, among other things. 

    Another common phrase for licensing fees are royalty payments. 

    Hit The Ground Sprinting

    How a Licensing Fee Works

    Before a person can practice a variety of occupations, many of them require licenses. These licenses are often granted following the person’s passing a certification exam and/or finishing a predetermined number of required training hours.

    A person is a licensee once they have their license. To keep their licenses, they might need to take more examinations and courses, and spend more money in the future. If they are proven to have broken the law or the code of ethics for their profession, their licenses could also be revoked.

    State governments frequently grant these licenses. This means that anyone who wants to conduct business in multiple states might need to apply for a license in each state. For instance, life insurance agents are normally licensed in their home state or the state where their business is based. Through reciprocity agreements with other states, they can receive nonresident licenses to conduct business in those other jurisdictions.

    The federal government, in addition to the states, levies license fees on specific company categories.

    What Are the Pros and Cons of Licensing?

    Some of the pros of licensing fees for the person doing the licensing are as follows:

    • They are a form of income that doesn’t have any overheads.
    • They can help you enter foreign markets easily
    • It can help to avoid conflict over ownership rights

    There are also some disadvantages to be had, such as:

    • There is a greater risk of IP theft
    • There is no guarantee of revenue
    • You are at risk of a diminished reputation if your licensee doesn’t conduct business in an ethical way
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    Example of a Licensing Fee

    Most people decide to employ an intellectual property lawyer to design the licensing agreement when they enter into a business relationship where one party wishes to use the property of another party.

    An adept license agreement attorney will be aware of the clauses and phrases that must be included in the agreement in order to safeguard both parties interests and adhere to legal requirements.

    Other examples include:

    • A liquor license
    • Cosmetology license
    • Commercial driver license
    • Regular driver license

    Summary

    An organization or person must pay a licensing fee to a government body in order for them to legally engage in certain activities, such as the sale of goods or services. This can also be used to describe the fee that an individual or group charges for the use of their intellectual property.

    Licensing fees are a good way for businesses and business owners to mark their intellectual property. It also allows them to have a solid form of income that has no overheads. License fees can help to avoid confusion over ownership and rights, meaning there are fewer conflicts that appear. 

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    FAQS About Licensing Fee

    How Do You Price a Licensing Agreement?

    Licensing agreements are calculated according to a predetermined percentage of the retail or wholesale price. This is normally paid as either a regular license fee or an upfront license fee. 

    How Do Licensing Deals Work?

    A licensing deal works by allowing one party to use and or earn revenue from the property of the other party.

    Is the Licence Fee Taxable?

    License fees are regular payments, so would count as an expense. Any entity that has income from a licensing fee would count it as income, so it would be taxable.

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