Business World

Understanding Royalties: How and Why They Are Paid

Businessman Pointing to a Text that says RoyaltiesWhen you use a copyrighted work, you can’t simply use it or pass it on as if it were your own. The person or company that owns the work deserves to be recognized, often in the form of financial payment.

The same is true when you use a patented product or idea, a property, a natural resource, or a franchise. The legal owner of the “intellectual property” may charge a particular fee if you intend to use their property for a purpose that gives you profit or an advantage.

The payment you make to the original owner is called a royalty, and it is legally binding.

How and Why Royalties are Paid

In most cases, an agreed-upon percentage is paid as royalty to the owner. Sometimes, the user of the property may negotiate, depending on how they intend to use the property.

An inventor, creator, or original owner often charges royalties in exchange for the use of their creation by a third party that “buys” their creation. The payment comes in the form of royalties from whatever revenues the third party generates in the future with the use of the production.

For example, you wrote and designed a comic book, and a film studio wants to make a movie based on your comic book. You may, through a contract, ask for a certain percentage of whatever the film makes in the box office, as well as any merchandise created and sold based on your comic book characters in the future.

How Do You Keep Track of Royalties?

It is often difficult for the original owner (or licensor) of the property to keep track of royalties. If your business builds software, for example, and sells it to third parties under license, you may find it a challenging addition to your work to keep track of and collect royalties for your software. This is why royalty management companies and systems exist, to help you in accounting for royalties and other activities related to your original property.

It is advisable to use a management company to avoid having problems with your royalty collection and accounting, especially if you have more than one product.