Do You Own the Software Your Business Purchases?

On Behalf of | Jan 14, 2025 | Business And Commercial Law

When running a business, it’s common to think of purchased items as assets owned by the company. Physical assets like equipment, vehicles, or office furniture clearly fall into this category and contribute to the overall valuation of your business. But what about digital assets like software? The answer might surprise you: in many cases, you don’t actually own the software your business uses, even if you’ve paid for it.

Understanding the distinction between owning and licensing software is critical for managing your resources effectively, avoiding legal issues, and making informed decisions about your business operations.

The Role of Licensing Agreements

When you “purchase” software, what you’re often buying is a license to use it, not ownership of the software itself. A licensing agreement outlines what you can and cannot do with the software.

For example:

  • Licensing Limits: Most software licenses grant usage rights for a set period or under specific terms. These terms often prohibit transferring, reselling, or modifying the software.
  • Non-Ownership: You don’t gain control of the underlying code or intellectual property. Once the license expires, you lose access unless you renew or upgrade.

This model is like renting an apartment. You can live in the space and use its amenities, but you don’t own the property, and you can’t sell or alter it.

This concept also applies to personal use, such as when consumers think they’re “buying” a movie or a video game. In reality, they’re paying for a license to watch or play under specific conditions.

The Shift to Subscription Models

In recent years, the software industry has moved increasingly toward subscription-based models. Companies like Adobe, Microsoft, and others have shifted their products to cloud-based platforms, requiring users to pay monthly or annual fees to maintain access.

For instance:

  • Recurring Costs: Your business may pay $50–$200 per month for tools like graphic design software or project management platforms.
  • Access Dependency: Once you stop paying, access to the software often ends immediately. This contrasts with older models where a one-time purchase granted perpetual use of the software (albeit without updates).

The subscription model benefits software companies by providing a steady income stream. For businesses, this means predictable expenses but also an ongoing financial obligation.

Why This Matters for Your Business

Not owning the software you rely on can affect your business in several ways:

  1. Asset Valuation: Unlike physical assets, licensed or subscription-based software typically doesn’t contribute to your business’s valuation since you don’t own it.
  2. Budget Planning: Subscriptions create recurring costs that need to be managed carefully to avoid budget overruns.
  3. Continuity Risks: If a subscription lapses or a licensing dispute arises, your business could lose access to critical tools, potentially disrupting operations.
  4. Resale Value: You can’t sell or transfer unused software licenses as you might with physical equipment, which limits your ability to recoup costs.

Practical Tips for Business Owners

To navigate this complex landscape, consider the following:

  1. Understand the Agreement: Before purchasing software, read the licensing agreement carefully. Look for details on usage restrictions, renewal terms, and what happens if you stop paying.
  2. Evaluate Long-Term Costs: Compare subscription costs with one-time purchase options, if available. Sometimes, paying more upfront can save money in the long run.
  3. Assess Ownership Alternatives: Some businesses opt for open-source software, which allows for more flexibility and ownership. Evaluate whether this is a viable option for your needs.
  4. Monitor Software Needs: Conduct regular audits to determine which software your business truly requires and eliminate unnecessary subscriptions.
  5. Plan for Continuity: Develop contingency plans to ensure uninterrupted operations if access to key software is disrupted.

Avoiding Legal Pitfalls

Licensing disputes can arise when businesses inadvertently violate licensing terms—such as using a single-user license across multiple devices. To avoid legal complications:

  • Ensure compliance with all licensing terms.
  • Consult with an attorney to review contracts for high-cost or mission-critical software.
  • Maintain proper documentation of all software purchases, licenses, and renewal schedules.

Conclusion

Understanding the difference between owning and licensing software is crucial for business success. While software is essential to modern business operations, it’s important to recognize that the money spent on it often buys access, not ownership. By being proactive and informed, you can make smarter financial decisions, minimize risks, and ensure your business operates efficiently in the digital age.