The term "royalties" is used to describe a revenue source for many different types of intellectual property as well as in the oil, gas and mineral industry. Book royalties, for example, are paid to the author each time a published book is purchased. Likewise, a patent holder is often entitled to royalties each time his patent is used by a company.
An incorporated business may own a number of different types of assets, including overriding royalty interests in oil, gas or minerals. The income derived from all assets owned by a company is shared by all stockholders of the company. As a result, royalty income may be part of dividends earned by stockholders or a company may choose to assign all royalty rights owned by the company over to stockholders.
Royalties in General
Stockholders are people who own a share of a company. A company can be privately held, meaning the general public cannot purchase shares of stock in the company, or publicly held, meaning that anyone can purchase shares in the company. When a public company needs to raise capital, it often makes a public offering of stock. Privately held companies are often family-run companies; however, the concept of stockholders, or shareholders, is the same whether the company is private or public. Each stockholder owns a portion of the company and therefore is entitled to share in the success or failure of the company. Each share of stock represents a portion of the net assets of the company. Stockholders may also be entitled to dividends each year on the stock they hold.
Overriding Royalty Interests
Oil, gas and mineral royalties operate in much the same way as intellectual property royalties. If, for example, you own a large tract of land where a natural gas deposit has been found, you may decide to lease the land to a company to harvest the gas. You, as the owner, may structure the lease agreement so that you are entitled to royalties, or a percentage of the income derived from the gas production. Overriding royalty interests are royalties that are paid for the duration of a lease agreement and that are calculated before any expenses involved with producing the oil, gas or minerals.
Relationship between Stockholders and Royalties
A company can own royalties as part of the company assets just like an individual can own royalties. Income earned as a result of overriding royalty interests which are paid to a company may be part of the company's net income for the year and therefore be included in any dividends owed to stockholders each year. In addition, a company can directly assign the rights it has to any royalties to the stockholders, if it chooses to do so. In that case, the stockholders become the sole owners of all rights to the royalties for the duration of the lease.