How the rich structure their business operations - Part 2: Moving to a Dual Company Structure

In prior articles we spoke about the advantages of running your business through a dual entity structure, specifically to protect your valuable business assets. Today we look at alternatives to reorganise your structure in order to establish a dual (or multiple) entity structure in order to mitigate risk to your business.

However, don't forget that very often these structures are held within a trust, where appropriate. Read our article "Why the Rich Hold their Businesses in Trusts - Easy to Follow Practical Examples" for a simple to follow explanation as to why.

In the meantime, let's dive into today's feature article.

How the Rich Structure Their Business Holdings - Transitioning to a Dual Company Holding Structure

At a glance

A dual entity structure can be set up by:

• Restructuring Up - incorporating a new holding entity, transferring the operating company to the new hold co and transferring important business assets to the new hold co, or

• Restructuring Down - incorporating a new entity, which will become the new operating company, and transferring all the external agreements to the new operating co

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Article - How the rich structure their business operations

A company structure is a great way of running your business as it offers a high level of legal protection and tax advantages. It's how the rich structure their business operations.

However, you may be at a stage where your business owns a large amount of intellectual property and other important assets, is beginning to seek investment opportunities, or expanding its operations into different business units.

If this is the case, moving your business to a dual (or multiple) company structure may be appropriate.

While the ideal time to set up the dual company structure is at the commencement of your business, we often have new clients come to us seeking our assistance to move the structure established by their former advisor into a more efficient and secure structure.

In today's feature article, we look at some of the options available to those who may have been operating a single company structure and now want to move into a dual or multiple entry structure.

What is a Dual Company Structure?

A dual company structure involves:

• a holding company, where the shares are owned by the founders/investors; and

• one or more operating companies, where the shares are 100% owned by the holding company.

Dual Entity Example Diagram - Simplified Structure

As the names suggest, the holding company’s sole responsibility is to hold all of the business’ important assets, such as:

• intellectual property;

• stock;

• machinery; and

• any cash from investment.

On the other hand, the operating company enters into contractual arrangements with customers, employees, suppliers and other parties.

Steps to Change From a Single to Dual Company Structure

Restructuring from a single to a dual company structure can be lengthy and heavily hinges on tax advice.

We recommend speaking with your accountant or tax advisor as a first step.

Restructuring will usually attract capital gains tax consequences, but there may be ‘CGT roll-over relief’ available to you.

Broadly speaking, there are two ways of performing this restructure.

1. Restructuring Up

Restructuring up involves placing a new holding company above the existing company. From an asset protection perspective, this is often a better option, as the new holding company will be ‘clean’ (i.e. free from any historical claims).

As such, this is commonly the method we recommend, as it provides a "cleanskin" entity to capitalise on the advantages of the dual company structure.

Depending if you are relying on a particular form of CGT roll-over relief, the steps that are broadly involved are as follows:

1. incorporate the new holding company, usually with the exact same shareholding as the existing company;

2. transfer the shares in the existing company to the new holding company to ensure the existing company is now wholly owned by the holding company. This may need to be the subject of a share sale agreement;

3. assign all intellectual property owned by the existing company to the new holding company. This would be subject to an IP license and assignment agreement.

Restructuring Up - Steps to Transition to a Dual Entity Structure

2. Restructuring Down

Restructuring down involves using your existing company as the holding company and incorporating a new operating company. Consequently, your existing company will wholly own the new one.

Whilst this option is more straightforward to complete, it carries more risk. For example, the existing company could have existing claims or be exposed to potential claims (from an employee, supplier, client or government).

As such, you would be exposing key assets that it holds (as a holding company) to risk. However, the risk may be low if the existing company is relatively new and has not begun trading.

Generally, this method is usually only utilised where it is likely there will be a capital gains tax liability and/or it is relatively simple and risk-free to make the appropriate entity and operational shifts to achieve. However, this is less common than "Restructuring Up."

The other challenge with this method is that transferring the various agreements can be challenging to transfer and will require good commercial logic to justify to external parties why the change is occurring.

Depending on tax advice, the steps involved in restructuring down are as follows:

1. incorporate a new operating company that is wholly owned by the existing company;

2. transfer certain business assets to the new operating company, like supplier contracts, employee contracts, leases, and other business assets (excluding IP). This would be subject to an asset sale agreement; and

Restructuring Down - Steps to Transition to a Dual Entity Structure

The Closing Word

No matter how you get there, having a dual entity structure is critical to protecting important your crucial and highly valuable business assets. Consult your accountant to see how the structure could work for you.

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Sapphire Bay Partners is always delighted to help!

We love working with dynamic, proactive clients and helping their businesses grow.

If you would like assistance, feel free to reach out to us.

Tel: + 61 3 9563 4666

Email: letstalk@sapphirebay.com.au

Important Information

This is general information only so it doesn’t take into account your objectives, financial situation or needs. Sapphire Bay Partners is not giving you advice or recommendations (including tax advice), and there may be other ways to manage finances, planning and decisions for your business.

Carefully consider what’s right for you, and ask your lawyer, accountant or financial planner if you need help. Alternatively, feel free to reach out to Sapphire Bay Partners for assistance or referrals to an appropriate professional. We’re always happy to help!