If your business is at a stage where you own a large amount of intellectual property and other important assets, is beginning to seek investment opportunities, or expanding its operations into different business units, moving your business to a dual company structure may be appropriate.
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.
The holding company’s sole responsibility is to hold all of the business’ important assets, such as intellectual property; stock; machinery; and cash from investments.
On the other hand, the operating company enters into contractual arrangements with customers, employees, suppliers and other parties.
What Are the Benefits of a Dual Company Structure?
- Asset Protection
One of the key advantages of a dual company structure is asset protection. Since the holding company is the legal owner of key assets, those assets could be protected from legal claims, such as third-party claims made by suppliers or customers.
Dave Smith owns a software-as-a-service business and operates through a dual structure. His holding company, Dave Tech Pty Ltd, owns all of the business’ intellectual property. His operating company, Smith Tech Pty Ltd, enters into agreements with customers. A customer brings a claim for breach of contract against the business. Since that customer signed the agreement with the operating company, their only course of action is against that company. As Smith Tech Pty Ltd does not legally own any of the business’ assets, it is highly unlikely they will be available to the customer if they win their case.
- Investment Opportunities
Many investors prefer to invest through a dual company structure because of the benefits they provide in relation to asset protection.
Changing from a Single to a Dual Company Structure
It can be lengthy process and heavily hinges on tax advice. We recommend seeking advice from one of our commercial lawyers as a first step. Restructuring will usually attract capital gains tax, but there may be ‘CGT roll-over relief’ available to you.
There are two key ways of performing this type of restructure:
- Restructuring Up (placing a new holding company above the existing company);
- Restructuring Down (using your existing company as the holding company and incorporating a new operating company so that your existing company will wholly own the new one).
A dual company structure is a more sophisticated business structure that offers a higher level of protection and is more attractive to investors. Restructuring from a single to dual company structure is an involved process that hinges heavily on tax advice.
For more information and expert advice, ask to speak to a lawyer at Ezra Legal on (08) 8231 6100 or email firstname.lastname@example.org
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