The rich don't risk their valuable business assets by owning them in the same company as their business operations. They use multiple entity structures to separate their critical business assets from their business operations.
We commonly see businesses run their operations and hold their assets through a single company structure. As a result, creditors of any sort could potentially attack the company and have access to these critical business assets, which can be extremely damaging or devastating.
Sophisticated owners and businesses instead mitigate this exposure through separate ownership of their operations and their valuable business assets into two distinct companies. This adds a barrier against potential litigants (which can include creditors, employees, customers and anyone else with a claim against the business).
In today's feature article, we compare single and dual company structures and explain why dual (or multiple) entity structures are preferred by rich and wealthy business owners.
Even if your only asset is cash, if your business is sizeable enough, it is often worthwhile considering a dual entity structure to protect your business assets and maximising tax efficiency.
So let's dive in.
At a glance
For many businesses, a dual company structure could be more advantageous than a single company structure in order to:
Protect critical company assets
Maintain and potential improve tax minimisation strategies
While these structures have increased complexity and higher establishment and ongoing costs, for businesses of any material size, it is often worth the investment.
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Article - How the rich structure their business operations
Background: the problem with single entity structures
We commonly see businesses running their business operations through a single company structure, similar to this structure:
In a one company structure, a single company bears all of the business’s responsibilities. This means that the company:
trades on behalf of the business
enters into business contracts
retains ownership of all assets, including intellectual property
bears liability and
employs employees.
Although the one company structure is comparatively simpler and the shareholders have limited liability, this is not how the rich structure their business operations.
The major pitfall with this structure is that all the business assets are owned within the same entity that operates their business, which means creditors of any sort could potentially attack the company and have access to these critical assets in the suit.
Critical business assets could include:
intellectual property
valuable machinery
land holdings
business related investments
cash
This structure also does not provide tax-free dividends and has limited flexibility if owned directly (which we also generally do not recommend).
The dual or multiple entity structure
A more advantageous structure is a dual or multiple entity structure which separates the critical business assets from the business operations through the creation of two separate entities.
A dual company structure consists of an operating subsidiary company that undertakes the following:
trades on behalf of the business
enters into contracts
incurs liabilities and
employs employees.
A holding company (or another company within the group) owns all of the business assets including any property, and intellectual property, and is separate and distinct legally from the operating entity.
A typical dual company structure may look something like this (note: this is a simplified structure):
Having both an operating company and a holding company provides greater asset protection than the one company structure. As the company holding assets is distinct and separate from the operating company, the business's valuable assets are afforded greater protection from third parties, employees, clients, creditors and suppliers.
Note: more than two companies may be advantageous, including where a significant asset could be especially valuable or susceptible to creditor risk (e.g. an interest in land or real property).
Disadvantages of the dual or multiple entity structure
While the dual company structure offers advantages, it also has some disadvantages that are important to note.
Firstly, there are associated complexities with setting up the two companies separately including but not limited to costs, legalities and agreement between the companies.
Furthermore, if an operating company acts on behalf of the holding company in the scope of an agent, as per the laws surrounding agency, the holding operating company will be liable for the agent’s actions.
There is also a risk that in certain, rare circumstances, the court may look past the separation of the two companies and view the holding company as the operating company’s shareholder, ‘piercing’ the corporate veil. It is important therefore to obtain legal assistance to understand and manage these risks.
Finally, there will be additional ongoing cost of the holding company, including annual ASIC fees and accounting expenses.
That said, while setting up two or more companies is more complex than setting up one, the ability to protect assets is very often an advantage that makes this worthwhile, especially where certain assets are so critical to the business that a loss to those assets could be damaging or even devastating.
When should I set up a dual entity structure?
The cleanest and most prudent time to set up the structure is at the very beginning of the business's life. While you may currently not have many assets that require protection, it can be important to have a business structure that is ready to accommodate the future needs of your business.
However, if your business is already established, it is relatively straightforward to implement a dual entity structure, though there could be some tax and legal implications that need to be managed in the process of separating the assets from the business operations.
Consult your accountant for help formulating your strategy.
The Closing Word
Ensuring protection of business assets from creditors, while maintaining income and tax minimisation strategies, are hallmarks of how sophisticated businesses and the wealthy structure their business holdings and operations.
Dual and multiple entity structures are one of the measures implemented to achieve these goals, in addition to personal wealth holding structures.
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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!
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