If you are looking to embark on a new business venture, one of the first decisions you will need to make is how to structure your company. This is the first of many strategic decisions you will need to make.
Keep in mind that a ‘company structure’ is not the only possibility for a new venture, however, it is by far the most common.
While it is possible (and relatively common) for a venture to consist of one stand-alone company, many ventures will often be set up as a ‘group’ from the get-go.
The group will often consist of the
- Holding Company,
- Trading Company, and
- will sometimes also have an IP Company.
The main purpose for splitting a single venture over separate legal entities, is to reduce risk and liability.
It is possible to re-structure a company to encompass a ‘group’ structure later, however it is often much easier (and cheaper) to do this from the start.
What’s the difference between a holding company & a trading company?
Put simply, a holding company owns and controls the assets on behalf of another company, known as the ‘trading company’.
It is general practice for the holding company to own the company’s intellectual property (IP) portfolio including trademarks, and patents.
A trading company, as its name suggests, engages in the operational side of the business. This includes the hiring of employees, entering in contracts and dealing with the day-to-day commercial activities of the business. As such, the trading company bears all liability and could be held responsible for anything unexpected that occurs.
For this reason, the trading company generally does not hold many assets.
Where the company wants to reduce risk of the IP even further, they may also create an ‘IP Company’ which is also 100% owned by the Holding Company. This separate IP Company would do nothing other than hold the company IP. This can be worthwhile for companies who have very valuable IP.
Why use a dual company structure?
The key benefit of a multi company structure is to mitigate the risks and to limit liability of the company and its assets.
While not all businesses will find value in a dual or tri company structure, you may want to consider how it could apply to your company with the following features in mind:
Whether your company holds valuable patents, trademarks or just generally wants to protect its IP from third parties, setting up a holding company can help mitigate risk.
For example: Where a company operates under a dual company structure and the trading company becomes insolvent, the IP and other important assets held in the holding company are further protected.
Inherent industry risk
In evaluating the risks that may face your business, it is important to consider the inherent risks associated with your company industry.
If your business regularly enters into contracts of substantial value with third parties, creditors, suppliers, or where the company operates in an industry that is heavily regulated, having a dual company structure will ensure any assets held in the holding company will remain mostly unaffected by the company’s trading risks.
For example: A clothing manufacturer that distributes their product to a large department store and has more than 50 staff operates with a higher trading risk than a small retail boutique with only 1 or 2 employees.
Just as start-ups love growth, investors love investment security.
Naturally, investors are attracted to companies with dual or multi company structures. The structure separates their investment from the day-to-day commercial risks of the trading company. Raises are often made more simple where the investment can be made directly into the holding company.
What are the drawbacks?
Set-up and ongoing costs
It goes without saying that setting up more than one company will cost more. The ongoing costs (tax returns, annual fees etc) will also increase proportionally.
Extra companies will come with extra admin. Each company will need to fulfil the same Corporations Act requirements.
This is the case even where one company is set up purely to hold assets, and do nothing else. This means each company will require active directors, annual reports, compliant record keeping and more.
Not sure on how you should set up your company? Think it is worth splitting your company into a multi-company structure?
Get in touch and we can refer you onto one of our experienced (and very friendly) start-up law firm partners. Cake can make the transaction a breeze.
This blog is designed and intended to provide general information in summary form, for general informational purposes only. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such.