In Short
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Asset Protection: A dual company structure separates valuable assets by placing them in a holding company, safeguarding them from liabilities incurred by the operating company.
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Limited Liability: Shareholders’ exposure is confined to their unpaid shares, reducing personal financial risk.
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Investor Appeal: Investors often prefer this structure for its clarity and risk mitigation, enhancing investment attractiveness.
Tips for Businesses
Implementing a dual company structure can bolster asset protection and limit liability. However, it introduces additional costs and administrative responsibilities. Before transitioning, consult with legal and tax professionals to understand the implications and ensure the structure aligns with your business objectives.
If you intend to set up a company or invest in one, you need to consider how you will own its shares. You can own shares in a company in an individual capacity, through a company or through a trust. This article sets out the advantages and disadvantages of owning company shares in one company (the operating company) through another company (the holding company), otherwise known as owning shares through a dual company structure.
Dual Company Structure
A dual company structure consists of two companies: a holding company and an operating company.
The holding company sits at the top of the structure and holds all of the business’s valuable assets (such as cash and intellectual property). The holding company will hold 100% of the shares issued in the operating company.
The operating company sits below and is the trading entity that carries out the business’s day-to-day operations. This operating company will enter into contracts with third parties, such as employees, suppliers and clients. Likewise, the operating company takes on any risks and liabilities associated with these contracts.
An Example
Brian has a dual company structure set up to run his business. Brian enters into contracts with clients through his operating company, Brian’s Furniture Store. Brian’s client, Phil, believes Brian has not fulfilled his duties under their contract and has decided to sue. Phil will have to take action against the company he has a contractual relationship with, i.e. Brian’s Furniture Store.
Importantly, all of the valuable assets of Brian’s business (cash, trademarks, website, etc.) are owned by Brian’s holding company. Phil cannot bring a claim against Brian’s holding company because he has never entered into a contract with this company. Accordingly, Brian’s dual company structure provides his business with asset protection from Phil’s claim.
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Setting Up a Dual Company Structure
Setting up a dual company structure involves registering two separate companies with ASIC. The holding company will be the shareholder of the operating company, which means the holding company owns the operating company. The owners of the business will be shareholders of the holding company.
Continue reading this article below the formPurchasing Shares: Which Company Should I Purchase Shares In?
As an incoming shareholder, you should always consider purchasing shares in a holding company when buying into a business with a dual company structure. This is because the holding company is the entity that owns all of the valuable assets of the business.
Buying in at the operating company level is not advised. The operating company is the entity taking on all the risks and liabilities associated with everyday business and will not own the business’s valuable assets. As a result, shares in the holding company offer the most value for you as an investor.
What are the Advantages?
Buying shares in a holding company is preferred because it offers the following advantages to you as a shareholder.
Asset Protection
You can ensure the holding company owns all of the business’s valuable assets and intellectual property and that the holding company is ring-fenced from potential liability. This will protect these assets, including the operating company shares, from being subject to any liabilities incurred in operating the business.
Limited Liability
A company structure provides limited liability to you as a business owner. Any potential liability you might face as a company shareholder is limited to the amount unpaid on your shares. A dual company structure provides an extra level of protection.
A dual company structure minimises risk, as the holding company holds valuable assets. This structure protects these assets from any debts or liabilities incurred during the business operation through the operating company.
What are the Disadvantages?
Although owning company shares through a holding company presents significant advantages, it is vital to know and understand the following drawbacks.
| Expense | Having two companies would mean keeping records for two companies. |
| Record-keeping requirements | Having two companies would mean keeping records for two companies. |
| Tax return obligations | As each company is a separate legal entity, it will need to lodge a tax return each financial year, increasing the ongoing costs. |
Owning Shares in the Holding Company through a Trust
You may also want to consider how you want to own shares in the holding company. For example, you may want to hold the shares through a discretionary trust (also known as a family trust). A discretionary trust allows the trustee to distribute income and capital to beneficiaries at their discretion, offering flexibility in managing the trust’s assets and potential tax benefits.
Discretionary trusts can provide several advantages when used to own shares in a holding company. These include enhanced asset protection, as the assets are legally owned by the trustee rather than the beneficiaries. They also offer tax flexibility by allowing for the distribution of income to beneficiaries in lower tax brackets, potentially reducing overall tax liability. Furthermore, discretionary trusts can be useful for succession planning and intergenerational wealth transfer.
However, trust structures are not without their drawbacks. They can be more complex to set up and administer than direct share ownership, and there are ongoing compliance and administration costs. Trusts are also subject to various legal and regulatory requirements that must be adhered to.
When considering whether to own shares in a holding company through a discretionary trust, it’s essential to assess your specific needs for asset protection, tax planning and succession planning. You should also carefully consider the potential stamp duty implications in your jurisdiction and weigh the benefits against the additional complexity and costs.
Key Takeaways
Despite the costs and complexity involved in owning shares through a company, several advantages exist. The main benefit of owning shares through a dual company structure is asset protection and limitation of liability.
If you require assistance setting up your dual company structure, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A dual company structure consists of a holding company and an operating company. The holding company holds 100% of the shares of the operating company and any major business assets. The operating company is the entity that the business operates from, holding all contractual agreements with employees, suppliers and clients.
By owning shares through a dual company structure, you can protect your company’s major assets and limit liability. This is because your holding company will hold 100% of the shares of the operating company. Meanwhile, your operating company is the face of the business and will conduct business operations. If a client has a dispute with your operating company, the assets which the holding company holds remain protected.
A disadvantage to the dual company structure is the added expenses required. Firstly, you would have to pay to incorporate a second company. There are also annual company renewal fees which you will need to pay for both the holding company and the operating company.
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