Part 2: What are My Other Structuring Options: Dual Company Structure

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Table of Contents

• A Dual Company Structure
• Advantages of a Dual Company Structure
• Disadvantages of a Dual Company Structure
• Key Takeaways

As your business grows, its structure may not be suitable for your long-term goals. For instance, you might start as a sole trader business structure and then realise that a registered company is more suitable to limit your liability and bring on investment. You may even be at a point where a single company does not align with your goals for expansion, and consider operating from a dual company structure. This article explores the dual company structure in detail and some of its advantages and disadvantages. 

A Dual Company Structure

A dual company structure involves a holding company that owns 100% of the shares in a subsidiary operating company. 

The operating company is the entity that enters into contractual arrangements with clients, suppliers, employees, distributors, and other third parties. They will also:

• trade on behalf of the business;
• own all the assets and assume the liabilities of the business; and
• employ employees and workers for the business.

Notably, the operating company will not hold any of the business’ valuable assets, such as intellectual property or raised capital.

In comparison, the holding company will generally own the business’ intellectual property, assets and any recently raised capital. It will own 100% of the shares in the operating company. Largely, the holding company will not enter into any contracts, except for a few cases, such as capital raising or employee share scheme offers.

The main difference from a single company structure is that the holding company will hold all the intellectual property and investment into the business. Investment into the business also includes Employee Share Option Plans (‘ESOP’). 

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Advantages of a Dual Company Structure

A key benefit of a dual company structure is asset protection. In this structure, the holding company will hold all the valuable assets and intellectual property. Likewise, if the operating company lands into trouble, the assets and intellectual property the holding company ‘holds’ are generally protected from the operating company’s creditors, subject to certain circumstances.

Additionally, dual company structures are ideal for business expansion as they offer more flexibility. Having a holding company will allow the business to set up further subsidiaries for new business activities, enter into new business ventures and easily diversify the company’s portfolio.

This structure also benefits companies interested in raising capital. Notably, many investors are familiar with and often recommend the dual company structure for the purposes of asset protection and expansion. Therefore, investors would be more likely to invest in a company with this type of structure. 

Disadvantages of a Dual Company Structure

Dual company structures enjoy asset protection, but this is subject to certain circumstances. Generally, the law views the holding company as a separate and distinct entity from the operating company. However, there are situations where the courts may choose to ‘pierce the corporate veil.’ Piercing the corporate veil means courts look behind the separate legal personality of the operating company to the holding company as its only shareholder. Some examples where they may do so include:

• to prevent a person forming or using a company to evade an existing, but not future, legal or contractual duty, obligation or liability;
• where a company’s controllers have denied it the resources to function independently of them; and
• where it is necessary in the interests of justice to do so.

A dual company structure is also more complex to set up and, as such, more costly to implement. Having a holding company and an operating company means:

• setting up two companies;
• keeping records for both;
• keeping two sets of accounts; and 
• submitting two Business Activity Statements. 

Ultimately, the business has more upfront and ongoing costs when operating under a dual company structure. 

Further, dual company structures may make decision-making less flexible, especially if certain decisions of the operating company require the sign-off from the holding company’s board of directors. Changing the company’s main business activities or rebranding the whole structure may also be time-consuming and costly. 

Key Takeaways

A dual company structure offers asset protection as you expand your business. Businesses that predict fast growth or enter into rapid growth periods should consider whether a dual company structure is appropriate for them. As for the additional paperwork, we have experienced business lawyers at LegalVision who can provide ongoing corporate legal services.

For more information, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.