In Part 1 of this series we discussed the single company structure. If you think your business will grow considerably, then a dual company structure may be more suitable for you.
The dual company structure
Under the dual company structure, you are required to set up 2 companies – a holding company and an operating company. We will call the holding company, Company A, and the operating company, Company B.
Company A will own 100% of the shares in Company B, and it would also own all the assets and intellectual property of the business. Company B, as the operating company, will trade on behalf of the business, and like the company in the single company structure (discussed in Part 1), it:
- trades on behalf of the business;
- enters into business contracts with suppliers, distributors, contractors, and other third parties;
- owns all the assets and assumes the liabilities of the business;
- owns all intellectual property; and
- employs the employees of the business.
What are the advantages of this structure?
The greatest advantage of this structure is asset protection. In this structure, Company A would hold all the valuable assets and intellectual property, and if Company B runs into any trouble, the assets and intellectual property held by Company A are generally protected from Company B’s creditors, subject to certain circumstances.
There is also the benefit of tax-free dividends. Dividends paid from Company B to Company A are tax free under the Income Tax Assessment Act (1997). Company A can then use these dividends to make further investments on behalf of its shareholders, which could be you and your mates, your family members, and other business partners. For more detailed tax planning advice, we recommend you consult a tax adviser.
What are the disadvantages of this structure?
As mentioned earlier, this dual company structure enjoys asset protection, but this is subject to certain circumstances. Despite the fact that Company A is regarded as a separate and distinct entity from Company B, there are situations where the courts may choose to ‘pierce the corporate veil’ i.e. the courts will look behind the separate legal personality of Company B to Company A as its only shareholder. There is no clear principle which sets out when the courts can do this, but 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.
This dual company structure is also more complex to set up. Having a holding company and an operating company means having to set up two companies, keep records for two companies, keep two sets of accounts, and submit two Business Activity Statements. This means additional upfront and ongoing costs for the business.
The big advantage of this structure is the protection it affords to the assets of the business, with some exceptions as set out above. This is an important advantage as business assets, especially innovative intellectual property, is often crucial to the profitability and viability of a business. As for the additional paperwork – we have experienced business lawyers at LegalVision who can provide ongoing company secretarial services.
If you have decided that you do not want to set up a company, there is one more option available to you which is to run your business through a trust. This will be covered in Part 3 of this series. Stay tuned!