13 May 2013

Corporate structure: to simplify or not?

When considering how to structure an operation, I normally prefer the single-entity route - after all, Occam's Razor is a practical method that works. However, there are circumstances that may dictate establishing multiple entities in a group:

  • Is it necessary to ring-fence certain assets? This can be as simple as placing an operation in an operating company, and the acquisition of the building it is operating from in a separate company. Of course, there would have to be a valid lease executed between the two companies, with rent and other connected charges being properly paid from one to the other, but it is an excellent strategy for creditor-proofing.
  • Does a company have a particularly valuable brand or other intellectual property (ie, patents, trademarks, etc)? These can be vested in separate management companies, with appropriate licensing agreements being executed between companies. All the fast food franchise operations (such as Tim Hortons or McDonald's) practice this.
  • Does the head office of a group perform significant services on behalf of its subsidiary operations? There should be a valid intercompany services agreement in place, with services being charged at appropriate rates.
Much of this strategy has arisen from transfer-pricing litigation by the various taxation authorities in cross-border cases, but the logic is the same even when done within the same country, given the provisions in income tax legislation mandating fair market valuation.

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