A dual company structure involves a business operating through two separate companies – a holding company and an operating company. This structure is popular for the added security it gives to valuable business assets.
How does a dual company structure work?
The holding company owns all the shares of the operating company and all of the major business assets (capital, intellectual property, real property). The holding company does not produce any goods or services.
The operating company performs all of the standard business activities. It hires the employees, enters into contracts, sells goods and services, markets the business and deals with customers and clients. As the operating company creates all of the legal relationships and liabilities, it is open to the most risk.
Benefits of a dual company structure
The dual company structure embodies the saying: ‘Don’t put all your eggs in one basket!’ The main advantage of the dual company structure is that it provides an added layer of protection for your startup’s assets. This is because the operating company is accountable for most of the business’ liabilities, and it does not own any of the business’ major assets. Consequently, if your startup gets sued, for example, by an employee, client, or supplier, their legal action will be against the operating company who they are in a legal relationship with. This keeps your valuable assets out of the equation in any negotiation, settlement or costs order.
Additionally, if the operating company becomes insolvent, the major assets (owned by the holding company) may be secure from debtors. However, this will not be the case where the directors of the holding company should have been aware of the operating company’s insolvency. So care still needs to be taken, particular to ensure the operating company does not engage in insolvent trading.
The added layer of protection of the dual-company structure often gives founders the confidence to make bolder business decisions with the knowledge their most important assets are protected.
Disadvantages of the dual company structure
Setting up and maintaining a dual company structure is more expensive, complex and higher in administrative work than the classic single company structure.
It is also not a foolproof safeguard. If your startup is found to have been fraudulent or been involved in other misconduct, the holding company may be held liable. Or as noted above, the holding company may still need to account for the operating company’s debt if it becomes insolvent.
When to consider
If you own valuable intellectual property or other assets and you want to take high-risk business moves, then a dual company structure is likely the best option for you.
Although it may cost more to set up and maintain a dual company structure, you may decide these disadvantages are worth the added protection for your IP or be a necessary safeguard so you can make more daring business moves.
If you need advice on setting up a dual-company structure, get in touch with us via the contact form or by calling 1300 337 997.