Advantages to being a company within a company

SwordofLight

Hi all,

I'm at the very early stages of trying to get a software venture up and running.

I have looked at competitors and noticed a few have multiple directors where some of those directors are other companies that the indviduals are directors in. I can't think of any advantages to this except a bit more legal shielding, but I can't help any gains would be offset by increased overheads.

Am I right in thinking that if I want to for example have a company with products A B and C, and I want some people to part own product B only, then product B will have to become a registered company. If my company owns the majority of shares in this new product B company, then it will be called a subsidiary company of my initial company.
Does that make any sense?

pedroeibar1

SwordofLight wrote: »

Hi all,

I'm at the very early stages of trying to get a software venture up and running.

I have looked at competitors and noticed a few have multiple directors where some of those directors are other companies that the indviduals are directors in. I can't think of any advantages to this except a bit more legal shielding, but I can't help any gains would be offset by increased overheads.

Am I right in thinking that if I want to for example have a company with products A B and C, and I want some people to part own product B only, then product B will have to become a registered company. If my company owns the majority of shares in this new product B company, then it will be called a subsidiary company of my initial company.
Does that make any sense?

Not really….:)

Being a director of different companies does not give you “a bit more legal shielding” – it actually increases your responsibilities, your legal obligations and therefore your exposure to sanction should something untoward happen.

If company A has products X, Y & Z, the shareholders of A own the entire business; the directors have a duty to company A to make sure it is run properly. If Z is a different product and it is deemed that it should have a “life” of its own and ownership is to be confined to certain shareholder(s) of A, it would be best to set it up within a separate company, e.g. newco. However, if that is done the value of Z must be paid to A and A’s shareholders would have to be in agreement for the sale/value (rules depend on A's existing structure).

Company A could own the shares in newco and if it is a majority it would make newco a subsidiary. But as it's a majority holding, the shareholders of A get most of the dividends/any increase in value, so what is the point of setting it up as a newco? You could consider organizing Z product activity into a separate “division” but that would have to have strict cost/management/accounting rules if the manager of the division obtained 'preferential' status. Also, if Company A and newco have common directors and do business there is a danger of conflict of interest issues that need to be examined.

I fully agree with the need to get the the ground rules right at the outset, but TBH it seems like over-egging the omelette for a start-up unless you have several shareholders and investors that want specific rules to apply and the products X Y Z are quite diverse.

SwordofLight

Many thanks for your response pedroeibar1.

Interesting about owning a company and using that company as a director of another company. So if for example company V's directors decided they would join or start another company H with say three individuals, and they bought equal shares, then company V would be receiving 25% of the dividends and maybe other allowances and fees etc. If I was the individual who was the majority shareholder and sole director of company V, I am thinking that there would be a disadvantage to this in that the money made from company H, would not be accessible to me personally as it would belong to the company (V). Maybe there's some tax benefit to be had but as you say it seems like a lot more hassle.

In regards the splitting of the company ownership of products, I think you're right in that I possibly am over-egging the omelette at this point. The situation is that I am developing a product and have spent a lot of time on it over the past 4 months bringing it to the business plan stage. At this point I need more people on board to secure funding. I am wondering what the best way of getting people on board is, do I offer joint directorship in the company, do I offer a handsome amount of shares for free (like 5 or 10%). Do I set up a company and make this a subsidiary, where I might have greater control because the main shareholder is a company and not an individual, therefore any legal dealings between directors / shareholders would not be with me personally but with this entity...(that might be where my legal shielding comment came from :-))?

SeanSouth

There are very good reasons for using this type of structure and even more so now, given that simple group structures no longer need to prepare or submit group accounts.

As alluded to already some of the main advantages of this type of structure are taxation based .

Dividends paid by a subsidiary company are tax free in the hands of the receiving company.

A holding company selling a subsidiary company can do so without payment of capital gains tax under certain conditions.

Also its sometimes better to hold certain valuable assets used in a trading company under separate ownership so that the assets are protected in the event of a liquidation or receivership.

There are many other advantages.

pedroeibar1

Sword,
You appear to be several steps ahead of yourself with structures and shareholdings when you are at the plan stage and have no idea of attracting investment . You also appear to be confusing shareholder and director roles and corporate/personal taxation. Most investors would run from a directorship position. 5 or 10% is not a "handsome amount of shares" in anyone's book. You really would benefit from a SYOB course.

pedroeibar1

SeanSouth wrote: »

There are very good reasons for using this type of structure and even more so now, given that simple group structures no longer need to prepare or submit group accounts........There are many other advantages.

How long has a Section 17 exemption been in place? The guy is at the business plan stage and the only reason I could see for a complicated structure is with regard to IP /patent income management. The guy needs to go back to basics and realize it is a start-up, not a corporate behemoth!

Joseph

With the recent Companies Act coming into force small groups of companies are now also exempt from audits.

As Sean mentioned, one of the biggest advantages to having Company A (which you personally own the shares in) owning the shares in Company B (the trading company) is that if/when you sell Company B, Company A can receive all the funds without paying Capital Gains Tax. It's more complicated than this but that's the jist.

pedroeibar1

Joseph wrote: »

With the recent Companies Act coming into force small groups of companies are now also exempt from audits.

As Sean mentioned, one of the biggest advantages to having Company A (which you personally own the shares in) owning the shares in Company B (the trading company) is that if/when you sell Company B, Company A can receive all the funds without paying Capital Gains Tax. It's more complicated than this but that's the jist.

Let's not get carried away....... it is a potential start-up at the pre-planning stage. No funding, no hope of funding, no idea on how to approach investors, so talk about capital gains on shares yet to be issued (let alone have a value increase) is somewhat premature?? Non?

Joseph

pedroeibar1 wrote: »

Let's not get carried away....... it is a potential start-up at the pre-planning stage. No funding, no hope of funding, no idea on how to approach investors, so talk about capital gains on shares yet to be issued (let alone have a value increase) is somewhat premature?? Non?

My reply was purely focused on the advantage(s) of having a holding company owning another company in relation to CGT.

SwordofLight

Many thanks for the replies, Sean, Joseph, Pedro. Now I understand why it is done. I know a few people doing this already but had no idea why they might.
I'd be happy if someone offered me a 10% share in a promising business. Maybe I'm watching too much of Dragon's Den
The reasons I want to offer joint directorship is so that these people can row in and become involved in steering the company, and with them being shareholders will offer an incentive to work well.
You may have misinterpreted my language - "I need more people on board to secure funding" - I mean wouldn't someone be more likely to invest in a team rather than one person.

newacc2015

AFAIK some companies within companies are being used by Irish companies to avoid CGT in potential sales of their businesses in the future. It is easier to organise this now, than when there is a potential sale in the future. People are setting up off shore companies to avoid CGT