Legal
For startups with ambitious growth targets, a well-defined company structure is essential. A common and often beneficial model involves three distinct entities: a holding company, an operating company, and a discretionary trust. Each plays a specific role, contributing to the overall strategic and financial health of the venture.
The Holding Company: Guardian of Assets
The holding company acts as the custodian of the venture's most valuable assets, primarily its intellectual property (IP). By separating ownership of the IP from day-to-day operations, the holding company shields these crucial assets from the inherent risks associated with running a business. This structure offers protection against potential liabilities and ensures that the core value of the company remains secure. The holding company also provides a platform for strategic management of the IP portfolio, including licensing and commercialisation opportunities.
The Operating Company: Driving Business Activity
The operating company is the engine of the business, responsible for all operational aspects. This includes product development, manufacturing, sales, marketing, customer relations, and all other activities related to bringing the product or service to market. By focusing solely on these operational tasks, the operating company can maximise efficiency and agility. This separation from the holding company allows for clearer accountability and facilitates performance tracking.
The Discretionary Trust: Optimising Financial Management
A discretionary trust can be incorporated to manage and distribute profits generated by the operating company. This structure offers flexibility in distributing funds to beneficiaries, such as founders, investors, and their families, in a tax-efficient manner. The trustee has discretion over the timing and amounts of distributions, enabling tailored tax planning and potential asset protection.
Is this structure right for my Startup?
While this three-entity structure offers potential advantages, it introduces complexities in administration and compliance. The costs associated with maintaining three separate entities, including accounting, legal, and regulatory requirements, should be carefully weighed against the anticipated benefits. It is important to acknowledge that a simpler, single-entity structure may be more appropriate for some startups, particularly in the early stages. The decision of which structure is most suitable should be based on a thorough assessment of the specific business needs, long-term goals, and risk profile.