When a company is first set up, usually its purpose and subsequent structure is clear. Over time, the business grows, and the company may outgrow its current structure, or in the alternative, the business may find itself in financial strife and so the structure of the company may need to be reconsidered.
Corporate structures must be set up correctly for whatever position the business is in. Poorly structured companies can cause a number of issues such as breach of director’s duties, claims by shareholders, taxation obligations and other fiduciary duties.
What is Corporate Advisory and Restructuring?
“Some of the larger legal and accounting firms use the nomenclature “Insolvency and Restructuring” or “Corporate Advisory and Restructuring” to describe work groups or divisions within the practices dealing with businesses under stress. It cannot be defined and covers a plethora of possibilities through which a business entity is reconstructed, rebuilt or rearranged (either wholly or in part) through formal or informal administrations.” Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 70 ACSR 1 at 197.
Some common things to consider
There are some common things to consider when thinking about your corporate structure and they fall broadly under the headings of risk, tax minimisation, and management.
Company structures should consider potential risks going forward, including the risks of directors, shareholders and liabilities. For example, if there are multiple directors who makes decisions in the event of a conflict, and who are the directors when there are clear consequences for breach of a director’s duties.
The members of the companies should also be considered. For example, do all the shareholders have equal rights or do some have dividend rights or voting rights only, and if a shareholder’s agreement should be put in place to minimise the risk to the company in the event that there is a falling out between shareholders.
Different corporate entities could hold different assets or liabilities in the company. This is to protect the IP in the company or other assets from claims of creditors or potential liability down the track, by isolating them.
A purposeful set up of a company group can minimise tax not only through companies but also through trust relationships that are facilitated through different corporate entities.
For example, there may be an operating company that receives the profits, which are then distributed to the company’s members. If you are a member, then you pay tax. It may be more tax efficient to own the shares in a trust relationship so that you may distribute those dividends in a more tax efficient manner.
Consider also how the company operates and who answers to who. Is the corporate structure in relation to a joint venture, franchise or head company? Should the operations of the company be separate to the holding of the physical assets which may have chattel mortgages, separate to the IP, and who directs and owns each entity?
Depending on what the corporate structure is trying to achieve, it may mean different structures are more appropriate than others.
Take home message
Corporate advisory and restructuring is an essential consideration for a corporate entity, whether the business is going well or poorly. Risk, tax minimisation and management strategy all need to be considered to ensure that the company or companies are set up in the best possible way. It should be noted, that in spite of all the extravagant and mind boggling corporate structures, a corporate structure must be easily understood by the business owner so that they understand their position and why the company or companies are set up in the way that they have been. Without understanding, many of the benefits of the corporate structure can be lost, and directors can inadvertently in breach of their duties.