At Springfords, we are frequently asked by our clients to advise on how best to structure their businesses’ operations. Some choose to operate within a single company, whilst others may choose a more complex ‘group’ structure. It is not uncommon to see businesses change from one structure to another as the business develops.
The following are some of the key pros and cons of setting up a group structure. As this is a complex decision with many factors to consider, the following is a guide only and we would always advise that you speak to us for advice before implementing any changes to your business.
Pros of operating with multiple companies
Ring fencing of risk
Probably the most common reason for subdividing an organisation’s activities into separate companies is that the risk associated with each part of the business is contained within the company in which that activity operates. In the event of a major claim against part of the business the remainder is protected.
Easier to split ownership
Key employees in a particular division of the business can be rewarded with shares in the relevant company rather than the overall business.
Easier to sell part of the business
If the organisation decides to sell part of its business, the process can be much easier if that part is in a separate company that can be marketed and sold.
Clearer separation of the business’ activities for reporting purposes
If part of the business performs better or worse than the rest, if that part is held in a separate company, the accounts of that company will reflect that performance.
Cons of operating with multiple companies
Potential additional tax costs
Corporation tax charges have the potential to be higher with multiple companies although this disadvantage is becoming less and less over time as the margin between the small profits rate and main company rate reduces (these are expected to come into alignment from April 2015). In addition, if the companies are 75% grouped, losses can still be transferred from loss making companies to profit making ones, which will also help to lessen any impact of demerging into separate companies.
VAT and payroll can be more complex to administer as you may need separate payrolls and / or VAT registrations for each company. These can be mitigated in many cases by setting up a ‘VAT group’ which prepares a single return and having one of the companies employ all the staff and recharge the cost to others (which may also have VAT implications).
For those in the construction industry the CIS scheme may prove more complex.
Impact on credit rating
There may be an adverse impact on the organisation’s credit rating with any new companies set up on a reorganisation having to build up a credit history. In addition, any existing companies which are having their trade subdivided may suffer a reduction in their credit rating due to a reduction in the trade conducted within that company.
The impact of this will vary according to the business and can be managed to some extent by discussing any change with key suppliers in advance.
Impact on tendering
If your business frequently has to provide accounts as part of the tender process for new work, a subdivision can make the organisation appear smaller which may have an adverse impact on the perception of the tender. In some cases this can be mitigated by preparing ‘consolidated’ or ‘group’ accounts which show the combined operations of the group.
Multiple companies will have to submit individual accounts, as well as potentially consolidated group accounts. This will inevitably mean higher audit / accountancy and other legal and professional costs.
There can also be implications for insurance, death in service and other costs.
The accounts preparation process for multiple companies has the potential to be more complex and time consuming for your internal accounts department which may lead to more resources being required.
We have seen examples of bank facilities (particularly invoice finance) being more complex to manage with separate companies. Although it is common to be able to negotiate ‘group’ facilities the bank will usually require cross guarantees between the various group companies which will limit the ‘ring fencing’ advantage above.