Restructuring Corporate Asset Protection

25 August 2020

There are a number of commercial reasons as to why business owners may wish to reorganise the operations or structure of their business, and the need for change is often influenced by a variety of pitfalls and risks which are inherent in running a business. These could be intrinsic factors such as inefficiencies which have an adverse effect on profits, or extrinsic factors such as claims for damages, and debts.

This is compounded further by the fact that many businesses develop a portfolio of valuable assets (both trade and non-trade assets) over time, which can become vulnerable if they’re not properly protected, for example in cases of litigation or settling liabilities and debts, both assets and cash could potentially be placed at risk.

Benefits of restructuring

Just as there are a number of reasons a company may restructure, there’s also a number of benefits in doing so. Some are financial, for example the ability to transfer trading profits and assets out of a trading company to allow for reinvestment of funds, and to protect the assets from legal claims or seizure. Other benefits include the ability for a company to separate its operations into distinct, independent entities allowing the business to position itself for growth and expansion in those areas, whilst preserving assets from risks.

common way to restructure – example

A husband and wife operate and own (equally) a trading company, the company holds cash and the trading premises which it’s acquired over time.

The owners have no intention of selling their business in the short-medium term, and wish to accumulate profits which they’ll then invest into a new business line, as they don’t need to extract the profits personally to maintain their standard of living. In such circumstances we might suggest the business owners restructure their business to help realise their goals, firstly by setting up a new limited company which would become a holding company, and the shares in the company would be owned in an equal proportion to that of the existing company.

The two trading arms of the business would then be separated into two distinct companies, which would require the establishment of one further limited company. The shares in both of these companies would be owned entirely by the holding company, forming a group. Furthermore, for additional protection, the trading premises could be moved into the holding company. The presence of a group of this nature would allow for cash and assets to be transferred tax efficiently out of the trading company to other members of the group; which in this case would be the holding company and the second trading company.

Where a capital gains group exists, assets will be transferred between group members as no gain no loss transfers making them tax neutral for both parties to the transaction. This allows the business owners to move assets into distinct entities, along with any related creditors which also insulates the business assets should any of the other entities fall into liquidation or have a legal claim issued against them.

Whilst the benefits here are clear, there are also complexities and considerations which are specific to each business and as such this would require professional examination before any action is taken.

If you’d like to find out more about the benefits of restructuring and how we can help your clients do so, please feel free to contact us. Over the coming months, we’ll be presenting webinars looking at the topic of business restructures to look at what can be achieved and how in more detail.