Structuring Your Business - Part 2

Welcome to 'The Bottom Line'. If you're incorporated as a Limited Liability entity, then considering the most efficient structure is essential. Today, we will cut through the jargon around Limited Companies and Partnerships. I'll explore the various types of Company and go through the advantages of a Holding Company structure. If you're not sure whether incorporating is the decision for you, check out part one of this two part series where we examined that question in detail. 

The Companies Act 2014 brought into existence a whole new range of Company types. Those most relevant to you are Private Companies Limited by Shares (LTD), Dedicated Activity Companies (DAC), Public Limited Companies (PLC), and Companies Limited by Guarantee (CLG). In addition, we have what's called a Limited Liability Partnership. While this is not technically a Company, I will include it here as it does provide limited liability. 

Private Company Limited By Shares (LTD) - Holding Company Structures
In the first part of this post last week (https://jesinnott.ie/the-bottom-line/structuring-your-business-part-1) I explained in detail the intricacies of an LTD. Please take a look at this before reading here, as our focus today is on the benefits of utilising a holding company/group structure for your LTD. 

A holding Company is a Company which owns shares in another. Basically, the shareholder of a Company can be another Company. The most simple method I've found to understand holding companies and groups is to treat them as a family. At the top is the Parent company, which can own the shares of one or more companies. These I look at as children of the parent, we call them Subsidiaries. There can be one or more, and they all together form a 'family', which we call a Group.

There are numerous advantages to a holding company. Firstly, the assets of the holding company are protected. Seeing as it's a shareholder in the subsidiary, it has limited liability. Should the subsidiary be wound up, the parent company and it's assets are protected. It can therefore be of great benefit to hold land and property in a Holding company, and rent it to the subsidiary Company which takes on the commercial risks of trading. The land is protected regardless of what happens the subsidiary. 

There are also several interesting tax advantages to this structure. A group can transfer assets between Companies without triggering a CGT charge. They can transfer losses and offset them against income of other Companies. If a VAT group is formed, they can even trade between themselves VAT free and need only file one VAT return on behalf of the group, not one for each individual Company.

One of the most significant tax benefits however, is when an Irish Company disposes of shares in a trading Company. There is no charge to CGT. Normally, when shares are sold, ie. when you sell your Company, you will get charged Capital Gains Tax at 33%. This is a significant amount. However, if your Holding Company sells the same shares, it is exempt from CGT under what's known as the Participation Exemption. This can be especially beneficial if after the Company is sold, you intend to reinvest the proceeds in another venture. For example, using the holding company structure, with proceeds of €1,000,000 you could reinvest the entire amount. If you personally owned the shares, you would loose €333,333 in tax before you could invest anything. A group structure is almost always worth considering, but I'd urge you to please consult with someone who fully understands your business before making any decisions as there are countless rules and exceptions which could make things a nightmare depending on your business type. 

Limited Liability Partnership (LLP)
An LLP is an interesting arrangement which can be extremely beneficial. It's similar to a normal partnership, however, it allows for up to 20 partners to have limited liability. There must be at least one general partner who must have unlimited liability, along with any other partner involved in the management of the firm. Don't let that put you off though, the general partner can in fact be a Company with Limited Liability for it's shareholders. An LLP has no requirement to be audited, publish accounts, register with the RBO or set out a designated activity. They are also tax transparent, meaning that each partner is taxable on their own income in their own jurisdiction. This structure is becoming very popular with firms of solicitors, due to the appealing protection of limited liability without the cumbersome constraints of a private Company. Furthermore, they can form an excellent piece of a multi-layered Corporate structure, with Companies entering into partnerships with each other to break chains of ownership for tax purposes and protect assets in holding companies. 

Dedicated Activity Company (DAC)
A DAC does exactly what it says on the tin; a dedicated activity. In fact, it can't do anything else. Essentially, this is the main difference between a DAC and an LTD. On incorporation, a DAC must outline it's purpose, or 'Objects Clause' as it's referred to in the legislation. For example; to provide insurance, to invest in property, to operate a branch of McDonalds, etc. The DAC can only then act within the scope of the objects clause, and cannot do anything other than this. Certain companies operating in specified markets are restricted by law to incorporate as DACs. This makes sense, as most people wouldn't want a Company insuring their car to also operate a chain of casinos for example. DACs can also be utilised for a joint venture, or a specific activity, where none of the shareholders whish for the Company to do anything outside what was originally agreed. For example, three parties coming together to build a gas pipeline may incorporate a DAC for this. They can each take comfort that the other two shareholders cannot decide to instead have the Company invest it's capital in building a Cinema. 

Public Limited Company (PLC)
A PLC is a Company which lists it's shares on a stock exchange. Any Company shares which you can buy easily on the stock market, for example Ryanair, Kerry Group, and Tesla, are all shares in a PLC. The main advantage of a PLC is that no limit is placed on the amount of shareholders. The other private company types may only have a maximum of 149 shareholders. A PLC requires a minimum of €25,000 capital, and also cannot qualify for audit exemptions like the other Company types, it must prepare audited accounts every year and publish detailed reports on an ongoing basis. Not many Companies begin as PLCs. Usually, they will trade as a private Company, and then once they are looking to issue shares on the stock exchange they will become a PLC. This process is known as 'floating' a Company.  

Company Limited by Guarantee (CLG)
A CLG is a Company with no share capital. These are usually used for charities, clubs, or non-profit organisations which require that coveted limited liability for it's members. Instead of issuing shares in exchange for a payment, a CLG issues them on the basis that each shareholder guarantees to contribute €1 to the Company if it were to be wound up. This is beneficial as it ensures no incentive for the shareholders to have the Company actually make any money, which is why it's great for charities and clubs. An example in a more corporate setting however would be for a buyers group. If a group of companies in an industry, say the hotel sector, could come together and form a Company to purchase bed linen for all of them in order to get bulk-buying discounts. If incorporated as a CLG, this would ensure that none of the shareholders could try to have the Company make any money off this scheme, as it would not benefit them. 

As always, I'd like to thank you for taking the time to read, and I hope it has been of value.  If you'd like to get in touch with any questions, or to learn more about structuring your business, please do not hesitate to leave a comment below, or reach out to us at [email protected] .

Be advised that the information provided in this blog post is for general informational purposes only and does not constitute legal or tax advice. While we strive to ensure the accuracy and completeness of the content, it should not be relied upon as a substitute for advice tailored to your specific situation. We are happy to provide this should you require assistance on any of the matters outlined above.