A Simple Reorganisation To Protect Valuable Company Assets From Trading Risk

Where a business is structured as a single trading company then it’s typically the case that the valuable business assets (such as property, intellectual property rights, plant and equipment etc.) are owned by that single company. Having everything pooled into a single company in this way creates a risk, as if the trading business were to fail then the valuable business assets would almost certainly be at threat.

The increased threat of business failure has brought risk mitigation and asset protection into sharp focus for many businesses now in the “stabilisation” phase (especially those where risk mitigation strategies had become less of a priority due to years of trading success).

The threat against valuable business assets can be mitigated by creating a group structure thereby allowing assets to be separated from the trading business. An easy way to achieve a group structure is to undertake a “share-for-share exchange” or “share swap” whereby all the shareholders of a sole company transfer their shares to a newly incorporated company in return for new shares in that new company. If this is structured correctly, it can be tax neutral and exempt from stamp duty (specialist tax advice should always be sought however). This results in the original company being a wholly-owned subsidiary of the new holding company, paving the way for assets to be transferred out of the original company but within the same ownership structure.

Once this is in place, the valuable business assets can be transferred to the new holding company (this would be intra-group which has certain advantages) thereby separating the assets from the risk of the trading business. If the trading business were to fail then the property should be protected in that it won’t be an asset available to creditors or a liquidator. This can make setting up a business in succession easier.

While implementing such a group structure or reorganisation can be relatively straightforward, it does take advance and careful planning. In particular, such a reorganisation should be undertaken while there are no question marks over solvency or future trading to ensure that it provides the expected benefits.

While the above strategy is only available to companies, those running a business as a sole trader or partnership should seriously reconsider their business structures in light of the personal liability being a sole trader or partner typically brings (especially bearing in mind the current economic climate and expected aftermath). Again, simple and tax efficient reorganisation can be undertaken to transfer the business into a limited company structure which affords protection against personal liability. This then paves the way to separate the assets using the reorganisation above.

BHW regularly advises on, and implements, a variety of corporate reorganisations (including demergers). If you would like to discuss a potential reorganisation further then please call Alex Clifton on 0116 281 6232 or email alex.clifton@bhwsolicitors.com.