Many entrepreneurs unknowingly play allin. Management activities, participations and capital accumulation are often in the same company. Often that structure has historically grown that way. That works fine as long as everything goes well, but increases the risk that problems in one corner will immediately affect the entire game board.
Just as in the casino, in M&A-land: those who put all their chips in one place may be running an unnecessary risk; directors' liability is by no means a paper tiger. Claims from creditors, tax assessments or accusations of improper management can become reality. By organizing activities, cash flows and participations more intelligently within your own group structure, you can better spread these forms of (directors') risk without losing flexibility or fiscal efficiency.
In this blog, we address DGAs and show how to go from "allin" to "spread bets": what structure options there are (non-limiting) and what to watch out for in practice.
Two structure options to spread your chips
Below we discuss two restructuring options we encounter in practice. Not a blueprint, but a useful framework for thinking.
Structure A - classic holding structure
The most robust a common solution is to place a holding company (HoldCo) above the existing structure. This HoldCo then holds all the shares in the operating entities, management limited liability companies and investment companies.
Why this works:
- Capital is distanced from operational and management risks.
- Facilitate maximum flexibility for future restructurings or carve-outs, expansion of operations, sale or addition of entities; and
- In a holding company structure, dividends can be upstreamed tax-neutral (participation exemption) from the operating company to the holding company, and (where appropriate) a fiscal unity can be formed, allowing profits and losses to be netted within the group.
Practical point: setting up a holding company requires a notary, and because the holding company will hold the shares of the working BV, a share merger exemption request may be needed from the tax authorities.
Structure B - asset transfer
In this structure, existing participations or assets are transferred to an already existing asset or investment company (instead of setting up a new holding company as in structure A).
Why this works:
- Assets and investments are separate from director risks from the working BV.
- Often fits well with private wealth and investment planning, especially if an investment limited liability company already exists.
But - attention: there are more snags in an asset transfer for tax purposes. An internal transfer of assets (such as shares) is considered a sale at market value. Without a proper valuation and/or sliding clause, you run the risk of discussion - and even more annoying taxation - with the tax authorities.
Conclusion: from gambling to controlled play
As a DGA, is it mandatory to have a holding company? Short answer: not mandatory, but as mentioned above in practice often wise as soon as:
- material operational risks are incurred;
- Profits are accumulated that you don't need privately;
- Sales, participations or restructuring may come into the picture;
- You want to engage in multiple activities.
Completely eliminating (director) risk is impossible. But continuing to play all in while your capital, management and participations are in one pot is often an unnecessary risk. By deliberately setting up your structure - and spreading your chips over several boxes - you create peace of mind, flexibility and resilience. Not by being complicated, but by thinking smartly ahead. Do you doubt whether your current structure still fits where you are now (or in five years)? Then it is a good idea to discuss the possibilities; we are happy to think along with you!
