The corporate conglomerate. This post discusses ways to organize a business structure when one business “owns” (informally speaking) several disparate businesses. I have a client that owns a transportation company, landscaping company, barricade rental, and some other seemingly unrelated companies. Each has their own insurable interest, customer set, advertising, etc. And none of these really overlap. So how should we set up his business in the most administratively and taxely efficient way (yes I made up a word)?
The three most common ways we can set up his business are the “holding company” or “wholly owned subsidiary” structure; the “operating divisions” structure; and mixed holding/operating. That last one is a combination of the two.
As we’ll see, there are good reasons for and against any of these corporate conglomerate structures. Often the decision of which form to take comes down to transaction/administrative costs; likelihood of outside investment for one unit but not the others; and exit strategies.
Let’s go:
Corporate Conglomerate: Wholly Owned Subsidiary
In this structure, there is one over-arching company owned by my client, the “holding company”. The holding company then owns 100% of the shares in the subsidiary companies: transportation it owns 100%; landscaping it owns 100%; barricades it owns 100%; and so on.
This corporate conglomerate form allows for some interesting growth and exit possibilities. First, if one of the subsidiaries needs to be qualified as a disadvantaged business enterprise for public contracts, that subsidiary, and only that subsidiary, can bring in a qualified owner for that purpose.
Similarly, if one subsidiary is looking to expand, it can bring in an investor to just that business line to infuse capital and possibly manage the business for the expansion.
Thirdly, it’s easier to sell the subsidiaries if they’ve been managed properly: all of the assets of one subsidiary should be owned by that subsidiary. They can then be listed in an asset sale agreement, including goodwill.
Corporate Conglomerate: Operating Divisions
On the other hand, a company can create “operating divisions” within itself to manage each of the disparate business lines. The sole company that exists owns all of the assets, manages the businesses, and all of the profits/losses belong to that business.
Administratively this format is somewhat more efficient because there is no need to track multiple state and federal registrations; there are not multiple tax returns due for each company; and they can all be administered centrally instead of each having some separate administrative burden.
But on the downside, the corporate conglomerate form has the disadvantage of all the assets and accounting being combined. If one wanted to spin off an operating division, it might be difficult to assess which asset belonged to which division if they are being shared (such as the common use of a panel truck). This may also make insurability more difficult.
Likewise, determining the goodwill and even the profitability of an operating division may take some accounting magic if they are not separated from the inception of the scheme.
Which One To Use?
Good question, that I am not going to answer for you. A lot depends on the factors, above, and many others I haven’t mentioned. The main considerations are economics of administration; tax efficiencies; insurability; and the owner’s exit plan for each business.
Contact me if you have any questions on setting up your conglomerate business, or any other business transaction. In western North Carolina, Asheville, Waynesville, Hendersonville at (312) 671-6453.
Email me at: palermo@palermolaw.com.
Be sure to check out my other blog posts HERE. Be sure to listen to my podcasts with Matt Mittan at BizRadio.US