The process of transferring assets from one company to another is a rather tricky one. If it’s done incorrectly, it can have severe tax and legal consequences. It is essential in these circ*mstances to take expert legal advice and our company legal experts are here to help.
In this article we cover:
- Transferring business assets
- Selling your business assets
- Creating a holding structure (or parent company)
Transferring business assets
The reasons for making a transfer should be treated with caution.
For example, if the company you’re transferring these assets away from is facing dissolution or insolvency, a transfer of assets could be perceived as an attempt to obstruct a creditor’s claims process.
When done correctly, the asset transfer process should ensure that each corporation is treated as a separate legal entity, with separate assets and separate accounting. This is essential, as it ensures that the assets and liabilities of both corporations aren’t treated as being the same. If this were to happen, you risk any limited liability created from having two separate entities, and potentially make it more difficult to sell one or both of the corporations in the future.
There are several ways of transferring assets and de-risking. The most common are:
- Transfer the assets by way of a dividend from one company to another. This is the simplest structure for transferring assets provided the company has enough profits to do it – known as distributable profits.
- Reduce the company’s share capital and at the same time transfer assets to another company. There is no profit requirement but it will still be important to make sure the transfer or demerger does not affect the company’s ability to pay creditors.
- Transfer assets via the transfer of shares. Another option is to swap shares in the company for shares in another one. So long as no actual money or other consideration changes hands and the values are the same the transaction should be effective.
Selling your business assets
One of the best ways to transfer assets, without having all of the assets and liabilities moved from one corporation to another, is to sell them from the first corporation to the second at a fair market price.
If you’re selling assets, you’ll also need to consider the chargeable gain and resulting capital gains tax that you need to pay. It’s vital to be fully aware of your tax bills and tax liabilities as a small business owner. This can be complicated, however, and it’s essential that it’s done correctly.
There are specifics involved, so it is advised that you seek professional advice and speak with your accountant and business lawyer before undertaking such a sale, or indeed before considering any other method of asset transfer of assets.
Company assets can include money, goods, real estate, and intellectual property. Other than acquisitions (where these assets will normally be transferred to the purchasing company as part of the sale), reasons for transferring assets between companies include:
Creating a holding structure
Creating a parent-subsidiary (group) company structure can help to mitigate risks by cushioning the holding company from the liabilities incurred by their actively trading subsidiaries.
What are the benefits of a holding company?
Normally the key assets in a group of companies are transferred to a non-trading holding company to protect them from risks incurred by the trading subsidiaries.
Diversification
Company owners who wish to diversify their products and services, or go in a new direction, may decide to set up a secondary company. In this case, it may be necessary to transfer some assets to the new company to provide it with the necessary investment (e.g., before it starts generating revenues).
Pre-sale preparation
Company owners who are looking to sell their businesses may want to hold on to certain assets (e.g., intellectual property) to prevent them from being included in the sale. If they intend to start trading again in the future, it may be sensible to set up a new company and transfer these assets across.
How to transfer assets between two companies
The transfer process itself can take the form of a contract for transfer/purchase of business assets.
In the case of money transfers, these can be done as a loan or by purchasing shares in the other company, or through dividend payments if shares in the transferor company are owned by the recipient company.
However, depending on whether or not the companies are both part of the same group, there can be taxes to pay.
Parent companies and subsidiary companies can be set up in exactly the same way as any other limited company is formed, as long as the parent owns the requisite shares in the subsidiary.
In summary, transferring assets between companies is a complex process with significant implications for tax, legal, and financial matters. Whether it’s for restructuring, diversification, or pre-sale preparation, seeking expert legal advice is crucial to navigate the intricacies of asset transfer effectively. mlplaw stands ready to provide the expertise you need for seamless asset transfers. If you require guidance or assistance in navigating the complexities of business asset transfers, please don’t hesitate to reach out to us at [email protected]. Your success is our priority.
Please see our Corporate Law Services page to find out more about the legal corporate services that we offer.
