Multiple businesses under a company vs new company for a new business?
Updated: 7 February 2021
Clients have many questions around business structure.
One of the popular ones is "should I setup another company for a new business?"
While many companies are setup with multiple businesses operating under their structure, below are some factors to consider before making the decision to bundle one or more businesses under a single company or setup a new company for a new business.
In a hurry? You can jump ahead below.
I am starting with shares because that ranks as a popular consideration for clients making structure decisions.
Shareholders are allocated shares in a company as a whole.
What does this mean?
It means that a shareholder will usually have a stake in the shareholdings of the whole company and not just one of the businesses under the company structure.
Do you want your shareholders to have a stake in all businesses operating under the existing company?
If not, your alternative is to setup a separate company for your new business.
A company is a legal entity (it can sue and be sued)
You may have heard that a company has its own legal personality.
Practically, this means a company can sue and be sued. So any businesses that are under that company are exposed to that same risk of being sued.
So, if you have a business that is riskier than others; you may want to keep that business separate to the others and launch it under a new company.
To reduce the legal risk exposure to the other business(es) under the existing company.
While you can't wipe away all risks and we'll discuss this under the topic "associated entity", it helps you manage most risks.
So, let's discuss risk management next.
Shareholders want their investment in a company to have every chance of success.
For this reason, they may not be too accepting of a new business venture under the company structure that could risk their investment.
And there may be rules around the kind of business(es) that a company can operate in the shareholder agreement.
So, what if you do decide to setup a new company for your new business - are you in the clear?
Let's consider the associated entity concept next.
While setting up another company means you are creating another legal entity with its own separate brand-new legal identity, there can still be a link between your companies because of the "associated entity" concept as I will explain below.
In certain situations, courts will consider the relationship between two associated entities; that is, 2 companies that are associated per the meaning given in s. 50AAA of the Corporations Act 2001 (Cth).
For example, in the case of a redundancy, the Fair Work Commission will consider if it would have been possible for the principal entity to redeploy an employee in an associated entity: s. 389 Fair Work Act 2009 (Cth) genuine redundancy criteria.
So what exactly is an associated entity?
Associated entity criteria
Briefly, an entity is an associated entity if these criteria are met:
- the associate and principal are related bodies corporate
- the principal controls the associate
- the associate controls the principal and the operations, resources or affairs of the principal are material to the associate
- the associate has a qualifying investment in the principal, has significant influence over the principal and the interest is material to the associate
- the principal has a qualifying investment in the associate, has significant influence over the principal and the interest is material to the principal, or
- a third entity controls both the principal and the associate and the operations, resources or affairs of the principal and the associate are both material to the third entity.
And costs for setting up the new company? we'll discuss those next.
Yes, there are legal and accounting costs for setting up another company.
The cost of setting up multiple companies is one reason why many choose to have multiple businesses run under one company.
And because each company has its own legal personality (can sue and be sued) so will need its own legal agreements and own tax return.
This can get expensive.
To give you an idea, setting up a company can cost anywhere from $500 to $3,000 and ongoing ASIC annual renewal fees are currently ~$300 at the time of writing this article. There's also the annual company tax return preparation fee which can start from $2,000 + range depending on your business size.
When to have multiple businesses under one company
Below are some situations where you may choose to have multiple businesses under one company.
- you are NOT seeking external investment;
- you need to manage cash carefully and want to avoid paying for the extra legal and accounting work.
- you are trying to manage costs and will later split out the business to a new company;
- the businesses are similar and/or carry similar operational risks and your board and/or shareholders are comfortable with the new business being under the same company structure;
If you do have multiple businesses under one company and decide to seek external investment, you can then speak to your lawyer and accountant about moving the business under a new company.
This brings us to the scenarios of when you will setup a new company.
When to setup a new company for a new business
You may choose to setup a new company for a new business in these cases:
- you have external investors in your original company for an existing business but you don't want the investors to have a stake in your new business;
- your current board and/or investors do not want you to undertake a new business under the existing company;
- you do not have cash restrictions and can afford the cost of running a separate company for a new business e.g. setup, accounting and ongoing ASIC renewal fees.
Do you have questions or comments about setting up your business structure? Be sure to leave them below.