But that is exactly what we often recommend clients do. This article and subsequent pieces will look at why and how to break a company, for all the right reasons.
Your business may include a variety of assets including a trade or two, property holdings, cash reserves, investments, etc. It is usually easy to understand how all of these assets and trades accreted into one company and, indeed, there may be good reasons for an eclectic mix of businesses and assets to be bundled together. There are economies of scale associated with keeping everything under one roof, there may be tax benefits, and management benefits. Often these reasons are good enough that you wouldn't want to change anything.
It is not always the right thing to do, but there can be sound commercial and business reasons to split up a business. The business may have developed into several trades, some of which work better than others and the owners may wish to ring fence the successful trade from possible losses in the less successful parts. Other owners may wish to prepare for sale or perhaps groom a developing trade for external investment.
Tax is often a key factor in reaching the decision to split up a company. An important example of this is found in two of the key tax reliefs for family business owners, ie:
The availability and extent of these reliefs depends on whether the shares in question are shares in a trading company. In the case of inheritance tax, the company must be wholly or mainly trading, and in the case of capital gains tax, the company must be substantially a trading company.
To use a simple example, substantial property or cash on the books which is effectively an investment can jeopardise the availability of tax relief. Reorganising the company can form an important part of tax planning to ensure that these reliefs are ultimately available.
Subsequent issues of our Family Business Law Brief will discuss some of the reasons for breaking up an otherwise nicely functioning company, and how to achieve a successful break up. We will look at: