The Hidden Benefits of Corporate Simplification
09 July 2020
Many organisations have unnecessarily complex corporate structures. In our experience, this often includes several dormant or relatively inactive companies. While these companies may have once served a specific purpose, that may no longer be the case due to a change in business needs, tax structuring or otherwise. Companies are also often acquired as part of a larger acquisition process and have simply remained in existence after the acquired businesses have been integrated. When organisations consider the benefits of maintaining these companies against the costs and risks of doing so, it can become clear that the organisation would be better served without them.
A key benefit of corporate simplification is the reduction of compliance and administration costs. An organisation can incur costs and expenses in excess of €8,000 a year to maintain a dormant, or relatively inactive, Irish company. These costs and expenses relate solely to ensuring that the company meets its ongoing compliance, audit and other legal obligations. This amount is in addition to the cost of employee and executives’ time spent in coordinating this compliance and administration. The long term cost savings that can result from a once-off corporate simplification exercise are clearly apparent where a company is no longer adding value to an organisation.
The existence of a company can expose an organisation to risk, including error, fraud or failure to meet regulatory or compliance requirements. These risks arguably increase with dormant and inactive companies given the likely reduction in monitoring when executives are focussing on the core companies required to run and grow the business. There is also the risk that, with the passage of time, the corporate memory will disappear making it more difficult to assess whether or not the companies should be retained. There are ongoing personal risks to the executives of an organisation who act as directors of these companies.
Eliminating unnecessary companies allows management, legal, and compliance teams to focus their time on the core companies required to run and expand the business. A less complex structure can also simplify the payment of dividends and intra-group financing arrangements for the organisation as a whole.
Governance Standards and Transparency
With ever changing legal and corporate governance requirements for companies, including new anti-bribery and data protection laws, ensuring that companies are meeting the required standards is an on-going challenge for organisations. It is far easier to maintain these standards with a less complex corporate structure. Improved transparency through a simplified structure is also likely to be welcomed by investors, finance providers and other stakeholders.
Sometimes complicated structures can lead to tax inefficiencies such as tax leakage or additional tax compliance burdens when repatriating cash up through the group. Simplifying the complexity of your corporate structure may resolve such tax inefficiencies within the organisation and allow for improved tax planning.
The earlier the steps in a corporate simplification project are taken, the sooner your organisation can enjoy the benefits. Our experienced Corporate and Tax teams can assist you in designing and implementing a corporate structure that is proportionate to your business needs and that can also assist in protecting and sustaining your organisation by reducing costs and improving business efficiencies.
To register for our Corporate Simplification Guide, please click here. If you would like to further discuss the next steps or your current corporate structure, or if you are considering a corporate simplification project, please contact Claire Lord or Gráinne Garvão.
The content of this article is provided for information purposes only and does not constitute legal or other advice.