ADVICE
Housekeeping – Andrew Rowe , managing partner of Azets ’ Teesside office , says legal entity rationalisation should be reviewed periodically .
Cut the clutter !
Simplifying your corporate structure
Andrew Rowe , managing partner of Azets ’ Teesside office , explains how principles that apply to decluttering your home can also be applied to your business ...
Marie Kondo , the organisational guru , famously said , “ The best way to find out what we really need is to get rid of what we don ’ t .”
This principle , though primarily applied to tidying up homes , resonates just as powerfully in the world of corporate management , particularly when it comes to legal entity rationalisation .
For many businesses , the accumulation of entities within a corporate group often occurs over time , leading to a complex and unwieldy structure that no longer serves the company ’ s best interests .
Simplifying this structure through legal entity rationalisation can provide significant benefits , including cost savings , reduced risk and more efficient operations .
Why rationalisation matters Over time , corporate groups tend to accumulate a variety of legal entities . These may have been created for purposes such as acquisitions , tax planning , holding assets or managing debt . However , as businesses evolve , the necessity of maintaining these entities often diminishes . Rationalising the group structure by eliminating unnecessary entities can result in a leaner , more efficient organisation leading to : 1 . Cost savings Each legal entity within a group incurs recurring costs to maintain its existence , often without contributing directly to revenue generation . By reducing the entities , these costs can be significantly lowered . The hidden costs of maintaining a complex corporate structure should not be underestimated . These include the increased burden on management time , demands on group accounting and treasury
and potentially increased scrutiny from regulatory authorities . 2 . Risk reduction A complex group structure can obscure the financial and legal health of the organisation . Corporate memory fades , and directors may not be fully aware of the contingent liabilities or risks associated with dormant or little-used entities . By streamlining the structure , companies can improve their risk profile . It also means fewer points of potential failure , reducing the risk of inherited liabilities from past mergers and acquisitions . 3 . Optimising distributable reserves and capital Legal entity rationalisation can also free up distributable reserves and capital , which might otherwise be trapped in dormant or underutilised entities . This is particularly relevant for companies looking to maximise shareholder returns . 4 . Enhancing corporate governance Compliance with both internal and external regulatory requirements becomes more straightforward when there are fewer entities to manage . Additionally , it enables the company to present a clearer and more transparent profile to stakeholders , including investors , regulators and business partners .
The process of rationalisation Legal entity rationalisation requires a systematic approach , a clear understanding of what is essential and the courage to let go of what is not . The process begins with a comprehensive review of the existing group structure . This should involve key stakeholders from across the business to ensure a holistic view .
Step 1 : What do you need ? The first step is to map out the current group structure and identify which entities are essential for the business . Step 2 : What don ’ t you need ? This might include dormant companies , entities created for past transactions or tax purposes that are no longer relevant or subsidiaries in regions where the company no longer operates . Step 3 : Address the ‘ tricky ’ entities Some entities may seem too complicated to eliminate due to potential legal , tax or operational challenges . However , it is crucial to address these entities rather than leaving them as a persistent burden . Engaging with experienced advisors and conducting a detailed risk assessment can help in finding solutions to wind down or merge these entities effectively .
Taking action Legal entity rationalisation should be a periodic review to ensure the group structure remains aligned with the company ’ s strategic objectives . It is advisable to set aside time to discuss the group structure and consider whether any changes are necessary .
Just as Marie Kondo advises decluttering our homes , businesses can benefit from regularly reviewing and simplifying their legal structures . While this process is often complex due to accounting , tax and company law requirements , it can lead to significant cost savings , reduced risks and a more efficient organisation that can focus on activities that drive growth and profitability .
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