Why open multiple entities?
14 Mar 2023
In today's wild world of business, it's not enough to do business based from one location or simply hiring from your local job board. You got to get all fancy and use complex organisational structures to get ahead of your competition by taking advantage of tax benefits, the best talent and access to capital from across the world. One way to do that is by creating a multi-entity company.
What is a multi-entity company?
A multi-entity company is basically a business that has different "parts" operating as separate legal entities. It's like having a bunch of companies within one big company!
This can help businesses to grow and expand into different areas or industries while keeping things organised. Each “part” will have its own team, bosses, and owners, but there's usually a "big boss" or holding company that makes the major decisions. Managing a multi-entity company can be complicated, but it's a great way for businesses to spread risk and grow faster.
Examples of famous multi-entity companies
The Walt Disney Company: Disney is a multi-entity company that operates in multiple industries, including entertainment, media, and theme parks. They have separate entities for their movie production, television networks, and amusement parks.
Alphabet Inc.: Alphabet is the parent company of Google and several other subsidiary companies. Each of these entities operates independently, with its own management team and business operations.
Berkshire Hathaway: Berkshire Hathaway is a holding company that owns several subsidiary companies, including GEICO, Dairy Queen, and Duracell. While these companies operate independently, Berkshire Hathaway provides overall strategic direction and financial management.
These are just a few examples of the many multi-entity companies out there. They can be found in a wide range of industries and can take many different forms, but they all have multiple separate legal entities operating under one corporate structure.
Benefits of multi-entity companies
Opening a subsidiary in a foreign country can be an effective way to expand your business. Doing so enables you to readily hire local professionals and more easily comply with the regulations of the country, giving your business an edge over competitors who attempt to sell in the market without a legal entity in the country.
For example, a business based in Europe receives a lot of interest from customers in the US, it may be time to consider setting up a US entity. This should help increase sales to US-based businesses, who prefer to work with other US companies and receive US banking details in order to pay.
The largest community of investors are in the United States, and it’s important to note that US investors typically prefer to invest in US companies. That's why it's common for foreign startups to open US entities, as it makes it easier to raise funds from US investors.
Consider the US accelerator, Y Combinator, which we were lucky enough to take part in back in late 2019. In order for us to accept Y Combinator’s investment, we had to do a Delaware Flip, which essentially meant creating a US holding company and turning our UK company into it’s subsidiary.
Nobody enjoys being sued, and businesses are no exception. A way to prevent this from happening is by creating different legal entities for different parts of your business. This not only protects the company's assets such as it’s Intellectual Property or money, it also lowers the overall risk to the business.
The beauty of having separate legal entities is that if one entity gets into legal trouble, the others won't be affected. This is a smart and simple way to keep your business safe and secure.
The US alone has over 11,000 different tax jurisdictions which can create a big headache for small businesses selling in the US. We recommend that that once your US sales reach $10,000 per month, incorporating in the US and hiring a US accountant is essential.
By establishing entities in countries with lower tax rates, a company can reduce its overall tax burden. This is why some businesses set up different entities for different business operations.
For instance, creating a UK company that employs engineers may allow you to take advantage of the UK's fantastic R&D tax credits. Similarly, having a Canadian entity that employs a marketing and sales team is an ideal location to hire a team with the expertise to sell to the North American market. Finally, opening a US entity to accept payment from US customers should help maintain good standing with the IRS by clearly identifying revenue generated in the US against other revenue of the wider business.
However it important to note that creating a company structure that truly reflects how your business operates is essential to comply with international tax laws.
The drawbacks of Multi Entity Companies
Managing a business can be stressful, especially when each entity requires its own set of accounts, tax filings, and financial statements. This can make it challenging for business owners to track their businesses' performance across the group, leading to potential confusion. If the company structure is disorganized or lacks clear communication, this can result in overlapping responsibilities, competing interests, and a lack of clarity among decision-makers in the company. But don't worry, with a little effort and organization, you can overcome these challenges and ensure your business runs smoothly.
Operating multiple entities brings additional regulatory and compliance risks, particularly if you have entities in different countries. Each company has to comply with the laws and regulations of the country it operates in, and the group of companies must comply with wider international rules such as the OECD’s transfer pricing guidelines. Transferring assets between companies within a group is a significant compliance issue that is often overlooked when establishing a multiple entity company.
It's should not come as a surprise that with added admin and compliance requirements, costs for the business can go up. Hiring professionals such as accountants, lawyers and tax experts can add up to a large bill, and it's always a good idea to weigh these costs against the benefits of opening multiple entities. The good news is that thanks to new technology, the cost of opening companies worldwide is dropping every year, whilst also making the process much simpler.
Is opening multiple entities right for you?
Creating a multi-entity company can be a smart way to expand your business, access the best talent, take advantage of tax benefits, and stay adaptable. However, it's important to weigh the benefits against the drawbacks, as managing multiple legal entities can be complicated, costly, and bring additional regulatory and compliance risks.