Setting Up Your Start-up: A Smart Company Structure
If you're planning to grow your startup significantly, how you structure your company matters. One popular setup involves creating three separate companies that work together: a holding company, an operating company, and a discretionary trust. Each one has a specific job that helps protect your business and manage your money more effectively.
The Holding Company: Protecting Your Most Valuable Assets
Think of the holding company as a safe vault for your most important assets—especially your intellectual property (IP). This includes things like your brand name, patents, trademarks, software code, or any unique technology you've developed.
Here's why this matters: by keeping your IP in a separate company, you're protecting it from the everyday risks of running a business. If your operating company gets sued, has financial problems, or faces other legal issues, your valuable IP stays safe because it's owned by a different company.
The holding company can also make money by licensing your IP to other businesses. This means other companies pay you to use your technology or brand. Having your IP clearly organised in one place also makes your startup more attractive to investors, as they can easily see what valuable assets you own.
The Operating Company: Running Your Day-to-Day Business
The operating company is where all the action happens. This is the company that actually runs your business day-to-day. It handles everything from developing your product, manufacturing, selling to customers, marketing, hiring employees, dealing with suppliers, and managing customer relationships.
By keeping operations separate from your valuable assets, you get two main benefits:
Focus: Your team can concentrate on growing the business without worrying about protecting your IP—that's already taken care of.
Risk management: If something goes wrong with a customer contract or supplier relationship, the problem stays with the operating company. Your IP in the holding company remains protected.
The operating company signs all the contracts with customers, suppliers, and employees. This means it takes on the business risks, but those risks don't threaten your core assets.
The Discretionary Trust: Managing Your Profits Smartly
A discretionary trust is a legal structure that helps you manage and distribute the profits your business makes. Think of it as a flexible way to share money amongst the people who should benefit from your success—like you as the founder, your co-founders, investors, or even your family members.
The key advantage is flexibility. A trustee (someone you appoint) decides when and how much money to distribute to different people. This allows you to:
Save on taxes: By distributing profits strategically, you can often reduce the overall tax bill
Protect assets: Money in the trust is separate from your personal assets, so it's protected if you face personal financial problems
Plan for the future: You can set up the trust to benefit your children or future family members, helping to build long-term wealth
Is This Structure Right for You?
Whilst this three-company setup offers real benefits, it's important to understand that it's more complex and expensive to run than a simple single-company structure.
The costs include:
Accounting fees for three separate entities
Legal costs for setting up and maintaining the structure
Ongoing compliance and regulatory requirements
More administrative work
When it makes sense:
This structure typically works best for startups that:
Have valuable intellectual property worth protecting
Are planning to raise significant investment
Are aiming for rapid growth
Have moved past the very early experimental stage
When it might not make sense:
If you're just starting out, bootstrapping with your own money, and still testing whether your idea works, a simpler single-company structure is probably better. You can always restructure later as you grow.
The best timing:
Many startups implement this structure after they've proven their product works and have some customers, but before they raise major funding rounds. This timing gives you the protection you need whilst avoiding the hassle of restructuring after you've already signed lots of contracts and brought on investors.
Making Your Decision
Choosing the right structure depends on several factors specific to your situation:
What type of business are you running?
How valuable is your intellectual property?
Are you planning to raise investment soon?
How fast do you expect to grow?
What are the main risks in your industry?
What are your long-term goals?
Important: Don't try to figure this out alone. Speak with a lawyer who has experience with startups. They can help you understand whether this structure makes sense for your specific situation and ensure you set it up correctly from the start. Getting expert advice early can save you significant money and headaches down the track.