There are a number of reasons why you may think of restructuring your business: an inward investment, tax reasons or in order to make it operationally efficient. However, there is another extremely important factor to consider when (re)structuring a business. Family. By family we mean those dependent on you and, therefore, also on the business, in order to survive.
So what should you be thinking about when it comes to restructuring + family? Well, you have to think about the worst possible scenario: what would happen if you weren’t around to run the business anymore whether because of death, disability or incapacity (as morbid as that thought is). How would that impact the business and also how would that impact the value that the business provides to your family?
This article highlights three key issues for you to think about.
Is the corporate structure that supports your business such that it would also support the business if you were not around? Would the business continue in the same manner? Would you not being around lead to adverse consequences, from a structural perspective? For example, if you are the sole shareholder of a free zone company or a 49% shareholder of a limited liability company based in the UAE, and you are unable to work anymore, what would need to happen in order for your family to continue benefiting from the business? Would they still be able to partake in the profits?
In the case of a sole shareholder, depending on circumstances, the shares in the business should devolve to their heirs; however, the process for that to happen could be complex and time-consuming. There are other corporate structures that could be put in place that would make the death/disability/incapacity of the sole shareholder a ‘non-event’, i.e. the business could continue as usual and, if certain arrangements are put in place, the dependents of the shareholder could also continue to reap the benefits.
One example, if one does not wish to put a particularly complex structure in place, is to simply have the owner hold his/her shares in the operating entity through an offshore corporate vehicle and for the owner to have an ‘offshore will’ in respect of the shares in the offshore corporate vehicle. This would allow the operating entity to continue functioning should something happen to the owner and allow the intended heirs/beneficiaries to get possession of the shares in the offshore corporate vehicle.
Another example would be a using different classes of shares in a holding company vehicle, which would ensure that the heirs (i.e. the holders of the second class of shares) take over the business if/when something happens to the owner/promoter (i.e. the holder of the first class of shares).
If one wishes to put a sophisticated/advanced structure in place, the use of trusts and double trusts could be considered, as shown in the example below.Diagram
The benefits of this structure (in no particular order) are:
- the offshore trust company would be entitled to the dividends generated by the operating company;
- the owner/promoter of the business would be entitled to nominate the beneficiaries of the family trust, who would ultimately be entitled to the dividends;
- the owner/promoter would not hold shares directly in the business, thereby eliminating any inheritance tax issues;
- by the owner/promoter not holding any shares directly in the business, he/she would reduce their personal exposure vis-à-vis third parties and claims made by such third parties;
- as the shares in the business are not part of the owner/promoter’s estate, they do not form part of the probate process should the owner/promoter die; and
- as the shares are held by an offshore trust, the management of the shares and business could still rest with the owner/promoter by virtue of him/her being a member of the board of directors of the offshore trust company.
Alternatively, one could also consider a ‘foundation’ structure; both DIFC and ADGM now have foundation regimes that could be used.
As can be seen from the options above, there are numerous ways to structure corporate entities in a way that can lead to the heirs/beneficiaries still benefitting from the business after the owner exits the business (for whatever reason). The optimum structure would depend on a number of different factors. Often even a simple ‘tweak’ to a current structure can lead to a significant advantage when it comes to protecting you and your family’s interest in the business.
Can decisions still be made, at the operating company level, if you are no longer around? Or does everything come to a standstill? Be honest now!
For example, if you are a sole shareholder of a company, and the company has substantial assets and a profitable business, how easy would it be for those assets to be transferred, if required? Is there a proper decision-making system in place or an ‘authority matrix’ that would enable other individuals who are involved in the management of the business to take over decision-making and ensure that the day to day functioning of the business is not affected?
In the UAE it would be essential to ensure that appropriate powers of attorney are in the place to enable relevant individuals to be able to represent the business vis-à-vis the local authorities. In addition, for the purposes of operating bank accounts, it would be necessary to ensure that bank account signatories are kept up to date and the bank is notified of any changes at the appropriate time.
Where a limited liability company is part of the corporate structure, you should ensure that arrangements with the 51% shareholder are properly documented to so that decision-making at the board level can continue and/or, depending on the circumstances, shares that were originally held by you, as the owner/promoter of the business, can be transferred to another member of the family, should the need arise.
Books & Records
A point that is often overlooked by entrepreneurs who are busy building their businesses is the importance of maintaining books and records. While on a day to day level, this may not appear to be the most important element of the business, and may take a backseat to actually winning new business, keeping clients happy and making sure employees do what they need to be doing, when it comes to protecting your interest, keeping a proper set of books and records is imperative.
If you have a company in the UAE, you should make sure all regulatory licenses and approvals and licenses are up to date, your VAT returns have been made on a timely basis and all your contracts (whether with customers or suppliers) are regularly reviewed, to confirm that they still make commercial sense and work from a legal perspective.
As your business evolves and expands, you would be well-advised to review the structure, governance and documentation that supports the business, at every stage of its life cycle. While the effort may seem significant, the value of this exercise lies in the mitigation of substantial risks that exist if such issues are not dealt with appropriately, and in a timely manner.
To read more about restructuring, check out our article on how restructuring your business can lead to an eventual sale. If you are considering selling a stake in your business, you may also wish to read our general article on Acquisitions and Sales.
We are here to help, so contact us if you would like a (free) initial consultation to discuss how a restructuring would be useful for your business.