Simplifying your corporate structure for efficiency and cost savings

Written by Lucy Fairclough from Azets

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 different 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.

1 Cost savings

One of the most immediate benefits of legal entity rationalisation is cost reduction.

Each legal entity within a group incurs recurring costs to maintain its existence, often without contributing directly to revenue generation. These costs include audit fees, tax compliance fees, company secretarial expenses and insurance premiums.

For example, maintaining a dormant entity can cost between £1,000 and £3,000 annually, while a trading entity could cost anywhere from £10,000 to £30,000 in maintenance and administration costs. By reducing the number of entities, these costs can be significantly lowered.

Moreover, the hidden costs of maintaining a complex corporate structure should not be underestimated. These include the increased burden on management time, higher demands on group accounting and treasury functions, and potentially increased scrutiny from tax or regulatory authorities. Simplifying the structure reduces these intangible costs, freeing up resources that can be better spent on value-added activities.

2. Risk reduction

Another critical benefit of entity rationalisation is the reduction of risk. A complex group structure can obscure the financial and legal health of the organisation. Over time, corporate memory fades, and directors may not be fully aware of the contingent liabilities or risks associated with dormant or little-used entities. These liabilities might include historical tax issues, legal claims, or environmental obligations that could surface unexpectedly.

By streamlining the group structure, companies can improve their risk profile. Fewer entities mean fewer directorships and thus reduced personal risk for directors. 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 through dividends. Simplifying the structure can remove so-called "dividend traps" where profits are locked within entities that cannot distribute them to the parent company due to legal or financial constraints.

4. Enhancing corporate governance

A streamlined corporate structure can lead to improved corporate governance. Compliance with both internal and external regulatory requirements becomes more straightforward when there are fewer entities to manage. This simplification reduces the risk of non-compliance and the associated penalties or reputational damage. 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 is akin to decluttering a home. It 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 operations, finance, legal, HR, and strategy to ensure a holistic view.

Step 1: Identify what you need

The first step is to map out the current group structure and identify which entities are essential for the business. These are typically the entities that are actively trading, holding critical assets, or serving a specific, ongoing purpose.

Step 2: Identify what you don’t need

Next, identify entities that no longer serve a purpose. These 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. The costs of maintaining these entities often outweigh any potential benefits.

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 advisers 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 not be a one-time exercise but rather a periodic review to ensure the group structure remains aligned with the company's strategic objectives. It is advisable to set aside time in board meetings to discuss the group structure and consider whether any changes are necessary. This discussion should include representatives from across the business to ensure all perspectives are considered.

The goal is to create a commercially optimised group structure where every entity has a clear purpose, and management time is not wasted on unnecessary complexities. By doing so, companies can reduce costs, minimise risk, and focus more on value-added activities that drive growth and profitability.

In conclusion, 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.

We’re here to support you through this, working seamlessly alongside your daily operations, so management can focus on what truly matters—driving the business forward.