In our modern economy, companies should attempt to cut costs wherever possible. But at some point companies hit a wall where additional cost reductions do not seem possible. Often, these cost walls develop because of overly complex corporate structures. Entities that were formerly useful can become burdens when their purpose disappears. Sometimes these entities remain from a merger or acquisition or may have been formed to facilitate a now defunct tax strategy or to hold a formerly important line of business. To get to the next level of cost savings, it is often necessary to look at the company’s legal structure, the company’s backbone.
Simplifying the structure to meet your company’s current needs can generate direct cost savings. It may also allow the company to eliminate levels of bureaucracy that can distract the company’s officers from their primary responsibility, increasing the company’s revenue.
Whether by design or accident, an improper corporate legal structure can cause the corporate functions to become more bureaucratic, which, in turn, can lead to unnecessary expenses, employee dissatisfaction, complacency, and other common issues encountered in bureaucracies. In addition, a complex legal structure can create inefficiencies in data management and financial and tax reporting. If your company has such issues because of its legal structure, a reorganization by consolidating and dissolving unnecessary entities can quickly produce real cost savings.
Even if you manage to keep bureaucratic issues at a minimum, you cannot escape the legally-required tax reporting requirements that federal, state, and local governments may impose upon multiple entities. This can affect your company’s income, property, and payroll tax efficiencies both in its compliance burdens and its overall tax payments.
In the worst case scenario, a company without legal guidance over time may actually increase its tax liabilities by improperly using the entities. By not knowing the function or tax treatment of each entity, a manager could, for instance, easily use an improper entity for purchasing a property. You should have your company’s legal structure regularly reviewed to ensure it is producing the lowest possible effective tax rate.
A company with an overly complex structure will have increased legal costs. There are direct costs associated with a company having unnecessary entities, such as additional resident agent and filing costs. But there are also indirect legal costs, such as inter-company transaction agreements, licensing agreements, and unnecessary inter-company documentation costs. Further, the company may lose some of its bargaining power with third parties and may unknowingly be negotiating deals as weak individual divisions. Some third-party contractors may not even realize the size of your business, given many company’s data systems separately log purchases by different entities.
In determining whether your company’s legal structure is too complex, you should involve the key members of your company and its tax and legal advisers. Untrained tax staff alone may not know the legal ramifications of dissolving or merging entities, so your legal advisers certainly should be involved. Conversely, an attorney without business or tax training may not understand the effects of changing a company’s structure.
Any company that has entered or left a line of business, bought or sold properties, or underwent a corporate merger or acquisition could very well have lingering legal entity appendages that drain the company’s cash and resources. Reducing corporate legal complexity to meet current needs provides both foreseeable and unexpected cost benefits to proactive businesses.
For further information, please contact Jeff Rogyom at (410) 929-4578. Please review the Disclaimer page regarding use of this website and its information.