As a Y Combinator company ourselves, we are no stranger to the famous ‘Delaware Flip’, used to create a holding company in Delaware in order to raise money from US Venture Capital firms. We help new YC companies, mostly early-stage companies, with this process and find that the same questions come up so we've put together this piece on what to consider when moving cash between entities.
More and more start-ups are structuring their legal entities using holding companies (parent companies, or top companies, however you choose to call it) to take in investments. They then use a subsidiary company to actually operate in, often, overseas. There are plenty of good reasons for this, such as accessing overseas investments, tax incentives and future planning to name a few. We wrote a post about it if you want to see if its right for you.
With this increasing popularity, we've seen more and more start-ups embark on the process with no idea of how to transfer funds from one company to another, and waste time worrying about this instead of building product and talking to users. Tax implications can be scary, but shouldn’t take up your valuable time. The steps below can help if you're taking care of your first intercompany transfer.
First things first, I am referring to groups of companies, where one company owns 100% of another. There may be multiple 100% subs, but for simplicity's sake, let’s assume just one parent company and one subsidiary. The next assumption is that the parent company has raised funds from investors and is otherwise not used for anything else (like sales, employing staff, etc). All your staff, contracts, and expenses are in your subsidiary, at least for now.
In this situation, you have 2 options to enable you to send the venture capital investment you raised from investors from your parent company to your operational subsidiary. Remember that each company has its own circumstances to consider so treat this post as a starting point for your research.
The parent company transfers money and records it in both accounts as a loan. Technically this should have interest on it to be at “arms-length” and failure to do so could cause issues with tax authorities. Add a market rate (good news is that interest rates are super low right now, so the rate will be small), and a simple loan agreement and you are good to go.
Pros: Can be repaid, so if you plan to work in the UK now, and then eventually open an office in the States in a year or so, you can send money back without worrying about the paperwork too much.
Cons: The interest rate will generate income in your parent company and if you have no plans to repay this, it might be added admin for no benefit.
The parent company sends the cash and records it as an investment. The subsidiary records the cash as capital (equity). Consider this an internal fundraise — the sub can then issue shares in itself in return (although it’s already 100% owned by the parent, so no changes in that). A simple board resolution and a notification to your local company register and you’re done.
Pros: One-off, no further actions needed and no ongoing interest.
Cons: Not reversible, so if you need the cash back in the parent co in the near future, you would then have to consider another mechanism like dividends or a loan.
Both of these can be done at the end of your financial year, so don’t panic if you have sent money sporadically without documenting it as above.
The two options above are for when the parent company is simply an investment-taking shell. Where you move funds between two companies that perform services for each other, then you need a services agreement and you need to work out the correct transfer pricing. Just recharging costs can leave you with a tax headache, so you essentially need a mark-up. This also includes cases where one of your companies is used for invoicing (as your customer or supplier might want to deal only with a US company). This is a wholly separate and complex area that I’ll cover in a different post.
If you are heading towards your year-end, and have made these types of transfers without any documents, don’t worry. Speak to your accountant and they will be able to help you out. If you are going down the capital route, it’s a simple form you can even complete yourself. Then, get back to building something people want!
Thanks for reading
This article is provided only for informational purposes. Rebank does not provide tax, accounting, or legal advice.