Do large companies just work as tax-free zones with lower accounting standards?


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Large companies are often organized into business units (GM is supposted to be a primer on this). These units essentially function like smaller companies. The only difference is that the accounting and legal requirements that formal companies have are gone, and there are no taxes to be paid on services to other parts of the company. My question is, therefore, what is the rationale for not separating these business units into wholly owned subsidiaries. Alternatively, what is the point of creating subsidiaries, when you could create business units?

Could it be a startup-idea to create a holding company, where other startups could become business units?

Edit: Based on the answer from Jeff Oresik I will elaborate. Maybe the holding company should provide basic services to the startup companies. These facilities could include the following:

  • Offices
  • An HR department
  • IT-department helping with basic IT, and telephony setup
  • Financial department, helping to access capital from investors
  • Legal department

Buying services from a lawer can quickly cost 300$ per hour, while a lawer employed by the company could work for 10.000$ per month. This is just a huge difference and no simple tax trick. I know, though that the taxation is not the main reason for this price difference.

Strategy Organization Large Companies

asked Jun 13 '10 at 06:20
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David
1,567 points
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3 Answers


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Could it be a startup-idea to create a holding company, where other startups could become business units?

No. Ownership is too powerful. Regardless of how strong legal protection you build in, the business unit entrepreneurs will always worry that if they get really successful you will usurp full control and take their money...

Edit: The question has been substantially changed, so let me follow up on that.

I personally would still never ever start a startup which was just a business unit fully owned by another company.

Regarding corporate services at lower cost -- well, that would be useful. But I doubt you could keep costs low enough to really interest startups in consuming a lot of these services -- most early stage startups try to avoid incurring expenses for HR, IT, accounting etc. As much as possible, they prefer to either not do these things at all, do it themselves, or scrape by on free-of-charge favors from friends, former co-workers and family.

answered Jun 13 '10 at 07:20
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Jesper Mortensen
15,292 points
  • This would at least be a challenge one would need to overcome. – David 9 years ago

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Your list would benefit startups with their team in place, but on this site seems like the needs for those looking to do a startup would need:

  1. Help in finding and qualifying potential partners. Multiple questions on this site: "How do I find a __?" Maybe two companies could share a developer, marketer or design person.
  2. Funding resources could be an option. Opportunities to "pitch" investors could go beyond the quick meetings and elevator pitches to seeing you in action on premises.
  3. Not just selling legal, accounting, and tax services, but creating more of a set way to do it. Get some benefits from a cookie-cutter approach (How different could all these companies be?) which would be a way to offer the services for less money. Sort of a Startup In a Box.
Previous Remarks Reference In Question I'm not sure how many cross products/services startups would share with one another. Seems like a lot of trouble in setting all this up to gain some sort tax break on a small amount of your revenue.

Wasn't there a movie where a guy gets demoted because his company was bought out by another company and they would create "Synergy" by buying from each other as if that was a way to grow a business?

answered Jun 15 '10 at 05:34
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Jeff O
6,169 points
  • I have edited by question – David 9 years ago

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I have seen shared services. My doctor has her private practice where she shares the receptionest with many other businesses. Also many outsource their services or even get a group of companies together as a sort of co-op and then buy services for them that at an individual level woudn't economicly work.

I think the comments about not being under another company though still holds and creating a co-op style would not mean being under the co-op. The other style that maybe your thinking of is franchise and that has shared services under one company. The ownership of the franchisee requires following a certain standard of the franchiser and also gets services covered under their agreements.

answered Jun 16 '10 at 04:00
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John Bogrand
2,210 points

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