Ownership structures determine how a business is held, controlled, and operated. The structure chosen dictates who owns the business, who receives its profits (and when), and who bears its liabilities. These structures play a critical role in structuring investment and lending.

Understanding a business’s ownership structure is essential for lenders and investors seeking to assess control, risk, and projected return. It also informs legal obligations and regulatory compliance, particularly in relation to anti-money laundering and persons with significant control rules.

What are common business vehicles and who owns them?

What factors influence the choice of business vehicle and its ownership structure?

For businesses of any real size or complexity, the limited company is the usual vehicle of choice with the key attraction of limited liability for the owners. For a larger business, there may be a rationale in keeping business lines or functions siloed within different entities, resulting in a proliferation of limited companies within a corporate group. Groups may be structured into layers, using tiers of operating and holding companies to facilitate investment or lending into specific parts of a group or in respect of a specific part of the business or an asset. Different types of corporate structures can be used within a group to allocate risk (and reward) and facilitate different types of investment. Where a business operates in more than one country, local law may specify that only a local entity can own key assets or enter into key contracts, and this may dictate the form of entity used - and who can own it. The choice of business vehicles and ownership structures may also be driven by tax considerations.

Increasing regulation and liability for directors (or their equivalent) are drivers for ensuring corporate structures remain as efficient as possible. Groups may grow over time through the acquisition of new businesses, but care should be taken to ensure that obsolete or unnecessary entities are closed.

Why do ownership structures matter to lenders and investors?

As part of its due diligence, the lender will assess who owns and controls the business and the borrower. In many types of lending, it is the lender’s relationship with the ultimate owner which underpins the decision to lend. As a result, many loan agreements require the lender’s prior consent to any change in ownership structure during the term of the loan.

More complex financings may require a tiered group structure. Here the objective is to render amounts owed to the ultimate owners structurally subordinate to amounts owed by the borrower (ideally being the operating entity) to the third-party lender. In this scenario, the return to the ultimate shareholders is dependent on revenue generation by the borrower, which is used first to service the third-party debt with any remaining distributable amounts distributed up to the capital structure. Any intermediate holding entity is likely to be a ‘special purpose vehicle’, being a company set up specifically for the structuring of the transaction with no purpose other than to hold all of the shares in the borrower and in turn be owned by the parent. It therefore provides a ‘clean’ point of entry if an event of default occurs and the third-party lender enforces its security interests.  For more on defaults, including on the consequences of an ‘event of default’, see our previous A-Z of banking and finance: D is for default, and to read more about types of subordination see our previous article A-Z of banking and finance: J is for junior debt.

For their part, equity investors and junior lenders will want clarity on how (and when) amounts can be distributed from the operating entity, as this informs both their assessment of risk and their calculation of potential return.

Key take away

Ensuring that the group structure and business vehicles chosen are (and remain) fit for purpose helps business owners manage risk and maximise opportunity. Owners will need to take account of a range of factors in selecting the correct business vehicles, but limiting the owner’s liability is usually a key driver. Obtaining third-party funding often results in a tiered group structure reflecting the differing risk profile of lenders and equity investors.