An SPV is a subsidiary company formed to handle financing purposes or a particular business deal. It protects the mother company from suffering risks, such as losses when purchasing or funding new assets. An SPV is a business with separate legal status and liabilities, among other things. Companies establish an SPV for specific purposes, usually to identify financial risks.
How an SPV Works
Several different legal structures, including an LLC, a corporation, a limited partnership, or a trust, can be used to create SPVs. An SPV works by protecting the liabilities and assets of the parent company. SPVs are separate legal entities managed separately from their mother companies. When the mother company becomes bankrupt, the SPV can carry on.
Creating an SPV is a good idea for businesses that want to undertake projects that carry enormous risks. If you need to acquire a new asset to diversify your company, or raise capital for upcoming projects, creating an SPV can introduce several benefits.
Why Your Business Needs an SPV
Companies create SPVs for several reasons, including to make the transfer of assets much easier and quicker, securitize assets, protect assets from the risks related to their operations, etc. SPVs are ideal options for investors and business owners for a wide range of reasons associated with financial returns and risk mitigation.
1. Capital Management
Starting an SPV will present your business with the capacity to pool funds. That can be extremely important if your startup business is in its early stages. Early-stage startup businesses should consider investing in an SPV since it can allow a maximum of 250 accredited investors to pool their investment working capital.
As a startup, fundraising through an SPV can help you kick off your investment journey confidently since it can help with ongoing financial bookkeeping.
2. Risk Sharing
An SPV isolates the mother company from task-affiliated risks. Business tasks carry varying levels of financial risks that can negatively impact them. An SPV can guide you on the steps to follow to legally and appropriately isolate those risks.
3. Securitization
SPVs are vital for the securitization of receivables such as loans. You can use an SPV in your business to securitize your mortgages or other receivables. An SPV can help you exclude your loan-backed securities from other obligations.
4. Risk Reduction and Isolation
When your business has an acquisition or a significant project, establishing an SPV will isolate you legally from those risks that can arise in the new venture.
5. A Quicker Way to Transfer Non-Transferable Assets
Creating an SPV presents a quick way to transfer or sell non-transferable assets. You can sell an SPV as a complete package when you want to exit from the merger.
6. Investment and Intellectual Property Protection
You can use an SPV to test the market before using any investment idea you have in mind. That can be especially important if you want to venture into the capital market.
In a merger, an SPV protects the parent company’s intellectual property. If there is a pre-existing licensing agreement, the parent company can establish an SPV to isolate itself from the deal. The SPV, in this case, will own the intellectual property.
7. Tax Benefits
Taxes play a crucial role in SPV investing. If you’re a real estate investor, you might realize some property sales attract more taxes than the return you make from the sales. When you set up an SPV to own the property, as the parent company, you can sell the SPV rather than the properties you opt to sell. That means you’ll pay taxes on the returns from the SPV instead of paying the property’s sales tax.
8. Flexibility
A special purpose vehicle can be modified and specified to your unique business needs. Most people consider an SPV investment a suitable option for startups only. That is because of the capital model it offers. However, an SPV is also an ideal investment strategy for other businesses. SPVs can be structured and modified to accommodate multiple investment strategies, including private funds, real estate, and other financial assets entirely.
Wrapping Up
Depending on your specific needs, you should explore the world of SPVs to learn how they can be beneficial to your business. Although using an SPV can present multiple benefits, you should seek expert advice on the implication of utilizing it before you go ahead and implement it in your business operations.
