A parent company may create a separate legal entity called a special purpose vehicle (SPV) to isolate financial risks. The former may use its SPV to reduce any negative financial impact on its investors, especially while undertaking a risky venture. Operations of an SPV are limited to financing and acquisition of specific assets separate from corporate resources.
Investors are assured of repayment even when the parent company is debt-ridden as an SPV maintains its independent balance sheet. A corporate may choose to form its SPV as a limited liability corporation, a trust, or a limited partnership firm.
Though the SPV document templates may vary accordingly, they must conform to the necessary incorporation laws in existence and ask experts to streamline the process.
What Should You Know About SPVs?
SPV acts as a structured finance tool capable of withstanding even an unfortunate eventuality of the parent company going bankrupt. Once the purpose of creating the SPV is attained, it is worth terminating this independent legal entity.
For instance, setting up a unique project may need exclusive funds that do not eat into the parent company’s assets. The SPV enables the corporation to isolate the funds required while protecting its assets, which in turn, assures the concerned investors of its financial stability. Once the project is operational and is functioning smoothly, you no longer need to continue with the SPV.
The common purposes of establishing an SPV include:
- Allows a corporation to isolate risks associated with a particular project legally
- Acts as security for loans taken by the parent company
- Facilitates smooth transfer of assets owned by a corporate by selling the SPV under which those assets reflect, through a merger and acquisition deal
- When taxes on property sales exceed the capital gain earned from the sale, selling the SPV, which owns those properties, makes business
Utilizing the expertise of specialists who have considerable experience in guiding clients with setting up an SPV eases the entire process. These professionals even tweak SPV document templates, which serve as a base for parent companies to customize the information they wish to divulge.
Creating an SPV should only be done after conducting a thorough study, so it proves to be a wise move for the parent company. You gain from:
Protection of Valuable Funds and Assets
When valuable company assets are transferred to an SPV, they are virtually untouchable even if the owner becomes bankrupt. An SPV saves the mother company from incurring massive losses should one of its high-risk projects fail to take off. In case of doubts, don’t hesitate to seek professional guidance.
Minimal Red Tape
Establishing an SPV is relatively easy and influenced by the choice of jurisdiction. Apart from not being a lengthy process, you also do not need to depend on government authorizations. Within the documentation involved, you can clearly outline the activities allowed and transactions prohibited.
Legal Protection and Tax Benefits
By appropriately structuring your SPV, you can limit the legal liability of your parent company to a high-risk project tank. SPV assets can also enjoy exemption from direct taxes, which proves to be a definite tax benefit.
Freedom of Jurisdiction
Your parent company can operate from outside the jurisdiction you choose to incorporate your SPV. Firms originating from the SPV take into account regulatory perspectives to select the most attractive jurisdiction.
Turn to a specialist agency that has your back covered throughout your SPV journey.