Spin-off of a Legal Entity

A spin-off of a legal entity is a form of business reorganization in which one or more new legal entities are established from an existing company, and part of its assets, rights and obligations is transferred to them under a separation balance sheet.

Unlike liquidation or merger, the legal entity from which the spin-off is carried out does not cease to exist. It continues its operations, while part of its assets, liabilities, contracts, employees or business areas may be transferred to the newly established company.

VINCO’S Legal Company supports clients throughout the spin-off procedure: from the initial analysis of the business structure to the preparation of corporate resolutions, the separation balance sheet, creditor notification and state registration of the newly established legal entity.

A spin-off means the transfer, under a separation balance sheet, of part of the property, rights and obligations of a legal entity to one or more newly established legal entities.

As a result of a spin-off, the original legal entity does not terminate. It remains active, while the new legal entity receives a defined part of assets, liabilities and rights under the separation balance sheet.

A spin-off is often used for business structuring, separation of assets, transfer of a separate business line, preparation for investment, or reduction of corporate risks.

A spin-off may be appropriate in the following situations:

• the owners want to separate a business line into a separate legal entity;
• part of the assets or liabilities must be transferred to a new company;
• the business is preparing to attract an investor or sell a separate business unit;
• there is a need to separate risky and stable activities;
• the corporate structure of a group of companies needs optimization;
• business partners agree to divide assets without liquidating the existing company;
• the company wants to create a separate operational, manufacturing, service or asset-holding entity.

The key document in a spin-off is the separation balance sheet. It determines which property, rights, obligations, contracts, debts, assets and other elements are transferred to the newly established legal entity and what remains with the company from which the spin-off is carried out.

The separation balance sheet must be prepared carefully, as its content affects the further performance of obligations, the position of creditors, accounting and tax treatment, and the ability to avoid disputes between participants or counterparties.

1.  Initial consultation and analysis of the spin-off objectives.
2.  Review of the charter, corporate structure, assets, contracts and liabilities.
3.  Preparation of a draft resolution of the participants or competent governing body on the spin-off.
4.  Determination of the procedure for transferring property, rights and obligations to the newly established legal entity.
5.  Preparation and approval of the separation balance sheet.
6.  State registration of the spin-off resolution in the Unified State Register.
7.  Notification of creditors and handling of their claims.
8.  Preparation of incorporation documents for the newly established legal entity.
9.  State registration of the legal entity created as a result of the spin-off.
10.  Amendment of information on the original legal entity, if necessary.
11.  Tax, accounting and HR support for the transfer of assets, liabilities and employees.
12.  Hand-over of documents to the client after completion of the procedure.

The following documents are usually required to prepare a spin-off:

• current version of the charter of the legal entity;
• information about participants, ownership structure and ultimate beneficial owners;
• financial statements and accounting data;
• list of assets planned to be transferred to the new legal entity;
• list of liabilities and contracts to be transferred to the successor;
• information about creditors and debtors;
• information about employees planned to be transferred;
• draft structure of the future newly established legal entity;
• documents related to real estate, vehicles, equipment, corporate rights or other assets, if such assets are transferred as a result of the spin-off.

Mistakes during a spin-off may lead to corporate, tax or litigation risks. The most common issues include:

• incorrect determination of the scope of property, rights and obligations transferred to the new legal entity;
• improperly prepared separation balance sheet;
• failure to notify creditors or improper handling of their claims;
• risk of challenging corporate resolutions by participants or creditors;
• tax consequences of asset transfer;
• issues with re-execution of contracts, licenses, permits or bank accounts;
• HR risks if part of the employees are transferred to the new legal entity;
• possible need for antimonopoly analysis if the spin-off is part of a larger transaction or corporate restructuring.

VINCO’S Legal Company provides comprehensive support for legal entity spin-offs and helps clients complete the procedure with minimal risks.

• advise on the feasibility of a spin-off and possible alternatives;
• analyze the corporate structure, charter, assets and liabilities;
• prepare resolutions of participants or another competent governing body;
• assist with the preparation of the separation balance sheet;
• support state registration of the spin-off resolution;
• prepare documents for the establishment of the new legal entity;
• support creditor notification and handling of creditor claims;
• coordinate tax, accounting and HR matters;
• support the transfer of assets, contracts and rights;
• provide legal advice after completion of the reorganization.

If you plan to separate a business, transfer a business line or create a new company without terminating the existing legal entity, the VINCO’S team will help you choose the proper spin-off model and support the procedure until completion.