6 Tips to Help You Utilize SPVs Correctly
Special Purpose Vehicles (SPVs) are a tool used in finance to provide financing for a single project. They can be set up as either limited liability companies or corporations. SPVs are incorporated to raise money and provide funds to other companies. Knowing some tips on SPVs will help you use SPVs for your organization’s benefit.
1. Know How to Define an SPV
A Special Purpose Vehicle (SPV) is an entity created for a specific purpose. It’s a legal entity set up to carry out a specific business activity that involves some form of financial risk. An SPV may be either a company subsidiary or an independent entity. It must exist solely for conducting business with other parties and then dissolving.
For example, an SPV may be created to agree with another company that is outside the scope of the parent company’s core business activities but profitable.
A corporation can be used as an SPV if its sole function is to hold real estate assets. You could use a limited liability company (LLC) as an SPV. An LLC provides some protection from liabilities while allowing you to deduct expenses against profits on your tax returns. However, these tax advantages only apply if the LLC holds property that generates passive income, such as rent and royalties.
Suppose you have no desire for passive income. In that case, using an individual who acts as a manager will likely provide similar benefits without having to go through the hassle of creating another legal entity first.
2. Differentiate between a Subsidiary and SPV
A Special Purpose Vehicle (SPV) is a legal entity created for a specific purpose. The term ‘special purpose’ means that it can have an objective other than generating profit for its shareholders.
It usually has a short life span and may be used to fund one or more projects before liquidation by selling off its assets. Subsidiaries are companies owned by another company, generally established in different countries.
Subsidiaries are common in global corporations. They allow the parent company to manage their foreign operations through more local entities while avoiding taxation. This also helps them comply with regulations in multiple countries and gives investors comfort that their interests are protected if something goes wrong abroad due to local law changes.
3. Determine the Purpose of an SPV in Finance
A special purpose vehicle is used to separate the risk of a company. It can be used for financing and dealing with the government and banks due to distinctive SPV administration services that are legally acknowledged by most financial institutions.
The main objective behind an SPV is to create an entity with a separate legal identity from its parent company or business house and be responsible for its assets and liabilities.
4. Know How to Structure an SPV
To establish an SPV, you must form a legal entity distinct from its parent company. It would help if you created a separate legal entity with its assets and liabilities. However, it should not be considered separate from the parent company.
Instead, it should still be tightly linked with the parent because both entities operate under one umbrella for tax purposes. This is why we often refer to these structures as “subsidiaries” or “special purpose vehicles” (SPVs).
The main benefit of using an SPV is that it allows companies to manage risk while taking advantage of attractive financing options available through public markets such as real estate investment trusts (REITs) and mutual funds.
5. Set up an SPV
The SPV is a legal entity and will be set up by a law firm. The people who own the company you want to invest in will transfer their company ownership to the SPV. The managers of this type of vehicle are usually lawyers but can also be other professionals like accountants or auditors.
6. Determine the Difference between SPV and LLC
The most important thing to remember about a Special Purpose Vehicle is that it is a company. It’s just like any other limited liability company (LLC) in that it has its own legal identity and structure. The main difference between an LLC and SPV is that while they provide limited liability protection for their owners/investors, they do so differently.
An LLC provides this protection by separating the business operations from personal ones, while an SPV separates them through separate legal entities (such as corporations). An LLC is a tax entity, whereas an SPV is not considered one—it’s only used for tax purposes!
An SPV can be a valuable tool for getting financing. It’s a separate legal entity established to own, manage or operate a specific asset. SPV can be used to gain access to the capital market without disclosing sensitive information about the project’s owner. The benefits of using SPVs are numerous. However, you should avoid some pitfalls when setting up an SPV.