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What does it mean to spin off a business?

On Behalf of | Nov 25, 2021 | Business Transactions |

As a business owner, you may have noticed that part of your business has the potential to be lucrative if it was a separate company. Some entrepreneurs take one part of a company they own and spin it off into their own enterprise. If this sounds like an attractive option to you, you might want to know how to proceed.

It is important to understand how spinning off a business works because there are different methods of divesting a part of a company into a separate entity. Science Direct has posted information to clarify how spinning off a business works in comparison to other forms of business reorganization.

Creating an independent company

The part of your business you want to spin off may include its own human resources, intellectual property and other assets. To divest this section into an independent business, you would establish a separate management structure to run this section as its own company. You would also give the new company its own name.

Additionally, you must make sure your parent company relinquishes control of the new company. You may do this by creating ownership shares of the new business and distributing them to your shareholders. Your parent company may give up full control or retain a small minority share of the new business.

Other ways to create a new business

You may have heard about splitting off or splitting up a business. Be aware that these methods are not the same as spinning off a business. A split-off is similar to a spin-off, but in this case your shareholders would have to surrender their shares in the parent company in order to gain shares in the new business.

Splitting up a business actually divides your current business into two or more entities. Your shareholders would give up their stock in the parent company in exchange for stock in the newly created businesses. You would also disperse your current business assets into the new companies.

Consider your priorities

There are multiple ways to divest business assets into a new business, so think about your goals for your present enterprise and the new company you want to create. This may help you as you explore different business reorganization options to find the one that suits you.