An Operating Company (OpCo) is an organizational framework used by businesses to manage risk and strategically allocate assets. This structure separates the core trading activities of a business from its ownership interests and high-value, non-operational assets. Creating distinct legal entities allows companies to achieve greater financial flexibility, optimize their capital structure, and defend against potential liabilities.
Defining the Operating Company (OpCo)
The Operating Company is the engine of the business, defined by its role in generating revenue and managing day-to-day liabilities. An OpCo is the legal entity that employs all staff, manages inventory, and handles the direct relationship with customers and suppliers. This entity holds the permits, licenses, and operational equipment necessary to conduct its trade.
All operational income and expenses flow through the OpCo, including sales revenue, salaries, utility bills, and insurance premiums. Because the OpCo engages in all trading activities, it is also the entity exposed to most of the business’s financial and legal liabilities. Claims related to contract disputes, product defects, or workplace accidents are primarily directed at the Operating Company.
The OpCo and HoldCo Structure
The Operating Company is frequently paired with a Holding Company (HoldCo). A HoldCo is an entity created primarily to own the stock or equity of other companies, including the OpCo, without engaging in business operations itself. This pairing establishes a parent-subsidiary relationship where the HoldCo maintains centralized control and provides management oversight for the entire corporate group.
The HoldCo often serves as the repository for valuable non-operational assets, such as brand trademarks, patents, and intellectual property (IP). The OpCo licenses the use of this IP from the HoldCo through a formal agreement. Separating the stock and IP ownership into the HoldCo facilitates corporate governance and simplifies the financing process. Investors and lenders often prefer this structure because it provides clear lines of authority and a distinct entity for investment.
The OpCo and PropCo Structure
Another arrangement pairs the Operating Company with a Property Company (PropCo), designed to separate liquid operational assets from illiquid, non-operational assets. The PropCo holds the physical real estate and facilities used by the business, such as warehouses, retail stores, or manufacturing plants. This structure is prevalent in asset-heavy industries like hospitality, retail, and manufacturing, where the value of the property is substantial.
The PropCo acts as the landlord, leasing the property back to the OpCo, which operates the business from the leased space. This creates a formal, arm’s-length landlord-tenant relationship between the two entities. Isolating the real estate in the PropCo shields these long-term assets from the operational risks and potential insolvency of the OpCo.
Strategic Advantages of Using an OpCo Structure
The primary motivation for utilizing an OpCo structure is the mitigation of financial and operational risk across the business. By siloing the core trading activities and associated liabilities within the OpCo, the valuable, long-term assets held by the HoldCo or PropCo are protected from potential creditor claims or litigation. If the Operating Company faces financial distress or bankruptcy, the intellectual property and real estate remain secure in the sister entity.
This legal separation also facilitates external investment and financing for both the operational and asset sides of the business. The OpCo, being asset-light, attracts equity investors interested in the growth and profitability of the trading business itself. Conversely, the PropCo can secure real estate financing, such as mortgages, at lower rates because the property serves as a secure form of collateral, insulated from the volatility of the operating business.
The structure can also create tax efficiencies, as rental payments made by the OpCo to the PropCo are often treated as a deductible business expense, reducing the OpCo’s taxable income. The ability to sell the OpCo without the accompanying real estate provides greater flexibility to future owners, which enhances the overall valuation of the corporate group.
Operational and Compliance Considerations
Maintaining the legal integrity of the OpCo structure requires diligent adherence to corporate formalities to ensure the separation is recognized by courts and tax authorities. The most significant challenge is avoiding the doctrine of “piercing the corporate veil,” where a court might disregard the legal separation if the entities are treated as one single operation. This requires each entity to have its own bank accounts, separate board meetings, distinct records, and independent financial statements.
A foundational requirement is the establishment of formal intercompany agreements between the OpCo and its related entities. These binding contracts must be executed at arm’s length and include formal lease agreements for property use or licensing agreements for intellectual property. These agreements define the terms, responsibilities, and pricing for transactions between the entities, such as the OpCo’s rent payments to the PropCo. The resulting transactions also necessitate complex consolidated financial reporting, where the financial results of all entities must be reported together to provide a complete picture of the corporate group’s economic performance.