When you can’t do without an agency agreement
We have repeatedly talked about the pros and cons of an agency agreement (see, for example, here), pointing out the need for a deliberate approach to the use of the tool, having a strong justification for the business purpose. Indeed, as practice shows, the use of the agency model of building relationships in a group of companies is mentioned in more than 10% of all cases related to the artificial fragmentation of a business.
However, there are situations when the specifics of doing business and the industry do not leave a chance to avoid an agency agreement. Here is one such example:
Initial situation: A group of companies carries out landscape design activities for private clients and organizations.
Most often, after the design, the company also provides full support for the implementation of the project, including the assembly and construction work. At the same time, the cost of such work and materials makes up a significant share in the revenue of the business.
At the time of the start of work with the client, the business structure included 2 main operating companies, between which, in order to share all incoming revenue, all contracts with clients were divided. At the same time, the linkage by functionality was not observed, the companies were fully affiliated (the business founder was 100% a member of each organization).
All the main signs of the artificial fragmentation of business in order to preserve the right to special regimes are obvious. The combined revenues of both companies exceeded RUB 250 million.
The contracts for the support of the assembly were concluded in the form of supply contracts, which artificially increased the revenue in its subjects. Although, in fact, companies were looking for suppliers / contractors and ordered individual production / selection of certain goods, according to the project. There is an intermediary function of the escort service. Meanwhile, the business cannot conclude an agency agreement for the corresponding services with the client.
In this case, your entire margin on services will have to be shown in the form of an agency fee, the amount of which, in comparison with the cost of the ordered goods, must be explained to the client. On the other hand, in relations with suppliers / contractors there is a nuance of receiving bonuses and discounts for designers, about which the client does not know anything at all. In a situation of an agency agreement in the interests of the client, it will not work officially to issue such a bonus.
What was done:
Based on the 5 rules we developed for building a group of companies without signs of artificial fragmentation, the legal structure of the business was adjusted as follows:
The logical functional division of the companies was ensured and strengthened: in the group of companies, 3 subjects were allocated – Design, Maintenance and a new company – Design for organizations. The third company deals exclusively with contracts with organizations, covering the entire range of works (design, design, consulting in terms of equipment support), taking into account the specifics of customers in the B2B sector. At the same time, we divide the entities strictly in compliance with Rule 1: “The structure of the group of companies, its subject composition and the relationship between the entities must correspond to real business processes” and Rule 4: “Provision of resources. Separating these or those functions into a separate subject of the group, it should also be endowed with resources for their implementation. Labor, financial, material “.
Each company deals only with its own type of activity, concludes only the types of contracts corresponding to it. Each company has a staff corresponding to its type of activity, an office, and other resources.
The relationship between the Escort company and the clients is preserved within the framework of the supply agreement, taking into account the features described above. However, the reality of the role of the Escort is taken into account – as an intermediary between clients and contractors. Objectively, the company only searches for contractors and controls the compliance of the result of their work with the project. To implement this status, if it is impossible to conclude a mediation agreement with a client, it was proposed to conclude agency agreements with contractors.
Thus, the Escort becomes the agent of its contractors.
This solves the following issues:
the real functionality of the company as an intermediary is legally fixed;
the contractors’ revenue is not included in the Maintenance revenue, which reduces the company’s revenue to its agency fee. Accordingly, the total revenue of the business as a whole decreases;
as a bonus, this allows the company to easily apply the simplified tax system with the “Income” object. Both the volume of proceeds and the absence of the need to take into account the costs of paying for the work of contractors make this tax regime the most profitable and, in general, possible for use;
the relationship between the contractor and the Support for the payment of bonuses for the client is preserved (which is typical for the design industries), the bonus is officially paid in the form of an agency fee. At the same time, the client does not know about its size and, in general, the very fact of the bonus, as before, when registering the chain of relations between the contractor-support-client with supply contracts.