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special purpose vehicle

What is an SPV and Why Might Your Company Create One?

A special purpose vehicle (SPV) is a company established to undertake an isolated business operation. It is not uncommon for larger organizations to create SPVs when specific risks are involved with launching a new project. Creating an SPV can also be helpful in instances where an entity wants to separate business segments and keep them legally separated. As you grow your company, you will encounter many situations in which creating a specialized subsidiary makes sense. An SPV is a company that operates with a specific scope or objective and has its own legal identity. While you may label them as “special” or “restricted” entities, they are still fully fledged corporations with their rights and privileges.

Why Might Your Company Create an SPV?

There are many reasons why a company might choose to create an SPV. Some of the common causes include:

Types of special purpose vehicles

  • Project financing special purpose vehicles created to fund a specific project: Project financing SPVs are often used in construction projects or other industries where a business has a high risk of incurring high costs that must finance ahead of time.
  • Corporate financing SPVs: Corporate financing SPVs are often used when a company wants to fund itself without issuing new securities.

Benefits of Using a Special Purpose Vehicle to Limit Risk

Setting up an SPV provides a level of protection to the shareholder(s). If the SPV is not correctly set up and structured, there may be a risk that the SPV could be challenged in court and have its corporate status revoked. If the SPV is contested, the court may order that the SPV be reorganized or liquidated and that any assets or money left over be given back to the parent company. If the parent company has many assets or money invested in the SPV, it can be very costly if the SPV is challenged and must forfeit those assets. When you set up the SPV, you can ensure that the support of the parent company is not at risk while still enjoying the benefits of the SPV.

How to Incorporate a Special Purpose Vehicle

When you set up an SPV, it’s essential to incorporate SPV management services as well. If the SPV is set up improperly, it could lead to significant legal problems. Here are some tips on adequately incorporating an SPV:

  • Choose the proper jurisdiction: The jurisdiction where you include your SPV will impact its regulation. If you want to set up an SPV in the U.S., selecting a state that does not have a reputation for heavy regulation and interference is best.
  • Make sure the SPV has a clear purpose: The SPV should be set up to do one specific thing. If the SPV is set up like a general-purpose company, it can lead to regulatory problems. The special purpose vehicle should have a narrow focus and be able to demonstrate how it is trying to achieve its goals.
  • Include the necessary terms and conditions in the articles of incorporation: The articles of incorporation are the primary document where you will set up the SPV. Make sure to clearly outline what the SPV is supposed to do, how it will be funded, how it will manage, or how it will be dissolved.
  • Have a proper shareholders’ agreement: When you set up the SPV, you need to make sure that the shareholders of the company are adequately protected. The primary purpose of the shareholders’ agreement is to establish the rights and obligations between the shareholders and the company. The shareholders’ agreement should be signed and filed as part of the SPV’s articles of incorporation.

The main benefit of a special purpose vehicle is that it allows you to separate risk and operations in an obvious way. When you set up an SPV, it’s essential to incorporate it properly. It’s important to make sure that the SPV has a clear purpose, that the SPV has a clear goal, that the SPV has the necessary terms and conditions in the articles of incorporation, that the articles of incorporation are signed and filed, and that the shareholders’ agreement is signed and filed.