Why do companies set up holding companies?
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Many business owners consider restructuring their companies and creating a holding company as there can be many benefits to having of a holding company.
Companies will often set up a holding company to gain tax efficiencies, minimise risk or prepare for sale or succession. There are clear benefits to creating a holding company as it can be used to protect profits or to separate out assets such as a business premises from the main trading company.
In this blog, I'll explain exactly what a holding company is, why businesses decide to set up a holding company for and the benefits of this type of business restructuring.
What is a holding company?
A holding company is a type of business that deals specifically with business assets, investments, and management.
A holding company will not produce any goods or services itself. Often its main purpose is to split off assets from trading companies. Assets could be in the form of shares, intellectual property, and real estate property.
Many SME business owners, believe that it's only large corporations that have holding companies, but there are many advantages of restructuring your business and splitting your assets from trading companies, which we will explore in this blog.
What is a ‘wholly owned subsidiary’?
When a business is 100% owned by a holding company, then it is termed as a ‘wholly owned subsidiary’.
A subsidiary company or trading company can be a corporation, limited partnership, or limited liability company.
Advantages of a holding company
Setting up a holding company has many advantages, such as:
1. Minimise risk
The best way to set up a holding company is to structure it in a way that it minimises the risk of its subsidiary companies and protect assets.
For example, if one of the subsidiary companies goes bankrupt, the creditors can receive their remuneration only from that subsidiary company and not from other subsidiaries or the holding company. Therefore, in the case that one of the subsidiaries goes bankrupt, the business keeps on going and valuable assets are protected.
Also, this type of structure limits tax liability.
2. Property advantages
For a business that owns assets, a holding company can be a way to both protect the assets and also potentially create some tax advantages.
A holding company does not produce goods and services but can hold assets both tangible and intangible such as intellectual property, land, buildings, trading stock etc.
One of the benefits of holding your business premises or other property in a holding company, is that you can then pass on or sell the trading company but retain the property post sale.
There is also a potential saving on Stamp Duty Land Tax (SDLT) when transferring a property into a holding company.
3. Tax benefits
There can be significant tax benefits when restructuring your business as it will allow the movement of cash, tangible assets and intangible assets to different entities without tax charges.
If structured correctly and prior approval obtained by HMRC, then there can be tax efficiencies in Corporation Tax, Capital Gains Tax & Stamp Duty Land Tax.
4. Group efficiencies
A group structure could produce synergies across the group, for example having a central admin, marketing and finance function operate from the holding company.
The costs of centralised teams could then be recharged to the subsidiaries for the services utilised, which can save each company having an in-house team.
5. Protection of assets
It is highly recommended to place your assets such as property into a holding company to ensure longevity of your business. If your trading company were to go into liquidation, your assets would be protected.
6. Opportunity to try risker investment strategies
One of the key features of the holding company is to protect its subsidiary companies and can give you the opportunity to try out riskier investment opportunities while protecting that risk from other parts of the company.
This can give you more flexibility for growth and development of the overall company.
7. Succession Planning
Another benefit of restructuring is that it may give you more options for succession planning. For example, you may want to pass the trading business onto family or sell the trading company but retain a property or other assets yourself.
8. Selling the business
Restructuring can be good for a future sale. Planning ahead shows your foresight as you may not want to sell your entire company, or you may opt to sell different parts or subsidiaries strategically and at various times.
What are the disadvantages of having holding company?
There are some disadvantages of this type of restructuring that you should also consider.
Additional administration and financial requirements of a holding company and subsidiary company, which could increase costs and bring additional challenges. It is easier to dissolve a holding company as compared to a single merger business.
Often holding companies want to influence the subsidiary company’s policies and decisions and this can lead to management conflict at times.
The cost of setting up the structure can be expensive, but with the right tax advice and tax efficiencies that the structure attracts, a holding company structure could save money.
Can you own assets in a holding company?
The purpose of restructuring is often to split off the assets from a trading company.
A common group structure can be a holding company and trading subsidiary. In this case, the holding company owns the groups valuable assets, and the subsidiary undertakes the riskier trading activity. Those assets could be things like property, patents, trademarks, stocks, and other assets.
Each company is its own legal entity, and each has limited liability, which protects assets and limits loss to the group should the trading company get into difficulty.
How to register a holding company
The process to register a holding company is similar to registering other private limited companies.
To register your company as a holding company, it must fulfil certain legal requirements, such as:
The main company or the parent company must own more than 50% of voting rights in its subsidiary companies.
The main company or the parent company is a member of its subsidiary companies and holds the right to fire or hire the managers or directors, if required.
The main company or the parent company is a member of its subsidiary companies and in accordance with the agreement of shareholders; it holds the majority of voting rights in the subsidiary companies.
Although you can register holding companies yourself, it is advisable to seek professional advice first and register it through your accountant to ensure everything is set up correctly to gain maximum benefits.
There are clear advantages of using a holding company and reviewing your business structure, but once set up it is tricker to break it down so, it is vital to seek advice before changing the set up of your operating companies and holding company to ensure that you avoid any unnecessary tax charges or surprises.
Splitting off the day to day operations /A corporate group structure with one or more subsidiaries or business entities
At Haines Watts we have a specialist tax team that can advise you on the best structure to obtain the best tax advantages of your holding company.
Contact us today at our offices in Chester, Wirral, and Liverpool to discuss your options on restructuring your business and creating a holding company.