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How To Set up a Holding Company – Ultimate Guide

holding company

To set up a holding company, you must form at least two separate legal entities for the holding company and the operating company. The holding company owns the operating company and each needs to have its own independent bank account.

The holding company needs to be registered with Companies House as a private limited company with a business name, administration details and the purpose of the company. You will then need to transfer funds into the holding company which will allow you to then invest into the operating company that it owns. The holding company can be funded through shareholder investment, loans or retained earnings from operating companies that it owns.

A holding company can acquire operating companies by purchasing shares or assets in other businesses and can control the strategy across several subsidiary companies. Ongoing management of a holding company requires consolidated annual accounts that combine the results of all companies in the group.

Setting up a holding company can be complex, so it’s beneficial to consult with lawyers, accountants and tax advisors to ensure that it’s the right decision for you and your business and to ensure that all areas are set up correctly.

What Is A Holding Company

A holding company is a parent company that is set up with the purpose of buying and controlling ownership interests in other companies.

Most of these types of companies won’t actually sell products or services of their own, meaning their main purpose for existing is to control stock or membership interests. This setup is called a ‘pure’ holding. A holding company can have its own business activity and this would be called a ‘mixed’ holding company.

The holding company structure can be several layers deep with holding companies owned by other holding companies.

Holding Company Overview

A holding company is a company that owns controlling shares in other companies. It is a structure that can be used for tax efficiency, to protect assets and centralised management.

In the UK holding companies are registered as private limited companies with companies’ houses and are bound by all the usual rules that incorporated businesses must adhere to including the need to file and publish annual accounts and pay corporation tax.

  • Tax advantages: Holding companies can minimise tax liability by splitting income and tax free dividends between companies in the group.
  • Asset protection: Holding companies can separate and shield assets from the risks facing operating companies.
  • Centralised management: Holding companies offer centralised management over the companies that are owned by it. This offers opportunities for business strategy.

Careful administration is needed to set up the holding company operating structure properly so that owners can make the most of the benefits available from this way of working.

Holding Company Structures

A holding company can own 100% of the subsidiary businesses below it, or just enough of the stock to gain control. The number of shares needed to be in control of the company will depend on how many shareholders there are. There could be 51% of ownership or a lower percentage if there are many owners.

The day-to-day running of the subsidiary companies will be managed by each company’s management team and not by the holding company management.

This type of business structure can be used by businesses of all sizes across many industries and quite often the end consumer doesn’t know they are investing in a holding company, not the operating company.

For example, a large corporation that makes and sells a wide variety of consumer goods may have a holding company with several subsidiaries rather than one business with different divisions.

On the other end of the scale, holding companies can be used by small businesses or even an individual. For example, if a businessman wanted to buy a block of flats for rental income, they could form an LLC operating company to own the block of flats and then a holding company that would own the operating company. If they then decided to set up another coffee shop business, this could form another operating company owned by the holding company.

What Are The Advantages Of A Holding Company?

The main advantages of a holding company are: tax efficiency, limited liability, access to finance, streamlined management, flexible ownership, asset protection and the knowledge that it’s a tried and tested, successful business set up.

Liability Protection

By placing operating companies in separate subsidiaries, businesses limit the legal and financial liabilities of each entity. This means that if one subsidiary is faced with legal proceedings or bankruptcy, the others are unaffected by this activity.

Access To Finance

By having a central pillar for assets, investments and credit assessment, a holding company can effectively secure lower-cost financing in comparison to its individual subsidiaries. It also can attract investors through equity offering without diluting operating company ownership. The investment bought in can then be shared across the operating groups within the holding company.

Streamlined Management

The option to have oversight and guidance on overarching business strategy can be a benefit of holding companies. As the operating companies have their own day-to-day management, the holding company can provide high-level strategic advice but doesn’t need to have specific industry expertise as this would be found at the operating level.

Flexible Ownership

A holding company can part-own or fully-own the operating companies below it meaning there is flexibility in ownership.

Asset Protection

If a company has valuable intellectual property and/or assets, they can be shielded from risk by the holding company taking ownership of them instead of the operating companies.

Disadvantages Of Holding Companies

There are on-going costs, management challenges and complexity to be aware of when it comes to using the holding company structure in business.

Whether large or small, holding companies can be complex to set up and manage effectively and therefore often requires specialist business management experience or the support of legal advisors which all comes at a cost. Accurate record keeping, asset liabilities and property owned by each company must be ensured otherwise they will be at risk from creditors looking to recover funds or assets above the subsidiary debtor.

When a subsidy isn’t owned by the holding company in its entirety, there are additional management parties to factor in. This can be a plus and a negative point. Where multiple owners of subsidiaries are present, that means more opinions to consider which can in turn lead to business conflicts arising.

As the holding company structure means that the holding company’s management doesn’t have to be an expert in the field of its subsidiary businesses, this can also cause conflict if strategy decisions are made that don’t align well with the industries because they’re unfamiliar with them.

As you would expect, there are fees and on-going costs involved in the running of a holding company. From formation fees and on-going compliance costs surrounding submission of annual accounts and tax obligations, these can quickly add up to a substantial amount if the holding company is responsible for several subsidiaries.

Getting The Most From Tax Efficiency

One of the most attractive parts of the holding company business structure comes from the tax efficiency it can offer to businesses.

UK holding companies must pay corporation tax on profits earned. At present the rate is 25% on profits over £250,000 with a lower rate of 19% for smaller profits. Allowable business expenses can be deducted including interest paid and the key advantage is that dividends received into the holding company from its subsidiaries are generally exempt from corporation tax. This avoids double taxation on subsidiary profits.

Shareholding exemption is another key tax benefit of the business structure. This means that capital gains achieved when the holding company sells any qualifying subsidiaries are exempt from corporation tax too.

Subsidiary companies are prohibited from buying shares in the parent holding company and approvals may be needed when transferring major assets between group entities. For example, if a parent company wanted to change property assets ownership to one of its subsidiaries, the shareholders of the holding company would need to approve this. This approval may also be needed with moving assets sideways between subsidiary businesses too.

Major loans and finance deals where a guarantor  is required from the parent company will also usually require shareholder approval.

There are strict processes involved in the lawful handling of moving assets between companies and legal advice should be sought to ensure the process is managed properly.

Key Legal and Compliance Obligations

When it comes to annual reporting requirements, holding companies must file their financial statements which combine the results of all subsidiary companies it owns. The accounts must be filed with Companies House by the reporting deadline set.

Each holding company must have a board of directors (at least two) that are appointed. They must be qualified and responsible enough to offer oversight to the group of companies they will oversee in the position. A director has a duty to act in the best interests of the company and its shareholders and in some countries a company must have a minimum number of directors from the company where the holding company is registered.

Holding companies must observe standard formal procedures for issuing stock, record keeping, board meetings and shareholder meetings. This includes keeping articles of association up-to-date with Companies House to ensure that director names, share structure and registered offices are accurately recorded and updated when changes occur.

Holding companies must follow all reporting, director appointment, and corporate rules to ensure the company structure is legally sound.

Exit Planning For Holding Companies

When the owners of a holding company want to plan their exit, there are several key areas to consider and organise including the sale or transition of ownership and reorganisation methods needed.

If the holding company is going to be sold, it can sell the shares it holds in subsidiaries or the entire holding in one transaction. The sale price will be based on the potential for asset growth, market comparables and if there is competition for the sale.

Management of holding companies can be bought out by others to allow the original management to leave and transfer the ownership to a new team. This can occur through effective inheritance and estate planning for example.

There are many ways to organise holding companies including merging subsidiaries or selling them on, dissolving the holding company and distributing its assets to shareholders, or moving to new corporate structures.

Proper exit planning should be done with the support of legal, tax and finance experts to ensure the value of the assets involved can be maximised.

Summary

To recap, a holding company is a business structure that utilises a parent company to own and control subsidiary companies below it. Quite often the holding company doesn’t produce its own goods or services and exists solely for the financial and strategic benefit of the companies that it owns.

The business benefits that a holding company business structure can offer include tax efficiency, liability protection, easier access to capital, asset protection and centralised management.

By keeping the operating companies as separate legal entities the holding structure shields them from financial and legal risks they might face as a single business meaning if one subsidiary becomes bankrupt, the parent company and the other subsidiaries remain unaffected.

Whilst overall advantageous, the set up, managing and winding down of a holding company is a complex task that requires meticulous record keeping, compliance and corporate governance to be adhered to. For this reason, professional expertise should be sought when considering this type of business structure.

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