Legal guide to setting up a company structure with a holding company, the advantages and disadvantages.

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A holding company is an entity that does not operate like a normal company in the sense that it does not carry out trading activities or productions.

What it does do instead is own assets such as shares in other companies (subsidiaries), intellectual property and real estate. Where the holding company holds shares in other companies, the holding company is often called the parent company.

The relationship between the holding company and the subsidiary company will depend on who has control of the voting rights of shares and control over the board of directors. Generally speaking the role of the holding company, as far as its relationship to any subsidiary companies is concerned, is really to oversee the operations of the subsidiaries which could include providing finance. The actual day to day operations are carried out by the subsidiary’s management, who report to the holding company.

There is no limit to the number of subsidiaries that a holding company can have and you should note that where the base of any holding company is registered is where its tax liability will be determined.

Good reasons for creating several companies and a group structure

  • ringfencing valuable assets – to protect them against claim if the trading company is subject to litigation.
  • organisational reasons – operating separate companies for different areas of the business as it grows, due to different risk aspects, perhaps such as when a business starts trading internationally and especially if certain activities are regulated.
  • when setting up employee share schemes – for aspects of the business which you may want to limit to the business in which the particular employees work, so that they reap the reward of their own efforts, not those of others.
  • thinking ahead about selling the business – you may not want to sell your entire business or may extract more value from it by selling parts strategically and at different times. It is also often preferable to sell the shares of a limited company rather than assets.

Why Do Organisations Use Holding Companies?

Many of the world’s largest organisations use holding companies because it means they can own and control a number of companies whilst reducing their risk. The biggest risk for all organisations (especially in the current climate) is of course insolvency and having a holding company means that, providing the holding company has not guaranteed any of the subsidiary’s debt, it is not liable for the subsidiary’s liabilities and thus it is protecting the other assets of the holding company. The only loss is the investment in the subsidiary.

Tax

There are sometimes tax benefits for subsidiaries and this is why a number of organisations have their holding companies in the UK.

The general rule is that a UK holding company is subject to UK corporation tax on its profits worldwide. It is not possible to go into the complexities of tax laws in the UK.

There are certain rules to establishing a holding company in the UK. This includes the fact that the holding company must hold a minimum of 10% of the share capital in the subsidiary for at least 12 months and both the holding company and the subsidiary must be either trading companies or holding companies of a trading group.

Restructuring is often necessary because of a financial crisis such as bankruptcy or other lack of corporate financial liquidity, including forced repayment of debt.

In those circumstances, a change of ownership through a merger, demerger, management buyout by management or other business may be necessary.

Re-financing debt, selling parts of the company to another business or increasing the company’s equity by issuing shares are some of the ways in which financial losses may be eased through a corporate reorganisation.

 Management involved in situations such as these usually will seek outside financial and legal advisers. Get in touch to discuss your needs.