Holding or parent company – good or bad?
A holding company is an entity that does not operate like a normal company in the sense that it does not generally carry out trading activities. The difference between a holding company and parent company is that a parent company will often trade.
Setting up a group company structure can have many advantages and reduce risk. However, if your business is already well established there are many complications, both legal and tax.
We are experienced in advising on group company structures and in dealing with the legal aspects, so please do get in contact to discuss.
The main purpose of setting up a holding company is to own assets such as shares in other companies (subsidiaries), intellectual property and real estate.
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.
There is no limit to the number of subsidiaries that a holding company can have.
Good reasons for setting up a group company structure
- Ring fencing 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.
- 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.
- Planning business sale – 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 group company structures because it means they can own and control a number of companies whilst reducing their risk and also possibly saving tax.
The biggest risk for all organisations is insolvency and having a holding company means that, providing the holding company has not guaranteed any of the subsidiary company debt, it is not liable for the subsidiary company 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 for us 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.
Corporate restructuring legal advice
Restructuring is often necessary because of a financial crisis 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.
There are legal and tax considerations, advantages and possible disadvantages to creating a group company structure. Most often, setting up such a structure occurs as a business grows. As a result, there will invariably be complex legal and tax issues to consider and deal with. Our solicitors are experienced and can help.
Commercial law areas we commonly advise on
We advise on a diverse range of business and commercial law issues including:
If you are considering setting up a group company structure with a holding or parent company and subsidiaries, there will be legal work involved and potential risks. We offer specialist and experienced advice at cost effective fee rates.
