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