A holding company is created to own and control other companies, either partially or fully.
Unlike a trading company, the holding company does not actively conduct business operations itself, it simply controls other companies through ownership or stocks.
Regardless of the share that the holding company holds, it is known as the parent company. Whilst the acquired company is known as a subsidiary.
How can a holding company benefit you?
You may think that any individual can buy shares in a company, so why set up a holding company?
Well, a holding company can manage the risk involved when investing in other companies, as it allows you to operate separate companies, whilst protecting your assets.
Also, subsidiaries are classed as separate legal entities from their holding company, meaning that you would not be liable if your subsidiary is subject to a lawsuit.
A holding company can also protect you, the business owners, from the risks involved – should an investment fail. For instance, if a subsidiary faces insolvency, the risk to the rest of the business is minimised.
Asset ownership, key management and some admin costs can also be covered by the holding company, allowing for protection, control and recharge of the relevant assets to other businesses within the group.
All profits can also be ring-fenced in the holding company and potentially channelled into investments or loans to other subsidiaries or other ventures.
There are also tax benefits associated with having a holding company, such as if your company owns over 10 per cent of the shares of another company and you decide to sell your shares, there is usually no tax due on any gains.
In the circumstance that you decide to sell in the future, you could opt to either sell all of your shares in the holding company, or individual subsidiaries.
Along with this, if individuals are brought in to assist in growing new business areas, you could introduce separate employee share schemes for their business. This allows employees to be directly rewarded for their efforts, alongside presenting tax benefits from the use of salary and dividends.
You also have the opportunity for dividends to be passed between subsidiary companies and the holding company without being subject to tax.
Additionally, if your holding company, along with 75 per cent of the subsidiaries form a Capital Gains Group, you can minimise any losses by transferring capital assets to another company in the group, without increasing the chargeable gain.
Equally, if any of the subsidiary operations were to be loss making then the losses in the subsidiary could be offset against profits in the other subsidiaries. There can also be management charges between different related subsidiaries.
However, opting to set up a holding company is not the best option for every business owner, and the decision to do so should be assessed in line with your circumstances and goals.
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