A holding company, sometimes called a “parent” company, is simply a company that owns another company (or companies). This ownership can be full or partial, and the holding company generally does not do anything beyond its ownership of the companies it controls, which are known as subsidiaries.
But why is a Holding Company necessary in the first place?
There are a number of reasons why a Holding Company is a sensible idea for a business owner, including the protection against risk.
Managing risk and liability
A Holding Company may own multiple subsidiary companies, but it is shielded from liabilities faced by each subsidiary.
Debt is a prime example: the debts accrued by a subsidiary company are generally attached to the subsidiary alone. This means creditors have no access to any assets outside of the subsidiary, which protects the holding companies and its other subsidiaries from this liability.
A Holding Company can own a range of assets including property, plant and machinery, cash, intellectual property and investments helping to protect them from the risks of a trading company. This can protect these assets from the event of a legal claim against the company or a significant downturn in trade.
Protection against insolvency
A growing and expanding business will likely undertake investments in multiple, separate areas. A holding company structure allows the business owners to move these investments to subsidiaries. This means if an investment fails and the subsidiary becomes insolvent, the risk to the rest of the business is minimised.
Ease of selling certain parts of the business
A large business with multiple trading parts may wish to sell one of them off. A holding company structure, consisting of independently trading subsidiaries, makes it possible to sell any one of the subsidiaries while keeping the rest of the business structure intact.
Reducing tax charges
A holding company can also bring tax benefits to business owners. Dividends can be declared from subsidiaries to a parent company without incurring tax charges, and assets can be moved between group companies on a tax free basis.
Losses arising in one group company can be used to offset profits in another, and the disposal of a subsidiary by a Holding Company can be entire free of Corporation Tax when more than 10% of a trading subsidiaries shares are owned by a Holding Company.
So do you need a holding company?
A holding company is a business structure that we regularly recommend to clients due to the various benefits that it brings. As with all things in business, however, planning is key.
That’s why we recommend speaking to an expert for advice on whether the structure is suitable for your business, whether you actually need it, or if an alternative business structure would be more beneficial.