Many businesses are born with the aim of offering specific products or bespoke services. However, there’s another type of company that exists solely to own or invest in other businesses, known as a ‘holding’ company. Contrary to common perception, holding companies aren’t exclusive to massive international organisations. This blog explores the intricacies of holding companies, how they operate, and the process of creating them, applicable to businesses of all sizes.
What is a holding company?
A holding company, in most cases, doesn’t engage in manufacturing, selling goods, or providing services. Instead, it is created to ‘hold’ assets such as equipment, machinery, property, trademarks, or copyrights. Often referred to as a ‘parent’ company when it owns 50% or more of another business (subsidiary), holding companies play a crucial role in the corporate landscape.
What are subsidiaries?
A subsidiary company is a business owned and controlled by another company, meeting specific criteria outlined in the Companies Act 2006. To qualify as a subsidiary, the holding company must be a member of the subsidiary, own more than 50% of the voting rights, have the right to appoint and remove the majority of the board of directors, and solely control a majority of the voting rights.
Should I set up a holding company?
The decision to establish a holding company involves weighing the advantages and disadvantages based on your unique circumstances. Here are some key considerations and uses:
Buying, Selling, or Creating Other Companies:
- Holding companies are ideal for businesses exploring new markets, branching out internationally, or venturing into different industries. Acquiring existing companies without merging them allows the holding company to maintain their established reputation.
Separating Assets from the Business:
- Holding companies are effective in segregating assets, such as property or equipment, from subsidiary companies. This strategy is beneficial when contemplating the sale of the business while retaining ownership of valuable assets.
Potential Tax Benefits:
- Creating a holding company can provide tax benefits when moving assets or cash between entities, offering flexibility in financial transactions. However, navigating tax rules requires expert advice.
- As a separate legal entity, a holding company shields the assets of its subsidiaries. In the event of one company facing bankruptcy, the others remain unaffected, preserving valuable assets.
- Holding companies facilitate experimentation and risk-taking. If a subsidiary’s venture proves high-risk or unsuccessful, the holding company remains insulated from potential losses, ensuring financial stability for successful subsidiaries.
How do I register a holding company?
While a holding company isn’t a specific legal structure in the UK, most are structured as limited companies. Registering a holding company follows the same steps as creating any other company limited by shares:
Pick a Unique Business Name and Register with Companies House:
- Choose a distinctive name and complete the registration process with Companies House, either online or by post.
Appoint Company Directors:
- Select company directors who will oversee key decisions and day-to-day management.
Write a Business Plan:
- Craft a comprehensive business plan, especially crucial for holding companies with multiple subsidiaries.
File Memorandum and Articles of Association:
- Submit a set of rules and structure explanation to Companies House, signed by all shareholders.
Open a Business Bank Account:
- Establish a business bank account to facilitate financial transactions.
Can I set up a holding company for my current business?
Yes, you can create a holding company with full ownership of an existing business, designating it as a ‘wholly owned subsidiary’ if the holding company owns 100%.
Can anyone own a holding company?
While anyone can create a holding company, adherence to legal requirements is crucial. Seeking advice from an accountant ensures a smooth and legally compliant process.
Understanding the dynamics of holding companies empowers businesses to make strategic decisions that align with their goals and circumstances. Whether exploring new ventures, safeguarding assets, or seeking financial flexibility, a holding company can be a valuable tool in navigating the corporate landscape. For personalised guidance, consulting with professionals ensures a seamless and compliant process.