Over the last few decades, the UK has become an attractive destination for establishing international holding companies.
To set up a legal holding company in the UK, several key steps need to be followed. First, you must choose a suitable structure, such as a limited company, and register it with Companies House. Next, you need to define the purpose and scope of your holding company, as it will primarily own and manage other subsidiary companies.
It is crucial to establish clear ownership and control relationships between the holding company and its subsidiaries. Additionally, you should draft appropriate legal agreements and contracts to govern these relationships.
Lastly, it is advisable to consult with a legal professional to ensure compliance with relevant laws and regulations. By properly setting up a holding company, you can safeguard your assets and facilitate other business operations and growth effectively.
The country ranks 9th in the world for ‘Ease of doing business’, it has the largest network of double tax treaties, and doesn’t withhold taxes on the payment of dividends.
Other major factors that help businesses set up holding company structure here include low stamp duty on the transfer of shares and zero tax on outward-bound dividend payments.
Some businesses decide to float holding companies to expand into new markets while minimising their risk and maximising taxation benefits.
These holding company structures at times present unique situations for their subsidiaries and parent companies. In this blog, we will discuss how a holding company functions and its pros and cons to help you make an informed business decision.
What is a holding company?
Business owners are always looking for ways to protect their company’s interests and assets.
One such solution is when they bifurcate the company into different companies that are governed and controlled by a single company.
This owning company is known as a holding company.
Also referred to as an ‘umbrella company’ or a ‘parent company’, a holding company does not market, produce, or sell any products or services.
Instead, it is established mainly to own another company, known as the operating company. These operating companies assume liability and generate profits like usual. A holding company assumes control by:
- Holding the controlling interest in stocks anywhere between 51-100%
- Having membership interests
- Helping avoid other companies or stakeholders to take over
It may also control the subsidiary company’s policies and management decisions. A holding company may also own trademarks, stocks, patents, properties, and other assets.
This company doesn’t directly run the daily operations of the subsidiary companies.
What Does a Holding Company Do?
Every businessman should seek proactive risk mitigation, which is where holding companies are important. The business community is diverse in all sectors.
Examples of Holding Companies
Holdings can have a market value of millions or even billions, but do not even trade products! When an organization is run by an individual or group under an other company or name, then they’re essentially pure holding company for a company.
Holding companies include GE Bank, Google e. g., JPMorgan Chase and other companies whose shares hold Google e. g. Please look at the example of property ownership holding companies above.
When a large company has different names such as those aforementioned is most likely a holding or trading company. In today’s economy, more businesses are considering a holding main trading company for advantages.
Unilever, a renowned multinational consumer goods company, holds a prominent position among global holding companies. With its headquarters located in London, Unilever boasts a vast and widespread portfolio of subsidiaries across a multitude of industries.
This includes food, personal care, and home care sectors, among others. Being one of the largest and most recognized holding companies worldwide, Unilever’s diversified presence allows it to cater to a wide range of consumer needs. With its commitment to delivering quality products and services, Unilever continues to play a significant role in shaping the global consumer goods market.
What are the benefits and drawbacks of a holding company?
Establishing a holding company has numerous benefits for business owners. On the other hand, owning subsidiary companies through a holding company may also present some challenges.
Let’s look at the advantages and disadvantages of a holding company in detail:
Advantages of a holding company structure
Simple to form
One of the biggest advantages of a holding company is that it is quite simple to establish. All that business owners need to do is to purchase the stocks of the desired company through the open market.
Since the purpose of forming a holding company is not to acquire any company, the consent of the stakeholders is not required.
Helps in the protection of assets and intellectual property
A single company and its assets are always at risk from various internal and external factors. Large corporations prefer forming a holding company primarily because it helps them limit this risk.
Since a holding company owns the majority of the assets of the subsidiary company, it allows for better division and management of assets and intellectual property, loans, and asset sales. It keeps the assets safe in cases of insolvency.
An important advantage of forming a holding company is that it insulates business assets of the subsidiaries llc holding company against risk. This is especially essential when the other operating companies of separate subsidiary are facing losses.
In this case, while the net worth of the holding company may decline or it may experience capital losses, it cannot be legally held responsible for the losses and pursued by the company’s creditors.
Group Loss Relief and Capital Gains Group provisions offer companies the opportunity to offset losses within a group structure, subject to certain strict conditions.
Under these provisions, a company within a group can transfer its losses to another company within a 75% Group. Various types of losses, including current year trading losses, non-trading deficits, excess UK property income, excess management expenses, and excess qualifying donations, can be transferred.
Additionally, if the group satisfies Capital Gains Group conditions, it is also possible to transfer Capital Gains or Capital Losses between Group companies. These provisions provide flexibility for companies to optimize their tax positions within a group structure.
Better tax benefits
Tax benefits are a significant advantage of forming a holding company structure. For instance, a holding company when formed in business-friendly economies such as the UK can avail the tax advantages of deductions on interest loans required for its business activities and lower debt financing costs for corporate group.
Another benefit is that holding companies can facilitate zero-tax transfer of assets to increase the capital gains, which arise during the transfer of assets between group companies.
Drawbacks for Holding Company Structure
One of the major drawbacks of a holding company structure is that it comes with reduced transparency. Since these companies do not report on the day-to-day operations of the subsidiary companies, the stakeholders are often not privy to proper information.
This may hamper their ability to make informed decisions.
There may be conflicts
When a business has multiple subsidiaries and a holding company, the latter often ends up influencing and controlling the decisions of the management regarding the policies and daily operations.
This, when left unchecked, may lead to a conflict of interest between the different business structures.
Creation of monopoly
A business that continues to acquire other organisations as a holding company may end up creating a monopolistic structure. This may lead to a monopoly in the prices and a lack of options for goods and services for the consumers.
Extension of liability
Although a holding company insulates its subsidiary companies against several risks and protects its assets, in some cases the liability can extend to the holding company.
For instance, a holding company may be held liable in cases where the management was aware of the risk of insolvency but decided to allow the subsidiary company to be operational like usual.
Holding companies often have a preference for influencing the policies and management decisions of their operating companies. This is because holding companies usually hold a controlling stake in the operating company and aim to maximize their influence and control over its operations.
However, disagreements between the operating company and the parent company’s decisions can often result in management conflicts. These conflicts arise due to differences in vision, strategy, or priorities between the two entities. Such conflicts can impact the decision-making process, hinder effective communication, and potentially lead to strained relationships between the parent company and the operating company’s management team.
Reduced rights for minority shareholders
When a holding company acquires an interest in an operating company, it does so with the majority of shares. In some cases, the shareholders of that subsidiary company may find themselves struggling to be a part of the decision-making process.
This may lead to more complexities when the holding company appoints its own directors and management team, which will promote its interests solely.
If you are operating a growing business and want to expand into new markets, you may consider establishing a holding company. This will help you protect your assets and intellectual property, let you control the companies better, and implement tax minimisation strategies better.
However, holding companies must be formed only after due diligence and shareholder approval, the absence of which may affect your holding company name’s integrity in the long run.
To know more about how to set up a holding limited company here in the UK and to make it work for your own business operations, get in touch with us today.