Benefits of forming companies in a group structure

A corporate group is a set of several subsidiary companies under a single parent company. These have a single point of control in the parent company and operate as a single economic unit. The parent company generally does not have any separate operations and may not be involved in any business activities directly. It is the owner of assets that may be in the form of shares of its subsidiaries, moveable and immoveable assets in the form of plant and machinery, land, factory premises and buildings, patents, trademarks etc. A group of companies operating under the umbrella of a parent company enjoy several advantages over isolated entities.

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The association between the parent company and its subsidiaries is influenced by factors like which entity has control over voting rights and also controlling stake in the board of directors. In general the primary function of a parent company is actually to supervise the activities of its subsidiaries including providing any kind of support like financial support when required. The regular operation of a subsidiary is looked over by its management which further reports to the parent company.

In terms of the number of subsidiaries, a parent company can have as many numbers of subsidiaries as it is required. A parent company’s tax obligations are determined at a location where it is registered.

A lot of promoters are not aware of the intrinsic risks connected to having a trading business and valuable assets together under one company. It is always suggested to split trading business and assets of a business into separate entities. This ensures that the assets remain untouched in case of any liability coming up from the trading business. There are multifold benefits of maintaining a group structure, each business depending on the type of business and industrial sector needs to be considered on a case to case basis.

The group company structure has following advantages to name a few:

Protection of important assets: It is essential to separate trading activities into a separate entity from properties or assets so that any obligations arising out of trading activities remain independent of these assets. This way precious assets of the group companies are isolated from any kind of future claims coming up in relation to other businesses primarily trading businesses which are generally not backed by any inherent asset class. There are no tax implications for transferring assets between group companies.

Efficient structure: Group structure facilitates in a centralized management that ensures better control and more efficient management of risks and other operational activities along with better and prompt decision making.

Better management control: A group may operate several entities from separate geographical areas and in different industrial sectors. Maintaining a separate legal structure for each of these is better in terms of risk mitigation and more efficient control of specific activities associated with each business. A business may initiate international activities some of which may be regulated. The group structure also facilitates in devising employee stock option schemes for separate businesses so that employees are rewarded for their own efforts and not others.

Business edge: The group may desire to hive off certain parts of its business and retain certain parts. Planning well in advance actually helps in these scenarios.

A group structure also offers various planning options around:

1. Contributions to employee pension.
2. Better management of dividends.
3. More efficient performance management of employees where in employees performing well in a certain company can be rewarded without any interventions.
4. Better debt management as per specific business requirements.

Reasons behind organizations using parent companies

A lot of global conglomerates implement group company structures. This is because it offers the option of owning and controlling several companies with lower risk and greater tax saving possibilities.

The greatest risk any organization faces is the risk of insolvency. A group company structure ensures that the parent company or holding company is not obliged to pay for any subsidiary entity liability provided it has not given any corporate guarantee on behalf of its subsidiaries. In this way, the parent company protects the assets of the entire group belonging to the parent or other subsidiary entities. But the parent company has to make certain investment in the subsidiary company to acquire controlling stake. In case of a profitable business of its subsidiary, the parent company is able to reap returns in the form of dividend or retained earnings from the subsidiary.

Taxation

In a lot of cases, subsidiaries are beneficiaries of tax incentives due to which several organizations have parent or holding companies located in the United Kingdom.

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.

The UK government has set out some rules for groups looking towards setting up a holding company in the UK. The holding company should hold a minimum of 105 of the share capital in the subsidiary for at least 12 months. Additionally, both the holding company and its subsidiary should be either companies dealing in trading or holding companies of a group that deal in trading.

Read More: How to Make Corporation Tax Payment to HMRC

Restructuring due to financial default

Financial crisis such as bankruptcy or paucity of financial liquidity or delay and default in debt re-payment are some instances which may lead to corporate restructuring. This may also lead to hastened debt repayment by the defaulting entity on demand by its creditors.

Restructuring may lead to change in management or ownership of majority stake through various processes that may include merger or management buyout etc.

Restructuring can also involve refinancing of existing debt obligations or hiving off parts of the group to other businesses or enhancing promoters’ stake in the restructured entity through equity infusion. In such circumstances, group structures can come to the rescue of profit making businesses of a group; while the non-core part of the entire business or the loss making subsidiaries can be hived off without any impact on the group’s profit making subsidiaries, financial losses can be minimized through re-organization.

A company needs to follow a set of rules while setting up a holding company in the United Kingdom. It is always suggested that an application for clearance should be submitted to HMRC to avoid any conflicting situation in the future. HMRC clearance ensures that the regulator is fine with the group structure and there are no issues in the application of share exchange treatment and some anti-avoidance rules thus, saving on unnecessary income tax charges.

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About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.