What is a Holding Company?
Meaning of holding company varies as per the context it is being used. However, as per the Companies Act, a company is a holding company, if:
- It holds the majority of the voting rights in its subsidiary company; or
- It is a member of its subsidiary company and holds the right to appoint or remove a majority of its board of directors.
In simpler words, a holding company does not produce any goods or services by itself; rather its main purpose is to own shares of other companies in order to form a corporate group and thus holding companies plays a vital role in reducing the risk of the owners. Also holding companies can have the ownership and control of a number of different companies.
The real purpose of its existence is to control another company, wherein later one could be a corporation, limited partnership or limited liability company. Apart from this, it can also own properties such as real estate, patents, trademarks, stocks and other assets and in case a business is owned 100% by a holding company, then it is termed as a wholly owned subsidiary.
By owning assets, holding companies allow the individuals to protect their personal assets and thus free them from the liability of debts, potential lawsuits and any other possible risks.
Holding companies are limited by shares and deals specifically with assets, investments, intellectual and real property and its management.
A very good example of a holding company is Berkshire Hathaway and its major holdings include Berkshire Hathaway Energy, Business Wire, Dairy Queen, Clayton Homes, Duracell, GEICO, Fruit of the Loom, RC Wiley Home Furnishings, Marmon Group etc. Apart from the above mentioned major holdings, Berkshire Hathaway also has minor holdings in companies such as Delta Airlines, Kinder Morgan, Apple, American Express, IBM, Goldman Sachs, The Coca-Cola Company etc.
Advantages of a Holding Company
Setting up a holding company has its own share of advantages, such as:
Minimize the risk: Best way to set up a holding company is to structure in a way that it minimizes the risk factor of its subsidiary companies and can disperse its assets through its subsidiary companies and thus can protect the later ones from the risk of bankruptcy.
For example, if one of the subsidiary companies goes bankrupt, the creditors can receive their due remuneration only from that particular subsidiary company and not from its holding company. Thus to save itself from the major risks, a multinational company should structure itself in a way that its one subsidiary own its brand name and trademarks, another subsidiary owns its real estate, whereas another subsidiary owns its equipment and so on so that in case one of the subsidiary goes bankrupt for whatever reason, the business keeps on going. Also this structure limits tax liability.
Hold the property and use it: A holding company does not produce goods and services but can hold assets both tangible and intangible such as intellectual property, land, buildings, trading stock etc. Also it can make its individual investment decisions and can use its property to its benefits and also for the benefit of its subsidiary companies.
Control over its subsidiary companies: A holding company, by its definition, has control over its subsidiary company which means that it has a say in the management of its subsidiary company and if required, can hire or fire its managers and directors.
Protection of the property: It is highly recommended to place your assets such as intellectual property etc into a holding company in order to ensure longevity to your business. Also doing so comes handy to you in case of liquidation and thus provides protection to your assets and property.
Flexibility to engage in risky investment opportunity to the advantages of its shareholders: One of the main features of the holding company is to protect its subsidiary company/s and thus offers flexibility for growth and development of the overall company.
Tax planning: UK law allows you to set up holding company in another country with a relatively lower corporate tax rate as compared to UK; also it has lower tax rates as compared to trust. A holding company can be exempted from VAT taxable supplies in case its functions are as below:
- Disposing of shareholdings in subsidiaries;
- Defending itself and its subsidiaries from takeovers;
- Receiving dividend payments from the shareholdings;
- The acquisition of shares in subsidiaries.
Since the HMRC does not observe listed functions as taxable supplies, any holding company with these functions are not liable for VAT. Apart from VAT exemption, holding companies can also enjoy tax exemption on its dividends if its annual turnover is lesser than £10,000,000.
Also, a holding company can take the benefit of corporation tax exemption on its earnings from the sale of shares in its subsidiaries. However, in order to enjoy the substantial shareholding exemption, below mentioned conditions needs to be met:
- The subsidiary company cannot indulge in substantial non-trading activities;
- Both the trading and the subsidiary company must be involved in trading both before and after the sale of the share;
- Holding company must own the share of its subsidiary company for at least a year before selling it off.
Succession Planning: One of main advantage of setting up a holding company is that it ensures the continuation of the business, even if it comes at the loss of its key people.
Directors of each companies act in the best interest of their corporation: Since the holding company and its subsidiaries are separate legal entities with their own set of directors, having their own and defined set of responsibilities. Thus, each Board of Directors acts in the best interest of their company. This becomes a more obvious and wanted feature because as per the law, the Board of Directors cannot act in the interests of a third party company.
Thinking ahead about selling the business: Setting up a holding company shows your foresight. You may not want to sell you entire company but may sell its parts or subsidiaries strategically and at different times. Also it is advisable to sell the shares of a limited company rather than selling its assets.
However, like every other thing in life, a holding company also has its own share of disadvantages, such as a holding company also has its own share of disadvantages, such as:
- It is easier to dissolve a holding company as compared to a single merger corporation.
- A holding company might end up paying more taxes in case less than 80% or 90% of the stock is owned by the parent company.
- Possibility of expansion of a holding company through debts and liabilities is more.
How to Register a Holding Company?
In order to register your company as a holding company, it has to fulfill below mentioned certain legal requirements, such as:
- The main company or the parent company must own more than 50% of voting rights in its subsidiary companies.
- The main company or the parent company is a member of its subsidiary companies and holds the right to fire or hire the managers or directors, if required.
- The main company or the parent company is a member of its subsidiary companies and in accordance with the agreement of shareholders; it holds the majority of voting rights in the subsidiary companies.
As per the Companies Act, process to register a holding company is somewhat similar to other private limited companies and thus while doing the same, you should have following details ready with us:
- Name of the company;
- Its registered address;
- Name and details of at least one director and shareholder;
- The Articles of Association and Memorandum
- Details of shares given to shareholders, if any;
- Information about people with significant control;
- In case you intent to use sensitive words in the name of your company, you need to have supporting documents for the same.
Once the above mentioned details are ready with you, you can submit your application to the Companies House online and if everything is in order, company will get registered within three working hours. A confirmation mail will be sent at your registered email address.
Although you can also go ahead and start with your application for registering your company as a holding company, however, it is highly advisable to go through a registered and authorized company formation agent.
One of the major decisions in setting up or registering a holding company is to finalize the right location for the same because one needs to consider the financial, logistical, business and operational requirements. Also to decide which jurisdiction your holding company will fall under, you would need to consider factors such as taxation of incoming dividends, corporate income tax on received dividends and taxation on ongoing dividends.