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Understanding different corporate structures can be valuable if your company is either looking to create its own subsidiaries or incorporate your business into a large corporation. Holding companies (sometimes called parent companies) is one way a business can form a corporate group. Typically, holding companies do not produce a good or service as part of their general operations. Instead, they exist to control stock in subsidiaries, and using one can be beneficial for several reasons. This article will explain what a holding company is and discuss some benefits of using this corporate structure.
What is a Holding Company?
A holding company is usually a corporation or a limited liability company with a controlling interest in several subsidiary companies. A subsidiary company is a business that is owned by a holding company. An example is Google, who are a subsidiary to Alphabet, a parent company.
A business that is completely owned by its parent company is referred to as a ‘wholly owned subsidiary’. Large corporations will usually have a portfolio of companies that it owns with varying degrees of interest.
A holding company usually will not (but not always) offer a product or service to customers, but it will sometimes have assets and legal liabilities. They can also get involved in management decisions of individual subsidiaries by using their voting rights.
Legal Classification
Under the Companies Act 2006, a company is a subsidiary of a holding company if:
- it has a majority of the voting rights; or
- the company has the power to appoint or remove a majority of its board of directors,
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Different Types of Holding Companies
Sometimes, holding companies may be referred to by different names to reflect their level of engagement with their subsidiaries.
A pure holding company, for example, is a company that is set up for the sole purpose of controlling shares in other companies.
A mixed holding company, sometimes called a holding-operational company, will control another company and also have its own operations. Where the company’s operations are completely different from subsidiary operations, the company may be referred to as a conglomerate.
Further, an immediate holding company is one that is a subsidiary of another holding company. These companies have controlling shares in a subsidiary, but they themselves are also owned by another company.
Benefits of Using a Holding Company
The next section outlines three key benefits of this corporate group structure.
1. Risk Management
One benefit of this corporate structure is effective risk management. Since subsidiary companies are not legally co-dependent in a corporate group, there is less risk to each subsidiary if one of them starts to fail financially. Instead of the whole company becoming insolvent, the individual subsidiary would become insolvent. This helps to manage risk for legal liabilities across the whole group.
2. Tax Benefits
There can be a number of tax benefits to using this corporate structure. For example, dividends can pass between the corporate structure without incurring tax. They can also benefit from tax exemptions. For example, when a company sells less than 10% of shares in another company that it owns, it will usually not have to pay tax on its gains.
3. Shared Costs
Subsidiaries can save on costs for certain aspects of their operations, such as administrative and central service functions. However, the extent of shared costs between operating companies and the holding company will depend on the nature of the businesses.
In some cases, you could have competition law concerns that raise the attention of the Competition Markets Authority. As a result, if you are looking to set up a new company with the view of acquiring subsidiaries, it is important that you seek professional legal advice on regulatory concerns from an early stage.
Key Takeaways
As a business, it is useful to understand the benefits of using a corporate group structure. This will typically involve a holding company with majority control over subsidiaries. Holding companies are often set up for the sole purpose of owning subsidiary companies rather than providing their own services. However, holding-operational companies may perform their own operations in some way. Further, using holding companies can offer many benefits, such as liability management, tax benefits, and shared costs for certain administrative functions.
If you need help organising your corporate group structure, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A company that owns a controlling share in other companies, usually referred to as subsidiaries.
A subsidiary company is a company that is owned by a holding or parent company.
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