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Understanding how to best structure your corporate group is essential when running multiple businesses. One option is to operate each business entirely separate from the other. However, you might benefit from creating a holding company. This article will explain the general purpose of a holding company and the practical benefits of creating this kind of business structure.
Understanding Business Groups
Most large businesses, such as those that operate in different countries or have several different business divisions, will usually arrange the organisation of their business across numerous different companies.
For instance, suppose you have a business that specialises in manufacturing automotive parts. You trade through a private limited company, “Build Co Ltd”. Consequently, you and the company’s other directors consider expanding your business so that you will also install the parts you manufacture rather than sell them to a third party.
You could run this new business through Build Co Ltd. However, you will need to be prepared to spend money to acquire new machines and make a dozen new hires. Instead, it might be better to obtain a loan. To qualify for a loan, you must grant the bank security over Build Co Ltd’s assets. This inherently comes with risk to Build Co, especially if the expansion does not go as planned.
Creating a Group of Companies
To limit Build Co’s liability, you can create a new company. This new company will need its own name, but it is free to use the brand you have already cultivated with Build Co, for example, Build Co Installation Ltd.
Before you create Build Co Installation Ltd, you will need to determine who will hold the shares in this company. We explore your options below.
Incorporate Build Co Installation Ltd Independently from Build Co
This might seem like the most intuitive way. Just like when you created Build Co Ltd, you incorporate the company and issue yourself with the shares. As a result, the only thing linking the two companies together is the fact they each share the same shareholder (you).
However, this can cause some problems. For instance, what if multiple shareholders in Build Co Ltd would also like to participate in the new company? Additionally, how will Build Co Installation fund itself? It is not easy for the shareholders in Build Co Ltd to extract money from it and then redeploy it into another company.
Build Co Installation Ltd as Direct Subsidiary
Alternatively, you could have Build Co Ltd own the shares in Build Co Installation Ltd outright. This would make Build Co Installation Ltd a 100% subsidiary company (also called “undertaking”) of Build Co Ltd, which would be the parent company and effective holding company for the entire “Build Co Group” (i.e. the sum of all the business activity).
Practically, it would be fairly easy to move assets between the two companies. Indeed, at the point of incorporation, Build Co would transfer the necessary cash and other resources to Build Co Installation and receive shares in the company in exchange. If Build Co Installation later needed further cash, Build Co could either loan it money or issue further shares for cash.
The ownership of the business does not change. When Build Co Installation makes a profit, the company directors (i.e. you and all the other directors of Build Co Ltd) can direct this money to Build Co Ltd. Likewise, you can issue dividends to you and the other shareholders.
Build Co Installation Ltd and Build Co Ltd Owned by a Third Company
Another approach is to create a third company, which you decide to call Build Co HoldCo Ltd.
Upon incorporating HoldCo, you and the other shareholders transfer your shares in Build Co Ltd. In exchange, you receive shares in HoldCo. You then incorporate Build Co Installation and issue shares to HoldCo.
HoldCo is the ultimate holding company of the Group structure.
All of the advantages you would enjoy in having Build Co Installation owned directly by Build Co Ltd are the same under this structure. If you decide to grow the business further, this is more advantageous if you do not want to create direct subsidiaries underneath one of your operating companies.
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Disadvantages to Holding Companies
If you are the director of one company, you know how many responsibilities and duties you owe the company. For each additional company that you create, your duties grow that much more.
For instance, you will need to prepare accounts for each company within your business group (though there are ways to consolidate these responsibilities). You will likewise need to keep each company’s records separate from the others, such as when holding board meetings.
Key Takeaways
A holding company usually arises where multiple companies are operating with a single business group. It is an effective way to manage the assets and liabilities of each separate company from a single incorporated business, which owns all the shares of its subsidiary companies.
If you need help managing a group of companies or more information on the purpose of a holding company, 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 at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A holding company is like any other company – it is legally distinct and can own property, including shares in other companies. However, a holding company does not typically trade itself, rather, its purpose is to own the shares to multiple companies.
As with incorporating a business from a sole trader into a company, the main benefit is limiting liability while improving organisational and tax efficiency.
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