You will often hear of large multinational corporations setting up in groups of companies. Usually, these groups of companies are set up in a “holding company” structure. In assessing whether you need a holding company, you will need to consider the long-term goals of your business. Below we will outline what a holding company is and reasons you might decide to use a holding company.
What is a Holding Company?
An ultimate holding company is defined in sections 9 and 46 of the Corporations Law 2001 (Cth). In basic terms, a holding company is a separate legal entity, which has control over one or more subsidiary companies but it cannot itself be a subsidiary company. It will, therefore, be the main or top company of one or more companies.
A holding company will have control over its subsidiary if it has majority ownership of the subsidiary. However, it might also own 100% of its subsidiary company, in which case the subsidiary will be a “wholly owned subsidiary”.
What is the Purpose of the Holding Company?
The sole objective of a holding company is usually to own shares in another company. The holding company is formed to organise, oversee and manage a group of companies. It will usually have the authority to hire and terminate managers and directors of its subsidiaries if necessary. However those managers are responsible for their subsidiary and its day-to-day operations, and the holding company will not be.
In many situations, an ultimate holding company might do nothing more than hold, borrow and lend property and make investment decisions. This property can include real estate, patents, trade marks, private stock or marketable securities.
Obligations and Costs of a Holding Company
Holding companies are registered with the Australian Securities Investments Commission (ASIC). They have additional incorporation or registrations costs. These costs can be ongoing, and include continuous administrative matters such preparation of annual consolidated financial statements and corporate tax returns.
Reasons to Set Up a Holding Company
Some people decide to set up a holding company to protect their assets or to minimise risk. The assets that rest in the holding company may be protected in the event its subsidiary company goes into bankruptcy. This is because, legally, the holding company is recognised as a separate entity, the debtors and creditors will not be able to pursue the holding company for remuneration.
However, this is not entirely a get out of jail free card. The holding company will be deemed liable in circumstances where their Directors were aware that the subsidiary was trading insolvent or was unable to repay its debts. In addition to this legal consequence, the holding company will encounter a capital loss and decline in its net worth, and may experience public distrust.
Some people decide to set up a holding company is for tax purposes. For example, the holding company may be established in another country that offers a lower corporate tax rate. It is of note that new laws have recently come into force on 1 January 2016, the Multinational Anti-Avoidance Law, in Australia to combat and regulate artificial tax or profit shifting arrangements.
Some people decide to set up as a holding company for estate planning reasons. Setting up a holding company may facilitate succession planning which might have tax benefits.
In light of the above, the question of whether you should set up a holding company requires an assessment of the nature and revenue of your business. This will then need to be assessed against the benefits and costs associated with running this structure. Mostly you will need to determine whether setting up as a holding company it worth your time and money. If you have any questions, get in touch with our business structuring lawyers by calling us on 1300 544 755 or filling out the form on this page.