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If you are starting a company, you may wish to consider using a holding company. This model is often described as a ‘dual company’ structure. This article will outline: 

  • when incorporating a holding company may be a good idea;
  • what some of the benefits of doing so may be; and
  • some of the potential drawbacks of incorporating a holding company.

What Is a Holding Company?

A holding company is a company that owns all the shares in another company. Rather than undertaking any operational or business activities itself, the holding company owns important business assets on behalf of the other company, which is called the ‘operating company’. Because the operating company hires employees, enters into contracts and deals with customers, it bears all liability. This means that assets that are owned by a holding company may be protected if something goes wrong. 

Is a Holding Company the Right Choice for My Business?

Some types of businesses will benefit more than others from using this company structure. A dual company structure may be a good choice if your business has any of the features outlined below. 

Valuable Intellectual Property 

If your business owns valuable and important intellectual property, setting up an IP holding company may help to protect these assets from the operating company’s trading risks. Your IP could include:

  • trademarks;
  • patents;
  • branding; or 
  • copyright.

If you have multiple companies that share the same IP, having a holding company centralises the ownership of these assets. This can help to minimise risks. 

Trade Risk 

Certain businesses involve higher risks than others. This may be the case if your business enters into high-value contracts with third parties or operates in a heavily regulated industry.

For example, a large food supplier that distributes goods to Woolworths or Coles and employs more than 50 people will have a higher trading risk than a small, local fruit shop. 

Establishing a holding company can ensure that any valuable assets remain largely unaffected by your business’ trading risks. 

Investment 

A dual company structure is a good business structure if you are hoping to find external investment. Typically, investors prefer to invest in this type of company because it ensures that their investment is held separately from the operating company’s trading risk. This means that external investors can help to grow your business with greater security for their investment.

What Are the Benefits of Setting Up a Holding Company?

Asset Protection

As discussed above, setting up a holding company allows you to separate your business’ valuable assets from the responsibilities of the operating company. This means that these assets are protected from creditors if the operating company begins to perform poorly, incurs liabilities or becomes insolvent. 

In most circumstances, holding all valuable assets in a separate legal entity minimises the risk of losing these assets to repay debts.  

Centralised Control and Ownership

In a typical dual company structure, the directors of the holding company will also control the operating company. This can make business operations easier to manage and boost performance and growth.

A centralised board also allows the company to keep running even if key personnel leave the operating company.  

Tax Management

Finally, using this company model can reduce the total amount of tax that your whole group pays. For example, you could establish a holding company in another country with a lower corporate tax rate. However, you should carefully consider the laws that regulate international tax profits, as these laws may affect any tax benefits.

What Are the Potential Drawbacks of Setting Up a Holding Company? 

Additional Fees and Costs of Setting Up a Holding Company

To set up a holding company, you will need to incorporate an additional company. This means that you will face additional set-up and maintenance costs from ASIC. For reporting purposes with ASIC, the holding company and any subsidiaries are considered one entity, which means you must prepare consolidated financial statements and corporate tax returns. 

Legal Documents

You will also need additional legal documents to facilitate a dual company structure. 

For example, the holding company may need to licence any IP it owns to the operating company for use in the business through an IP licence agreement. 

You should ensure that any legal documents you need are carefully and correctly drafted.

Liability

Although a holding company typically provides separation and protection of your assets, it may still be held responsible for the actions of its operating company in certain circumstances. 

For example, the holding company may be liable for the actions of the operating company if it was aware of the operating company’s potential insolvency and did not intervene. 

This means that you may not always be able to rely on your holding company to protect your business assets.

Key Takeaways

If you are establishing a company, setting up a holding company may be a good idea. Before you commit to this company structure, you should think carefully about the nature of your business. A holding company may be useful if your business:

  • owns valuable assets (such as intellectual property);
  • plans to seek investment; or 
  • is more susceptible to risk.

However, there are also certain drawbacks to this company model. If you have any questions about structuring your business, contact LegalVision’s business structuring lawyers on 1300 544 755 or fill out the form on this page.

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