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There are many different ways to structure your business, depending on your business goals. If you are looking to set up a dual company structure, it is important to know the difference between a holding company and an operating company. This article will explain the difference between the two and how this structure can reduce your risk and protect valuable assets.
Holding Company vs Operating Company
As the name suggests, a holding company is a company that holds 100% of the shares in a subsidiary company. This structure is common with startups and is often referred to as a dual company structure. People often use this structure so that the holding company can own the business’ valuable assets, including intellectual property (IP), cash and equipment, and keep these separate from the subsidiary operating entity.
An operating company, or a subsidiary of the holding company, does all the trading and can be considered as the active company. The operating company will enter into contracts, hire employees, and deal with customers. Your operating company is the face of the dual structure and generally is responsible for all the liabilities of your business. As a result, the operating company is at risk of being held responsible if something goes wrong within your business.
The Role of a Holding Company
You can create a holding company to own the shares of your operating company. Your holding company will not produce goods or services or take part in the daily operations of the business. Instead, its purpose will be to own the shares in your operating company and the key assets used in the business.
As a business owner, setting up a dual company structure can provide greater safeguards against risks as your business grows. Likewise, this structure can streamline operations for a business that is still growing and diversifying.
Additionally, the key benefits of having a holding company can be:
- reducing risk and protecting the value of the business;
- providing centralised corporate control; and
- offering a flexible structure for growth.
Greater Protection
Your holding company can hold the valuable assets of the business, including the:
- property;
- intellectual property;
- equipment; and
- cash.
Meanwhile, your operating company will take on the trading responsibilities and the day to day running of the business, including entry into customer and supplier contracts. This means that if a customer has a claim against the business, the claim will be against the operating company. Consequently, the operating company’s assets are at risk.
However, under a dual company structure, the holding company’s valuable assets are protected from creditors and other liabilities that the operating companies might incur. Therefore, if the operating company is performing poorly or becomes insolvent, the risk of losing your assets is minimised as the holding company – not the operating company – hold them.
Centralised Control
Usually, the board of the holding company and operating company comprise of the same directors. This provides a centralised management structure that allows the holding company to maximise its performance and growth.
Flexible structure
Having the holding company hold all the key assets allows the group to diversify, invest in new ventures and exit ventures if needed without affecting the key assets and value of the business.
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The Role of an Operating Company
The operating company is the company that conducts the business under the control of its holding company, which typically will own all of the shares in the operating company.
For your holding company to have control of the operating company, the holding company must:
- control the composition of the operating company’s board;
- have control of over 50% of the total number of votes at a general meeting of the operating company; or
- hold more than 50% of the issued share capital of the operating company.
Clients
Your operating company will be responsible for entering into all agreements with clients. They will also take on all risk and responsibility concerning the business’ servicing of the clients.
Employees
The operating company will be responsible for hiring all employees and contractors in the business. Once again, if any issues arise, it will be the responsibility of the operating company.
Suppliers
Your operating company will enter into all of the supplier agreements and will consequently be held accountable for any payments and debts incurred. Typically, any creditors will only be able to claim outstanding debts from the operating company.
When a Holding Company May Be Liable for an Operating Company’s Debt
A liquidator of an operating company may recover debts from a holding company when:
- it was a holding company of the operating company at the time the debt arose;
- the operating company was insolvent when the debt arose or became insolvent by incurring the debt;
- at that time, there were reasonable grounds for suspecting that the operating company was, or would become, insolvent; and
- either the holding company or one or more of its directors was aware of the grounds for suspecting the operating company was insolvent, or it would be reasonable for one or more of the directors to suspect the subsidiary was insolvent.
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Key Takeaways
If you are establishing a company, setting up a dual company structure may be the best structure for you. Before you commit to this company structure, you should think carefully about the goals of the business. The holding and operating company will play different roles in your business, so it is best to consider:
- does your business have valuable assets?
- is your business taking on any material risks?
If you have any questions about the dual company 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 1300 544 755 or visit our membership page.
Frequently Asked Questions
A holding company is a company that holds 100% of the shares in a subsidiary company. The holding company can own the business’ valuable assets, including intellectual property (IP), cash and equipment, and keep them separate from the subsidiary operating entity.
An operating company is a subsidiary of the holding company. It does all the trading and will enter into contracts, hire employees, and deal with customers.
By setting up your business through a dual company structure, you can protect your holding company’s key assets. This is because your operating company will enter into most contracts (like supplier or employment contracts) and run the general operations of the business. If there is a claim, this will usually be against the operating company. Hence, the holding company’s key assets, including IP, cash and equipment, are safeguarded.
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