If you intend to set up a company or invest in one, you need to consider how you plan to own the shares. Owning shares in a company can be in an individual capacity, through a company or a trust. This article sets out the advantages and disadvantages of owning company shares in one company (the Subsidiary Company) through another company (the Holding Company).
There are several advantages to owning shares through a Holding Company, and these include the following:
- Asset protection: You could ensure the Holding Company owns all of the business’ valuable assets and intellectual property and that the Holding Company is ring-fenced from potential liability.
- Limited liability: In the unlikely event that the corporate veil of the Subsidiary Company were to be pierced, any potential liability you might face as a shareholder of the Holding Company would be limited to the amount unpaid on your shares.
- Cost: It is less costly and complex to establish share ownership through a Holding Company than through a trust.
- Flexibility: Shareholders in Holding Companies have more flexibility to decide individually on their draw down/reinvestment strategy.
- Dividends: Dividends paid from the Subsidiary Company to the Holding Company are tax-free. The Holding Company can use the dividends to make investments on behalf of its subsidiaries. Shareholders in Holding Companies can determine whether they want to direct the flow of dividends from the Subsidiary Company to themselves, or leave some or all of it in the Holding Company for reinvestment without incurring an individual tax liability.
- Succession: There are no potential succession problems relating to the shareholder’s death as companies cannot die.
Although owning company shares through a Holding Company presents significant advantages, it is important to know and understand the following drawbacks:
- Expense: You would have to pay for a second company to be incorporated.
- Reporting requirements: Having two companies would mean having to keep records for two companies.
- Business Activity Statements. As well as the complexity involved in this, it would also result in additional costs for the business.
- Privacy: Your financial affairs, including your share investment, will be made public.
- Tax: Profits distributed to shareholders are taxable at the shareholder’s top marginal rate.
- Capital gains tax discount: The shareholders are not entitled to a capital gains tax discount if they sell their shares.
Despite the costs and complexity involved in owning shares through a company, there are several advantages. The main being asset protection and limitation of liability. It is then a viable option when considering how to own shares. However, you should also consider owning your shares through a trust. You can read more about owning shares through a trust in our earlier article.
Setting up a company with a two-tier holding company and subsidiary company structure can be quite complex. A business structuring lawyer can assist you in protecting your assets and minimising your liability.
Questions? Call us on 1300 544 755.