A holding company is a legal entity which has control over another company’s board of directors. Another company will not control the holding company. More often than not, a holding company will do no more than hold assets through its incorporated subsidiaries companies. A holding company is defined in sections 9 and 46 of the Corporations Act 2001 (Cth). This article sets out the advantages of having a company with a holding function.
The Advantages of a Holding Company
There are several advantages in setting up a holding company.
Has control over its subsidiary companies
- A holding company by its very definition has control over its subsidiary company’s board of directors. What this means, practically, is that the holding company has a say in the management of its subsidiary and, subject to law, has the authority to hire and fire managers and directors, if necessary.
Can hold property and use it
- A holding company can hold its own tangible and intangible assets. These may include land, building, intellectual property and trading stock. Further, it is not limited to holding these.
- A holding company can hold, borrow and lend property and make investment decisions. It can use this property to its advantage and the benefit of its creditors of subsidiary companies.
Can minimise risk
- Holding companies, especially large multinational corporations usually have many valuable assets. Accordingly, it is advantageous that a holding company can protect its assets.
- The holding company may be structured in a way that protects or minimises risk, in that it can disperse assets throughout its subsidiaries. The advantages of this become very real in light of a bankruptcy or insolvency.
For example, let’s say a subsidiary of a holding company’s goes into bankruptcy or liquidation. Creditors of the bankrupt subsidiary are generally limited to receiving remuneration from that subsidiary. A creditor will not be able to go after the holding company for the reason that it is its own entity at law. This structure, therefore, has the ability to isolate or minimise damage to the overall holding company. However this is not always the case, a holding company may be liable when its directors are aware that its subsidiary is trading insolvent or unable to repay its debts.
Can hold property and protect it
- Placing your business’ intellectual property or other assets into a holding company may be very beneficial to your business’s longevity. This is especially true in light of a liquidation.
Flexibility to engage in risky investment opportunity to the advantage of its shareholders
- A holding company that engages in risky investments can protect the shareholders of a subsidiary. It might do this by investing in its holding company, however, the subsidiaries will be largely unaffected. Accordingly, this offers flexibility for growth and development of the company overall company.
Directors of each company must act in the best interests of their corporation
- The holding company and its subsidiary companies are each separate legal entities with their own Board of Directors. The Board of Director has a responsibility, under the law, to act in the best interest of their company. The Board of Directors cannot act in the best interests of a third party company.
- The holding company may be set up in another country that offers a lower corporate tax rate.
- The holding company may be an advantageous structure, in that it usually has lower tax rates than a trust would usually have.
- A holding company may ensure the continuity of business, even on the loss of key people.
There are many advantages of a holding company. Namely, a holding company provides an efficient structure for a company to consolidate its compliance and financial risks, minimise its tax, and facilitate opportunities for growth. If you have any questions about setting up any holding company for your business, get in touch with our business structuring lawyers.