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When considering different structuring options for your business, you may have heard of the idea of having a holding company. However, it is important to understand what a holding company is and how it can benefit your business. Depending on the size and structure of your business, a holding company can provide some real advantages, these include:

  • reducing risk;
  • providing centralised corporate control; and
  • offering a flexible structure for growth.

This article explains what a holding company is and seven different ways that one can benefit your business.

What Is a Holding Company?

A holding company is a company created to buy and own the shares of other companies. These other companies are known as the subsidiaries of the holding company. The holding company usually does not produce goods or services, or take part in the daily operations of the business. Instead, it often owns assets that subsidiary companies use.

Business owners usually consider setting up a holding company and one or more subsidiaries to help structure their business as it grows. Indeed, this is because the holding company can provide greater safeguards against risks and streamline operations for a business that is still growing and diversifying.

7 Benefits of a Holding Company

What are the advantages of a holding company and how could one help your business?

1. Protect Assets

A holding company can hold the valuable assets of a business. These assets may include:

  • property;
  • intellectual property; and
  • equipment.

The subsidiaries then take on the daily operations of the business and its trading responsibilities. Therefore, the valuable assets held by the holding company are protected from creditors and other liabilities that the operating companies might incur.

2. Reduce Risk

Where a holding company holds the valuable assets and is an entity separate from the operating companies, it minimises the risk of losing those assets if the operating company performs poorly or becomes insolvent.

For example, if an operating company faces insolvency, the holding company may lose money too. However, creditors will not pursue the holding company legally for the responsibilities of the operating company. However, in some circumstances, courts may still hold the holding company liable for the actions of the operating company’s directors. Specifically, this will be the case if they were aware of the poor performance.

3. Minimise Tax

A holding company can be set up to reduce the amount of tax that the group as a whole has to pay.

For example, the holding company may be structured to receive lower tax rates. Or, it may be possible to establish a holding company in another country that has lower corporate tax rates. However, note that new laws introduced in 2016 to regulate tax or profit shifting to international jurisdictions have limited the tax benefits that may result from this.

4. Central Control

Usually, the management of the holding company and the subsidiary companies is controlled by the directors of the holding company. Therefore, this provides a cohesive and centralised management structure that allows the holding company to maximise its performance and growth.

For example, the holding company directors may introduce a debt-structuring procedure that benefits all operating companies. A holding company may also help individual operating companies gain more favourable financing terms then if those companies were standing on their own.

5. Concentrate Property Assets

As the central holder of property assets, the holding company can deal with those assets for the benefit of the group as a whole. Subsequently, trading companies do not need to take the risk and time to do so.

6. Flexibility for Growth and Development

Additionally, another benefit of a holding company is that it allows for greater flexibility. Specifically, having the valuable assets held by the holding company allows the group to:

  • diversify more efficiently;
  • invest in new ventures; and
  • exit ventures if needed.

The operating companies can take these steps without risk to the holding company and the group’s assets. Moreover, a holding company gives greater power to the group and subsidiaries to invest in larger projects.

7. Succession Planning

Finally, a holding company helps with succession planning. This is because it has a centralised board of directors. Therefore, it can ensure continuity of the business when key people from the operating companies leave.  

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Key Takeaways

A holding company is a company created to buy and own the shares of subsidiaries. While holding companies do not produce their own goods or services, they often own assets that subsidiary companies use. Holding companies and subsidiary companies are useful for business owners to structure a growing business. Indeed, this is because the holding company can provide greater safeguards against risks and streamline operations for a business owner. By doing so, holding companies can promote the growth of your business, while minimising some of the risks that come with this growth.

Specifically, you can gain benefits in:

  • the operation of your company;
  • tax minimisation; and
  • financial advantages.

Separating property assets and using the buying power of a larger group can help a business grow creatively and flexibly. If you have any questions about holding companies contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.  

What is a holding company?

A holding company is a company that buys and owns the shares of other companies. These other companies are subsidiaries of the holding company.

How does a holding company protect business assets?

The holding company can own assets like property and equipment. Therefore, if the subsidiary incurs any debts, this means that it cannot pay the assets owned by the holding company. It also means that it will be protected from creditors.

How does a holding company centralise control?

The holding company controls its management and its subsidiary companies. This provides a cohesive and centralised management structure.

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