The decision whether to include a holding company as part of your business plan is an important one that has many benefits. However, it is also important to be realistic about the limitations of a holding company before making your final decision.
What Is a Holding Company?
A holding company is one that is set up in conjunction with an operating business. Most simply, a holding company buys and holds the most valuable assets or shares of a subsidiary business, also known as an operating business. Hence the operating business continues to function and produce but does not own its own shares or assets.
What Are the Advantages of Setting Up a Holding Company for your Business?
The most well known advantages include the following;
- Reduction of risk of loss; allows for protection of assets from liability that might be incurred by the subsidiary
- Protecting assets; including both real property and intellectual property
- Tax incentives; that reduce the overall amount of taxes paid by the companies involved
- Centralised Control; as the Board of directors of the holding company is also the Board of the subsidiary organisation
- Asset management; which allows for the focus of managing the overall assets of the two companies to be located in one managing body
- Growth potential; it allows for the operating company to focus on taking more risks with regard to expansion and new product development
- Stability; both financially and inside of the management structure as the holding company is less likely to have changes in personnel than the subsidiary business
Is Your Business One that Could Benefit from a Holding Company?
Depending on the type of business you engage in, a holding company could prove very beneficial for you. Some businesses that benefit from having a holding company structure include;
- Businesses that deal in various forms of intellectual property such as trademarks, patents, branding or copywriting
- High risk operating businesses that could succumb to being sued or incur large losses
- Businesses that are in need of investors are more likely to attract such investors if the investor(s) have the security of knowing their money is invested in the holding company, rather than the operating company
What are the Negatives of a Holding Company?
It is important to remember that the protections afforded by a holding company are not fool proof. In the event a subsidiary company is sued, it is possible for the plaintiff to also join the holding company. To prevent the holding company from being liable for the mistakes or negligence of a subsidiary business, the holding company cannot over-reach its control of the subsidiary. It is imperative that the holding company and the operating company do not intermingle their professional identities. Hence a holding company does not want to take control or even appear to take control over the subsidiary, or participate in the actions of the subsidiary. If the holding company does not abide by these rules, they can be considered to have “pierced the corporate veil” and find themselves equally liable in a legal action against the operating company.
Before making a decision regarding setting up a holding company, it is important to know the type of business you will be engaging in and evaluate the risks and liabilities the business will encounter. It is also imperative to identify the value of the assets of the company and the need for external investors. To fully understand and evaluate these important factors, it is highly recommended that you seek the advice of a solicitor and other professionals who have an expertise in evaluating and developing the right plan for your business needs.
