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Should I create a holding company?

If you have more than one trading business in your portfolio, or you’re looking to diversify, then you’re probably asking yourself, “Should I create a holding company?”.
Should I create a holding company?
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    If you’re an ambitious entrepreneur with a strategic mind, there are certainly a lot of benefits in doing so.

    Establishing a holding company can protect the owner’s assets, i.e. property, investments and other assets, and reduce risk for each trading company in the group. It can also help to save money by achieving greater operational and tax efficiency.

    Read on for Smooth’s helpful guide on setting up a group structure and what the advantages are, including details of the tax benefits.

    What is a holding company?

    A holding company structure is a corporate group comprising a parent company and one or more subsidiary companies. The parent/holding company isn’t operational; its purpose is to own assets and shares and oversee the strategic direction of the group. Think Virgin Group and its many subsidiaries like Virgin Atlantic and Virgin Mobile.

    What are the advantages of a holding company?

    So, just what is it that motivates savvy entrepreneurs and business owners to establish holding companies? Let’s take a look at the most common reasons to opt for a group structure.

    Asset protection – In a holding company structure, all its assets are held by the parent company, e.g. property, machinery, intellectual property and investments. The holding company effectively shields these assets from the risks and liabilities of its subsidiary companies. Simply put, if the subsidiary company goes south, then the assets can’t be used to pay off its debts.

    Risk management – Holding companies allow business owners to divide their activities into different subsidiaries, therefore spreading the risk. If one group company encounters tough times, the overall parent company and other subsidiaries should remain unaffected.

    Tax efficiency – A holding structure limits tax liability, for example:

    1. A holding company can offset the losses and profits of its subsidiaries to reduce the group’s overall tax liability.
    2. Dividends received by a UK holding company from its subsidiaries are generally exempt from corporation tax, providing a smart way to distribute profits within the group.
    3. A holding company may be eligible for Substantial Shareholding Exemption (SSE), in which case it is exempt from capital gains tax on the sale of shares.

    Diversification – Using a holding company structure allows entrepreneurs to dip their toes into other industries or markets without risk to the other subsidiaries.

    Strategic control – A holding structure provides centralised control over multiple businesses, allowing for more streamlined decision-making, consistent branding, and efficient allocation of resources, for example.

    Operational synergies – There are, of course, operational efficiencies and cost savings to be made across the group companies, e.g. administrative and procurement costs.

    How to set up a holding company

    It’s essential to do your research if you’re considering the holding company route. If your mind is made up, here’s a brief summary of what you need to do next.

    1. Consult with your accountants. They have a wealth of business knowledge to ensure your new group structure hits the ground running.
    2. Decide which assets the parent company will hold and which trading companies will be included under its umbrella.
    3. Choose an appropriate business structure for the parent company, e.g. LLP, limited company or PLC. Again, your accountant can help you make an informed decision.
    4. Register your company name with Companies House and HMRC.
    5. Appoint the board of directors responsible for managing and overseeing the company’s operations and draft the internal policies and governing procedures.
    6. Define the share structure and ownership distribution.
    7. Open bank accounts for the holding company and set up accounting procedures for handling funds, payments, and financial transactions.

    How can Smooth Accounting help with setting up a holding company?

    The financial aces at Smooth Accounting can provide invaluable guidance to UK SMEs when it comes to creating a holding company.

    We can help you with registration and set-up, ensure you understand the legal and tax obligations, devise tax planning strategies to maximise your group’s profits, as well as fulfilling vital accounting tasks like bookkeepingpayroll and filing accounts.

    If you need advice on whether a holding company structure is right for your business, then please get in touch with the experts at Smooth Accounting to find out more and arrange a consultation.

    Frequently asked questions about setting up a holding company

    What happens if the parent company dissolves?

    Parent companies are legally separate from their subsidiaries, so if one company dissolves, the other companies can continue to trade. If the parent company itself dissolves, the subsidiary can carry on trading, but it will need to adapt and make necessary adjustments to run autonomously. It’s vital to consult with an accountant as well as legal professionals in this scenario to ensure the transition is smooth.

    Do holding companies generate revenue?

    In and of itself, a holding company does not generate revenue through operational activities. Instead, it generates income through dividends, capital gains, and interest from its subsidiary companies. It focuses on managing investments and ensuring the success of its subsidiaries.

    Is a holding company structure suitable for startups and small businesses?

    While holding companies are often associated with larger corporations, they can also benefit startups and small businesses looking to expand into different industries or protect their assets.

    Conclusion

    Entrepreneurs and business owners juggling multiple businesses or seeking to diversify should seriously consider the benefits of establishing a holding company. This structure can serve to protect the group’s assets and manage risk effectively.

    There are also valuable tax benefits to be enjoyed, and the group can take advantage of economies of scale to cut operational costs. It’s recommended to consult a financial expert, such as an accountant like Smooth, to weigh up the pros and cons before establishing your holding company.

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