What is a holding company?

If you’re exploring different ways of running your business or businesses, you might be wondering whether a holding company is an appropriate solution.

But what is a holding company? What are its biggest advantages and risks, and what steps are involved in setting one up?

Here’s what you need to know:

What is the purpose of a holding company?

At its core, a holding company is a type of business entity that doesn’t conduct any operations or produce any goods or services itself. Instead, it exists primarily to own and control other companies, which are called its subsidiaries. Think of it as a parent company that oversees and manages its children companies.

The main purpose of a holding company is to provide a centralised structure for controlling multiple businesses while reducing risk. By keeping its ownership and operations separate from one another, a holding company is able to protect its assets. Even if one of its subsidiaries faces financial difficulties, the other companies under the holding company’s umbrella are still protected.

Another key purpose is financial efficiency and control. Holding companies can help streamline investment management, tax planning, and resource allocation across their subsidiaries (we’ll explore this in more detail in a moment). And they often provide strategic direction and financial support to these companies, helping them to develop and grow.

What’s the difference between a holding company and an operating company?

While holding companies own and control other companies, operating companies actively conduct business activities, producing goods or providing services.

For example, a bakery that makes and sells bread and pastries is an operating company. But if it’s managed by a separate company that helps it and other businesses to run but doesn’t actually make or sell anything itself, that’s a holding company. You can find many different holding company examples across various industries, but the common feature is that they are at the top of the group structure, with one or more operating companies underneath.

What are the advantages of a holding company?

Setting up a holding company can be an incredibly efficient way of overseeing and streamlining your operations. Here are some of the primary advantages you can expect of this kind of arrangement:

• It helps to protect your assets: One of the biggest holding company benefits is that it creates a valuable shield for your assets. A holding company protects your businesses from operational risks, keeping the financial and legal challenges of one company separate from the others.
• It’s tax efficient: Holding companies can offer substantial tax benefits through group relief structures. You can offset losses from one subsidiary against profits from another within the same group. What’s more, dividends received from UK subsidiaries are typically tax-free, and you may benefit from Substantial Shareholding Exemption (SSE) if and when you choose to sell any of your subsidiaries.
• It streamlines your investment management: A holding company structure makes managing multiple businesses more straightforward. You can efficiently move capital between subsidiaries, centralise investment decisions, and maintain strategic control over your portfolio. It also makes it easier to raise capital, as lenders often regard holding companies as stable entities.
• It can help you grow your business: Holding companies provide a robust framework for acquiring new businesses, entering joint ventures, or starting new subsidiaries. The structure makes it simpler to compartmentalise different business ventures and manage them effectively.
• It has a number of administrative advantages: Centralising certain functions like accounting, legal services, and strategic planning at the holding company level can reduce your overall administrative costs. This arrangement allows your subsidiaries to focus on their core operations while benefiting from the shared services and expertise you offer.

What are the risks of setting up a holding company?

Of course, any business venture comes with a few risks, too, and a holding company is no different. Here are the primary risks you should keep in mind when setting up a holding company:

• It can be quite a complicated arrangement: Managing a holding company structure requires sophisticated financial and legal oversight. You’ll need to handle complex accounting procedures, including consolidated financial statements and inter-company transactions. This complexity often leads to higher professional fees for accountants and lawyers, and there’s a risk of making costly administrative errors if anything goes wrong.
• You’re likely to face regulatory scrutiny: Holding companies usually experience stringent regulatory oversight, especially when it comes to their tax arrangements and transfer pricing. You might find that HMRC scrutinises transactions between your holding company and subsidiaries. And there’s the risk of falling foul of corporate governance requirements if you’re not thoroughly familiar with the regulations.
• You’re at the mercy of some financial interdependence: While holding companies can protect assets, they can also create financial interdependence. If one of your major subsidiaries struggles, it might affect your holding company’s ability to raise capital or maintain its credit rating. And if the holding company takes on debt to acquire subsidiaries, this leverage could become problematic during economic downturns.
• It comes with certain management challenges: There’s also a risk of losing touch with day-to-day operations as your corporate structure grows more complex. The distance between the holding company’s decision-makers and operational activities can lead to poor strategic choices or delayed responses if the market suddenly changes. You might also face challenges in maintaining effective communication and control across multiple subsidiaries.
• It’s difficult to exit: Unwinding a holding company structure can be complicated and expensive if your business strategy changes. The process might have tax implications, legal challenges, and potential disputes with minority shareholders. This can make it difficult to respond quickly to sudden market opportunities or threats.

How do I start a holding company?

Setting up a holding company in the UK isn’t particularly complicated, but you might need some help along the way. The basic registration process through Companies House is similar to setting up any limited company. After that, it’s a good idea to seek out professional advice to properly structure your shareholding arrangements, set up appropriate governance structures, and ensure you’re operating as tax efficiently as possible. Most business owners work with an accountant and solicitor to get these elements right from the start.

This step-by-step guide will give you a sense of the process:

1. Choose your company structure

In the UK, the majority of holding companies operate as private limited companies. While including “Holding” or “Holdings” in your company name isn’t required, it can make your company’s purpose clearer. At this stage, it’s worth chatting to a legal professional to ensure you’re choosing the most appropriate structure for your specific business needs.

2. Register with Companies House

It’s pretty easy to register your company through the Companies House website. You’ll need to complete the online registration process, which includes submitting your Articles of Association and paying the £12 fee. For holding companies, you’ll typically use SIC code 64205, which specifically refers to holding company activities.

3. Set up your shareholding structure

This crucial step involves determining how your company’s shares will be distributed and what rights they’ll carry. You’ll need to carefully consider voting rights and share classes, ensuring everything is properly documented. Your intention here is to maintain clear ownership structures and to try to prevent any disputes in the future.

4. Establish your banking arrangements

Your holding company will need its own business bank account, separate from any subsidiary accounts. You’ll also need robust accounting systems to manage investments and handle fund transfers between your holding company and its subsidiaries efficiently and transparently. An accountant can help you here.

5. Put governance in place

Good governance starts with appointing appropriate directors and, if necessary, a company secretary. You’ll need to establish a clear board structure and create defined reporting relationships between your holding company and its subsidiaries. This part of the process is all about ensuring proper oversight and control.

6. Sort out your tax arrangements

Register for Corporation Tax straight after you’ve set up your company, and consider whether you want to register for VAT, too. Bring tax advisers on board to help you arrange group relief options and establish systems for tax-efficient profit distribution across your companies.

7. Create legal documentation

There’s no shortage of paperwork in this process, but it’s important. Proper documentation is there to protect you, and should include comprehensive shareholder agreements, subsidiary management agreements, and inter-company loan agreements. If you’re transferring any intellectual property between companies, this needs to be formally documented as well.

8. Establish your accounting systems

Your accounting infrastructure needs to handle consolidated accounts and track transactions across your companies accurately. You’ll need clear reporting procedures for subsidiaries and might want to consider working with an accountant who has specific experience with holding company structures.

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Holding company FAQs

What assets can a holding company own?

A holding company can own virtually any legal asset, including shares in other companies, property, intellectual property, investments, vehicles, equipment, and cash. While it doesn’t operate these assets directly, it can hold ownership through proper documentation and legal structures.

What is the minimum capital required to form a holding company?

In the UK, you can form a holding company with just £1 of share capital, as there is no legal minimum capital requirement for private limited companies. However, most holding companies typically start with more substantial capital, depending on their investment plans and the scale of operations they intend to oversee. Banks, investors, and potential business partners will also expect to see more significant capital investment.

Can a holding company have employees?

Yes, a holding company can have employees in the UK. Typically, these employees work in core functions like finance, strategy, and administration at the group level. Holding companies might also employ staff who provide shared services like HR or IT across all subsidiaries. That said, most operational staff are usually employed by subsidiary companies rather than the holding company.

Is it a good idea to have a holding company?

Whether it’s a good idea to have a holding company or not depends on your unique circumstances. There are pros and cons — advantages and risks we mentioned earlier in this article. It’s worth reviewing these and speaking to an expert before making your decision.

Quickfire summary

A holding company serves as an umbrella organisation that owns and controls other businesses, known as subsidiaries, without engaging in direct business operations itself. Rather than producing goods or providing services, its primary function is to maintain ownership stakes in other companies and oversee their management.

There are several advantages to running your business this way, including protecting your assets, streamlining your investment management, and helping you grow your business. Inevitably, however, there are some risks to be aware of, too.

Setting up a holding company can be a complex process, and it’s good to have the right team to support you. Surround yourself with excellent financial and legal advisors, and an experienced broker for all your commercial insurance needs. For all your insurance needs, the team at Howden is always here to help.

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