Holding company: what you need to know

The goal of setting up a company is to ensure that the business thrives. This is achieved through proper planning and management. Setting up a holding company is a good way to manage large corporations that specialise in different products and services. 

Keep reading to find out more.

What is a holding company?

Simply put, a is usually referred to as a parent or umbrella company. This is because it serves as the management of other subsidiary companies while not taking part in their individual day-to-day activities.

How does a holding company work?

Take, for example, a company that could be into producing clothing materials as well as agricultural activities, producing preserved foods, and probably shoes and bags. Instead of establishing a single company with different units to handle each of the productions, they simply incorporate a single holding company and each of those units is incorporated as a separate company which comes under the parent holding company.

This way, it is easier to manage the operations of the company and expand too.

How to register a holding company in the UK?

Registering a holding company is the same process as incorporating a limited liability company in the UK with the exception that the holding company is not providing any services of its own other than to oversee its subsidiaries.

The following are the requirements for registering a holding company in the UK

1. Unique company name. Just like the business or limited liability company name, this name has to be unique too.
2. Registered office address.
3. SIC (Standard Industrial Classification) code. You have the liberty to choose a maximum of 4 here, whereas you can only choose one for the limited liability company or business name.
4. Director’s details. A minimum of one is required.
5. Shareholder’s details. A minimum of one is required.
6. Details of PSCs (Persons with Significant Control).
7. Memorandum and articles of association.
8. Statement of capital

Criteria for registering a holding company in the UK

For a company to be recognised and registered as a holding company, it must meet the following criteria as provided by the Companies Act 2013.

1. A holding company must have at least one subsidiary company.
2. The holding company must own a minimum of 50% interest in its subsidiary companies.
3. A holding company can exist only to manage and control subsidiary companies. It cannot transact business on its own.
4. A holding company must have the authority to make managerial changes and decisions, as well as control the decision-making process of the management of the subsidiary companies. In other words, the holding company must be able to influence the decision of who will be the directors of its subsidiary companies.

Who can open a holding company?

Anybody can choose to incorporate a holding company. A holding company can be controlled by a single person or shareholders.

Types of holding companies

There are three types of holding companies

1. Pure holding company – this type of holding company is acting as a holding company to subsidiary companies only and is not a subsidiary to another company itself.
2. Mixed holding company – this type is a holding company but is also involved in the day-to-day activities of its subsidiary companies.
3. Intermediate holding company – in this category, the holding company is a subsidiary of another holding company.

Benefits of holding company

Registering a holding company with subsidiaries instead of a single one with many units has a lot of benefits attached.

• The operations of the company as a whole are easier to manage.
• Selling a part of the company (a subsidiary) is easier since each is set up like an entity on its own.
• The holding company is a good way to minimise liabilities for the shareholders since each subsidiary is a limited company that is seen as a single legal entity. Each is set up to bear its own liabilities.
• Even though the holding company cannot transact business, it can hold properties, intellectual properties, as well as stock. The holding company can trade on this and use the proceeds to its advantage and for that of its subsidiaries.
• Creating a holding company is a sure way to ensure the longevity of the business as the holding company is shielded away from the liabilities of its subsidiary companies.
• Efficient tax management. The UK law allows a UK company to have a holding company that is not located in the country and that minimises its corporate tax liability. Also, the HMRC exempts holding companies not located in the company several exemptions that could cut down on tax expenses. When the holding company’s taxable income is lower than £10,000,000 in a year, they get tax exemption on their dividends.

Disadvantages of the holding company

Establishing a holding company has its disadvantages too.

• It is much easier to dissolve a holding company than one that is running as a single entity. This is because each unit has been set up to run on its own anyway and can easily be sold off or liquidated if the need arises.
• The managerial structure is more complex. Each subsidiary company must have its own board of directors, different from the holding company, each with its own set of rules and responsibilities. 
• Managing and financing the setup requirements of a holding company may be more tasking.
• There could be a conflict of opinion between the holding company management and the subsidiary company.

Conclusion

Setting up a holding company could come before incorporating a company or as an afterthought to ease management. Either way, the establishment of holding companies is a good way to manage wealth and expand businesses.