Pros and Cons of Setting Up a Holding Company

A holding company is a company that exists solely to invest in subsidiary companies. Unlike regular businesses, holding companies do not produce goods or services themselves. Instead, they derive their value from a strong understanding of business and by seeking out good investment opportunities.

Setting Up a Holding Company in the UK

If you want to create a holding company, it’s important to understand that it isn’t a specific legal business structure. You will still need to choose between being a limited company or a sole trader. However, most holding companies are set up as limited companies. Once you have decided on your business structure, you can start setting up your holding company like any other business. Here are a few things to remember:

Appoint company directors: Holding companies can control any number of shares in their subsidiaries and will be responsible for making strategic business decisions.

Write your business plan: Holding companies with multiple subsidiaries can be complex, so having a good plan is key to success.

Check the tax implications: One benefit of setting up a holding company is that subsidiary companies can move assets between them without being taxed. However, the income of the holding company itself will still be liable for corporation tax.

Holding Company Structure

There is no one-size-fits-all structure for holding companies. It depends on how you choose to invest and the subsidiary companies you control. For example, your holding company could have three subsidiaries underneath it. You don’t necessarily need to be the majority shareholder in any of the companies, but this will affect your level of control. The more shares you own in a company, the more responsible you are for strategic decisions. If you want more voting rights and control, you’ll need to own more shares. By investing fewer shares, you’ll have to defer to the majority shareholder on certain decisions. Your holding company structure may be influenced by the amount of money you have to invest in shares, as this can change over time.

Holding Company Examples

You might be surprised to learn that many well-known companies have holding companies as shareholders. Some examples include:

  • Berkshire Hathaway: This holding company owns assets in Duracell and Fruit of the Loom and has minor shares in companies like Coca-Cola, Goldman Sachs, and Apple Inc.
  • Apple Inc.: Apple itself is a holding company with subsidiaries such as Apple Studios and Beats Electronics.
  • Sony: Sony is a holding company that controls companies like Sony Interactive Entertainment and Sony Music Entertainment.
  • Amshold: Lord Alan Sugar’s holding company has shares in Tropic Skincare and Amstar Media.
  • Unilever: One of the largest holding companies in the world, Unilever, owns brands like Dove and Ben & Jerry’s.

Pros and Cons of a Holding Company in the UK

Setting up a holding company has its advantages and disadvantages. Here are some of the pros and cons to consider:

Tax benefits: One major benefit of having multiple companies under a holding company is the ability to move assets between subsidiaries tax-free. However, tax can be complex, so it’s best to seek advice from a professional.

Risk management: Keeping businesses separate allows you to protect your assets. If one company goes bankrupt, the others won’t be affected.

Less liability: Setting up a holding company as a limited company provides more protection compared to being a sole trader. Your personal debt won’t be affected if your business suffers substantial losses.

Less transparency: Running a business through a holding company can make it difficult to present an accurate financial picture when needed, such as when seeking investors.

Parent Company vs Holding Company

While both holding companies and parent companies have subsidiaries, they operate differently. A holding company only invests in subsidiaries and doesn’t have its own business practices. All outputs come from the subsidiary companies. In contrast, a parent company controls and invests in subsidiaries while still having its own business practices. For example, a parent company may produce and sell its own products while acquiring other companies to sell related items under separate subsidiary names.

Is Setting Up a Holding Company a Good Idea?

Before starting a holding company, it’s important to determine if it makes strategic sense for your business. Owning multiple companies can help expand your market reach and customer base, and you can either focus on one industry or diversify across different areas. However, managing multiple businesses and shareholders can come with challenges. The level of control you have over your subsidiaries depends on the number of shares you own. Before making a decision, it’s recommended to consult with a financial advisor or accountant who understands your specific circumstances.