Why Set Up a Holding Company?

At Wilds, we act for many companies structured as a group, with a holding company and one or more subsidiaries. A common question we get asked is: What are the benefits of this kind of structure?

In principle, we would identify three main advantages:

1. Acquisition

It’s quite common that when an acquisition takes place, the buyer doesn’t have all the monies required for the acquisition available on day one. Often, part of the purchase price is deferred, or the buyer takes out funding to cover it.

In both scenarios, the expectation is that the future payments will be subsidised by the profits of the acquired company. If the buyer is an individual, extracting those profits from the company is subject to income tax prior to them being handed over to the vendor.

However, if a company is used for the acquisition, dividends between the two companies aren’t subject to income or corporation tax. This can leave the group with around 50% more cash in hand to pay off the vendor than if a company wasn’t used.

2. Security

Under UK law, the owners of a business rank behind the creditors in the event of insolvency. This means you could end up with a situation where the owners of a company have, over a period of many years, left excess profits in the company in order to support growth and development. In the event of a subsequent insolvency a creditor, even if they’ve only been dealing with the company for a matter of months, could still take priority in an insolvency distribution.

To protect business owners in these circumstances, and encourage continued investment, we recommend setting up a holding company. We also suggest voting profits up to the holding company year on year and then lending back to the trading company, secured by a debenture. In the event of insolvency, the debenture holder would be a secured creditor and take preference over the general creditors and other unsecured creditors in an insolvent distribution.

3. Flexibility

When a business is involved in a number of different activities, it can make sense to keep each activity separate. By housing each activity in its own separate company within a group (rather than running multiple standalone companies), you create greater flexibility – particularly when it comes to transferring funds or tax losses from one group member to another.

Thinking about restructuring or setting up a holding company?

We’re here to help you explore the pros and cons for your specific situation. If you’d like to chat through the options, just get in touch with the team at Wilds.