Should You Put a Holding Company Above Your Business?
Most businesses start with a simple structure. You own the shares in a limited company. That company runs the business, employs the staff, signs the contracts, owns the assets and receives the profits.
And, at the beginning, that may be exactly what you need. But businesses change.
You might build up cash reserves. Buy business premises. Acquire valuable assets. Start another venture. Buy another company. Bring in an investor. Or start thinking about selling the business.
At that point, it is worth asking a simple question:
Does everything still need to sit in the same company?
One option may be to introduce a holding company.
What is a holding company?
Take a simple example.
You currently have:
You
↓
ABC Trading Ltd
You own ABC Trading Ltd directly, and the business and its assets sit in that company.
If you introduce a holding company, the structure becomes:
You
↓
ABC Holdings Ltd
↓
ABC Trading Ltd
You now own ABC Holdings Ltd, and ABC Holdings Ltd owns the trading company.
You are still the ultimate owner of the business. What has changed is the structure underneath you.
A new holding company can often be introduced through what is known as a share-for-share exchange. Put simply, instead of owning shares directly in the trading company, you exchange those shares for shares in the new holding company.
So why might you want to do that?
1. Putting your assets in the right place
As a business grows, it can accumulate significant value – cash, property, investments, intellectual property and other valuable assets.
If everything sits in the trading company, those assets sit alongside the day-to-day business: the employees, customers, suppliers, contracts, borrowing and trading risks.
A holding company structure gives you more flexibility over where that value sits.
For example:
ABC Holdings Ltd - Holds property, surplus cash and other assets
↓
ABC Trading Ltd - Runs the day-to-day business
Subject to the appropriate legal and tax advice, profits that are not required by the trading company may be paid up to HoldCo by way of dividend. Property or other assets may also be held at HoldCo level, with the trading company using them under appropriate arrangements.
This can create a useful separation between the company carrying on the trade and where some of the value built up by the business is held.
It can also give you options later. You may eventually want to sell the trading company but retain the property, for example, or use funds held by HoldCo to invest in another business.
There is an important caveat. Separate companies do not automatically mean that every risk is separated. Guarantees, security, loans and other financial arrangements between HoldCo and TradeCo can affect the position.
And if valuable assets such as property are already sitting in your trading company, don't simply move them. Transfers between companies can have legal, tax and financing consequences and need to be properly planned.
The aim isn't simply to “protect” assets.
It is to make a conscious decision about which assets the trading company actually needs to own and where the wider value of the group should sit.
2. Creating room to grow
A holding company can also provide a useful platform for growth.
Suppose ABC Trading Ltd is your original business and you decide to acquire another company.
Your structure might become:
ABC Holdings Ltd
↙ ABC Trading Ltd
↘ XYZ Ltd
Both businesses are ultimately owned by you through HoldCo, but they remain separate companies.
The same approach can work when launching a new venture. Instead of putting every new activity into the original trading company, the new business can potentially have its own company beneath HoldCo.
That can make sense where the businesses have different customers, management teams, funding requirements or levels of risk.
It also means the group can continue to grow without necessarily putting every new activity and asset into one company.
3. Bringing in an investor
A group structure can also provide more flexibility when external investment comes along.
Imagine you have:
ABC Holdings Ltd
↙ ABC Trading Ltd
↘ ABC Technology Ltd
An investor is interested in ABC Technology Ltd.
You want their money and expertise in that particular business, but you don't necessarily want them to have an interest in ABC Trading Ltd or the other assets held elsewhere in the group.
Keeping the businesses separate can give you more options over exactly what the investor is investing in.
Depending on the circumstances, the investment might be made into the particular subsidiary rather than at the top of the group.
That is much easier to consider when the structure has been thought about in advance rather than when an investment deal is already underway.
4. Making a future sale simpler
The same principle applies if you eventually want to sell.
Suppose you have built two successful businesses but only want to sell one.
If each business already sits in its own company beneath HoldCo, there may be a much clearer distinction between what you are selling and what you intend to keep.
If everything is mixed together in one company, you may first need to separate the business being sold.
That can mean working out which contracts belong to it, which employees move with it, who owns the intellectual property, which assets are used by each business and which liabilities should go with the sale.
A reorganisation can be carried out before a sale to put a particular business into its own company.
But ideally, you don't want to discover that your structure is a problem when a buyer is already carrying out due diligence.
Thinking about structure early can give you more choices later.
5. Can I just move things around within the group?
Once you have a HoldCo and several subsidiaries, it is easy to think of everything as one business.
Commercially, it may be.
Legally, it isn't.
Each company is a separate legal entity.
If ABC Trading Ltd owns a property, HoldCo doesn't automatically own it. If one subsidiary owns intellectual property, another subsidiary can't simply start treating it as its own.
Moving assets, businesses or shares between group companies is still a transaction.
Depending on what is being moved, you may need to consider valuations, contracts, employees, property documentation, intellectual property, lenders, third-party consents and tax.
The fact that the same person ultimately owns the group doesn't mean those steps can be ignored.
A useful rule is:
Work out where you want everything to end up first. Then take legal and tax advice on how to get it there.
6. Don't forget employee share options
There is another issue that can easily be overlooked when introducing a new holding company.
Employee share options.
Suppose some of your key employees have options over shares in ABC Trading Ltd.
You then introduce ABC Holdings Ltd above it.
From your point of view, very little may appear to have changed. You still ultimately own the same business. Legally, however, introducing a new parent company can amount to a change of control of the existing company.
Depending on the share scheme rules, that can have consequences for existing employee options and other share awards.
It may therefore be necessary to exchange – or “roll over” – existing options into equivalent options over shares in the new holding company. Particular care is needed with tax-advantaged arrangements such as EMI options.
If your business has employee share options, make sure they are reviewed before the structure changes rather than afterwards.
7. Plan the structure before you create it
There can be very good reasons for introducing a holding company, but there isn't one group structure that works for every business.
The starting point should be what you are trying to achieve:
Are you trying to separate valuable assets from the trading operation?
Do you want somewhere to hold surplus profits?
Are you planning an acquisition?
Do you expect to launch other businesses?
Could you bring an investor into one of them?
Might you eventually sell one part of the group while retaining another?
Once you know where you want to end up, you can work out the right structure – and how to get there.
That may involve exchanging shares, moving assets, paying dividends, creating loans or carrying out a number of transactions in a particular order.
Tax can have a significant bearing on those steps, so your legal and tax advisers should be involved at the planning stage.
So, should you put a holding company above your business?
Not every business needs one.
For a straightforward business with one trade and relatively few assets, introducing another company may simply create additional administration.
But as your business grows, it is worth periodically asking whether the structure you started with is still the right one.
A holding company can potentially give you more flexibility over:
Where your assets sit
How you grow
How you bring in investment
What you can sell or retain in the future.
The important thing is to think about those questions before you need to act.
A holding company isn't about adding another company for the sake of it.
It is about creating a structure that works for the business you have today – and the business you want to have tomorrow.
How Daly McCormick can help
If your business has grown, acquired valuable assets or is preparing for its next stage, it may be worth taking a fresh look at whether your current structure is still the right one.
At Daly McCormick, we advise business owners on group structures, holding companies and corporate reorganisations, working alongside your accountant and tax advisers to make sure the legal structure supports your wider commercial and tax objectives.
Whether you are introducing a holding company, reorganising existing assets and businesses, planning an acquisition or preparing for future investment or sale, we can help you work out where you want to get to – and the steps needed to get there.
Your business. Our legal expertise.
Dungannon, Belfast, Omagh
02887441840
Disclaimer: The information provided here does not, and is not intended to, constitute legal advice. Instead, the information and content available are for general informational purposes only.
