Benefits of a holding company

What is a holding company?

A holding company is a corporation that owns another company, known as its subsidiary, by owning 100% of its shares. 

What are the advantages of setting up a holding company?

There are three main merits of having a holding company structure.

‍

Protect assets

Since a company is a separate legal entity, its liabilities are confined to the company itself and do not extend to its shareholders. 

‍

This means that Company A’s liabilities will not be carried over to either the holding company or Company B as illustrated in the chart above. Hence, establishing a holding company can be utilised for separating a company's assets from its operations, providing enhanced protection for those assets.

‍

Here is an example of asset protection.

You're the owner of a successful bakery. You have invested a lot of time and money into building your business, and you own both the bakery itself (the operating company) and the building where it's located (an asset).

Now, let's say one day, unfortunately, a customer slips and falls in your bakery and decides to sue you for medical expenses and damages. If your bakery and the building are both owned by the one company, creditors can potentially access the building in the event that the lawsuit is successful, this could result in the forced sale of the building to pay debts.

However, if you had set up a holding company and transferred the ownership of the building to the holding company, the building would be shielded from such claims because it's a separate legal entity to the operating company in which the injured customer was transacting with.

‍

Reduce investment risks

With asset protection in place, a business can explore dynamic investments in new opportunities without putting the core business assets at risk.

‍

For example,

Suppose you have several businesses operating under your holding company. One of your subsidiaries specialises in software development and has a prospect to expand its operations by venturing into a new market, such as mobile app development. This involves some level of risk, as it requires significant investment in research, development, and marketing.

However, the risk is mitigated if the subsidiary’s assets are held within the holding company. Even if the mobile app development venture fails, the core assets of your business, held within the holding company, remain protected. This separation of assets allows your subsidiary to pursue growth opportunities and diversify its operations without exposing the entire business to unnecessary risk.

‍

Succession planning

Setting up a holding company can simplify your succession planning. With each business owned by the holding company, transferring ownership of the entire operating group becomes as simple as distributing shares of the holding company.

‍

Moreover, the holding company structure enables a clear separation between ownership and equity participation. This distinction is particularly advantageous when considering welcoming employees as new equity participants. By exclusively offering shares of subsidiaries, the holding company retains ownership of the entire group, preserving ownership continuity for future generations.

‍

CTK Accounting is a full-scope accounting firm based in Wollongong, servicing clients nationally.

For advice on Tax, BAS, GST, Bookkeeping, and Payroll issues visit us at ctkaccounting.com.au

‍