Should You Set Up a Holding Company?

As businesses expand and business owners diversify their interests, many begin thinking about more sophisticated structures to manage their enterprises more effectively. One of these structures that has become increasingly popular is the holding company; a parent entity that owns shares in other businesses but does not necessarily engage in trade on a day-to-day basis.

But is a holding company for everyone? It is important to take time to learn how a holding company functions, who will benefit from it, and what to consider before you choose to create a holding company.

What Is a Holding Company?

A holding company is an organization established with the intention of owning and controlling other businesses, or subsidiaries. Instead of selling its products or services directly, the holding company’s role is to handle and monitor investments in these subsidiaries. It has the potential to own intellectual property and shares as well as tangible assets such as equipment or real estate.

This structure is often used by company owners running multiple businesses under one roof, investors managing a portfolio of startups, or families looking for tax-efficient ways to safeguard and transfer assets.

Advantages of Running a Holding Company

There are several strategic and financial benefits to owning a holding company:

Asset Protection

Valuable assets like intellectual property or cash held in the holding company keep them away from risks involving trading entities (e.g., lawsuits or debt).
Tax Efficiency

Dividends received by a holding company from its subsidiaries are usually exempt from corporation tax, provided certain conditions are met (such as the dividend exemption rules), allowing profits to be reinvested or redistributed more flexibly.
Simplified Group Structure

It can bring together management, ownership, and control under a single umbrella, making it easier to oversee different business ventures.
Business Continuity

A holding structure comes in handy when planning a succession or selling pieces of a business but retaining control of the group as a whole.

These are some of the reasons why a holding company is especially appealing to entrepreneurs with long-term growth strategies or who have various sources of income.

Points to Keep in Mind Before You Start a Holding Company

Despite the clear benefits, it is important to understand the responsibilities and complexity that come with this setup:

Initial and Recurring Costs

Maintaining and having multiple entities involves registration, accounting, and compliance charges on top.
Administrative Complexity

A group structure involves intercompany transactions, consolidated accounts, and careful record-keeping to avoid regulatory issues.
Substance Requirements

Especially relevant for international structures, tax authorities may challenge holding companies that lack genuine activity or substance.
Limited Use for Single Businesses

If you own just one company, a holding company may be unnecessarily complex unless you're expecting significant expansion or investment activities.

For others, the advantages outweigh the additional complexity. For some, especially small companies with simple operations, a simpler company organization may be preferable.

Is It the Best Move for You?

The decision to establish a holding company is based on your current business structure, ambitions, and tax objectives. It is especially worth considering if you:

It is also advisable to speak with a tax adviser or accountant who will be able to help in designing the right structure based on your goals. A poorly structured group can be detrimental instead of helpful if not designed carefully.

Conclusion

Forming a holding company can be a smart business move for entrepreneurs who desire control, freedom of action, and future tax advantages. However, it isn’t always that simple. While the structure does have its disadvantages, requiring careful planning and professional guidance can ensure you make the best of it.

If you are considering going down this route, be sure to have a thorough grasp of the obligations involved and take professional advice to ensure that your group structure works for you, not against you, in your finances.