​​Strategically Using a Holding Company

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Understanding the role of a holding company is essential for businesses looking for a strategic corporate structure. We discuss the dynamics between holding and operating companies, exploring how holding companies can be used for risk protection, tax liability reduction, and enhanced business structure flexibility. 

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What is a holding company?

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A holding company is a business entity that exists primarily to own other companies, known as subsidiaries. Unlike operating companies that engage in the day-to-day business operations, a holding company's primary purpose is to manage and oversee its investments in various subsidiaries. 

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The holding company typically owns a significant portion of the subsidiary, giving it control over the subsidiary's management and strategic decisions, and can be instrumental in the strategic management of a portfolio of businesses.

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Many business owners create a holding company for the purposes of strategic business structuring. With the assets of their operating company sitting under the control of the holding company, there are potential benefits to be gained. 

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Holding company vs operating company

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A holding company and an operating company serve distinct roles within a corporate structure. A holding company is primarily used for owning a portfolio of subsidiary companies, typically through the ownership of assets. Its primary purpose is to oversee the activities of its subsidiaries, while maintaining a level of separation between them.

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Holding companies do not engage in the day-to-day operations of their subsidiaries, instead focus on strategic planning, investment decisions, and asset management. 

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On the other hand, an operating company is directly involved in the production of goods or services. It is the entity that conducts the core business activities, interacts with customers, and manages the operational aspects of the company. 

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While the holding company provides strategic direction and oversight, the operating company executes those strategies to generate revenue and ensure the success of its operations. Together, the holding company and operating company structure allows for effective management, risk mitigation, and flexibility in business operations.

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Why do people use a holding company?

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People use holding companies for various strategic and financial reasons. One of the main reasons is to create a structured and organised framework for managing a range of businesses or assets. Holding companies provide a level of separation and independence between subsidiaries, allowing for more effective risk management and asset protection. 

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Holding companies can also help reduce tax liabilities by consolidating tax losses and taking advantage of tax concessions. With multiple companies under a holding company, it may be appropriate to consolidate losses and offset them against profits from other subsidiaries — ultimately reducing the overall tax liability. 

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The holding company structure also allows for easier transfer of assets and shares, streamlines administrative processes, and enables strategic decision-making at the parent level. Holding companies are often used in complex business environments where diversification, risk mitigation, and centralised control are crucial elements of a successful corporate strategy.

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How are holding companies used strategically?

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Risk protection

By separating the assets from operating companies, a protective barrier against liability is created. Each subsidiary is solely responsible for its own debts — not the holding company — which helps prevent the operating company’s creditors from accessing the assets held under the holding company, in the event of debt collection or legal claims.

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A holding company can also be used to protect intellectual property (IP) from the operating company’s trading risks. It can be used to protect IP such as trademarks, copyrights or patents. 

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Tax liability reduction

As mentioned above, holding companies can offset the profit from one subsidiary with the losses of another, resulting in a smaller tax liability overall. Another strategic advantage is the potential small business CGT concessions a holding company may be able to claim in the event of a subsidiary being sold. 

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Business structure flexibility

A holding company enhances business structure flexibility by consolidating key assets at the parent company level, enabling the group to invest in other business ventures or exit from ventures without compromising the core assets and overall business value.

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Do I need a holding company?

While holding companies may offer increased risk protection, flexibility and reduced tax liabilities in some cases, the advantages of holding companies vary depending on the specific business circumstances, making them more favourable in certain situations than others. To discover whether your business could benefit from the use of a holding company, please get in touch with us today.

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