Why more business owners are choosing holding company structures

As businesses grow, the structure that worked on day one does not always remain the best option.

Many owner-managed businesses start with a single trading company. However, as profits increase, new ventures are launched, or owners begin thinking about succession or future exits, a holding company structure can become an attractive option.

While every situation is different, a holding company can provide greater flexibility, protection and opportunities for future growth.

What is a holding company?

A holding company is a company that owns shares in other companies.

Typically, the trading activities are carried out by subsidiary companies underneath the holding company. The holding company itself may have little or no trading activity and instead exists to own and manage investments in the group.

Why implement a group structure?

Protecting profits and assets

One of the most common reasons for implementing a holding company structure is asset protection.

As a business becomes more successful, surplus cash often begins to build up. Rather than leaving significant amounts of cash within the trading company, profits can potentially be distributed up to the holding company and retained there.

This can help separate accumulated wealth from day-to-day trading risks.

Many business owners also choose to hold valuable assets, such as investment properties or intellectual property, outside of the trading company where possible.

Creating a platform for growth

A holding company structure can make expansion easier.

If a business owner wishes to start a new venture, enter a new market or acquire another business, a new subsidiary can often be added beneath the existing holding company.

This can allow each business activity to operate independently while remaining part of the wider group.

This creates a cleaner and more organised structure as the business grows.

Ringfencing risk

Not all business activities carry the same level of risk.

For example, a company involved in construction may face a very different risk profile to a company holding investment property.

By separating activities into different companies, business owners may be able to reduce the impact that difficulties in one company could have on other parts of the group.

Future sale flexibility

Many business owners have an eventual exit in mind, even if it is years away.

A holding company can provide greater flexibility when that time arrives.

Rather than selling an entire business group, owners may have the option to sell individual subsidiaries while retaining other parts of the business.

This can be particularly useful where different divisions have different values, growth prospects or potential purchasers.

Succession and family planning

Holding companies can also be useful when considering long-term ownership planning.

Whether the intention is to bring family members into the business, reward key employees, or eventually pass the business to the next generation, a group structure can provide additional flexibility.

In some cases, it may be easier to introduce different share classes or reorganise ownership at holding company level than within an existing trading company.

Tax considerations

There can be tax advantages associated with holding company structures, but these should rarely be the sole reason for implementing one.

Where companies form part of a group, reliefs may be available for certain intra-group transactions and losses. In some circumstances, favourable tax treatment may also apply when a subsidiary is sold.

However, the tax position depends entirely on the facts of each case and restructuring a business can itself trigger tax consequences if not carried out correctly.

Is a holding company right for your business?

A holding company structure is not appropriate for every business.

For some owners, the additional administration may outweigh the benefits. For others, particularly businesses with growth ambitions, significant cash reserves, multiple activities or future succession plans, a group structure can provide valuable flexibility.

How can we help?

Our experienced team at Ad Valorem can help you decide if a group structure is appropriate for your objectives and, if so, can implement the desired structure in a tax-efficient manner.

(E) enquiries@advaloremgroup.uk (T) 01908 219100 (W) advaloremgroup.uk