There are numerous advantages for business owners when setting up a holding company.
A registered entity that is used primarily to hold outstanding stocks in other companies, they are also utilised to manage legal liabilities and to procure additional tax benefits for their subsidiary companies. Holding companies are also useful for purchasing discretion, exploring unique investment opportunities and acquiring low-interest loans.
Indeed, to fully explore the benefits of holding companies in more depth, we've compiled a breakdown of their structure and how they can be put to work for your business. First, though, it's important to establish who can benefit from such an arrangement.
Why would I need to set up a holding company?
If you are planning on retaining a large amount of capital within your company long-term – or if you are planning on doing business in a high-risk industry – then a holding company would be a wise choice.
Bear in mind, too, that a holding company does not generally produce goods or services (although it is very much able to be used in this way). Instead, it is often used to house goods or other inventory on behalf of its subsidiary companies.
If either of these points aligns with your business model, then it may be worth seriously considering this option; given the potential costs involved, though, you should first speak with a professional before making any key restructuring decisions.
What are the benefits?
Other advantages of a holding company include:
1. Enhanced Limited Liability
In the same way that registering a company protects the company owner from being held personally responsible for mistakes or debts incurred through company operations, a holdings company prevents the company from losing its assets in the event of a lawsuit or extreme debt collection.
This is particularly beneficial for companies operating in high-risk industries such as construction, insurance, hospitality, and consulting because the need for protection is much higher.
The need for limited liability, however, should be considered by business owners in any industry. Between niche markets and multi-function businesses, there is the scope to explore this option within some capacity.
2. Deferred Taxes
In many countries, dividends between private companies are allowed to move tax-free, with or without limitation. Because this is not the case with dividends paid out to individuals, company owners and shareholders can temporarily direct their dividends to be held in trust by the business's holdings company.
This structure of dividend disbursement is not only beneficial for tax purposes but also allows the holding company to reinvest the collective amounts of the dividends in a suitable investment vehicle – at least until your shareholders opt to withdraw.
Note, though, that in some countries – such as the US – holdings companies are required to hold a specified percentage of subsidiary company shares before becoming eligible for tax-free dividend transfers. Be sure to check local regulations before making plans to utilise this strategy in your company structure.
3. Reduced Taxes
Another way that holdings companies can reduce taxes is when one or more of your subsidiary companies incur a net loss for the tax year. The amount of this loss can be deducted against the net profit of the other companies, thereby reducing taxes owing.
The company director will also have the option to carry this loss forward if the benefits of doing so in the next tax year are forecasted to be higher than the deduction in the current tax year. A professional tax adviser or accountant can help you decide the best strategy for achieving the greatest tax savings long-term.
4. Options for Income Splitting
To minimise income taxes for your subsidiary companies, the holding company will often assume a portion of the companies' income as its own to place the subsidiary companies in a lower tax bracket.
Because holding companies generally pay much lower taxes, this process becomes hugely cost-effective. This method of reallocating corporate income is sometimes referred to as "skimming" and should only be conducted under the experienced hand of an accountant or business financial advisor.
5. Capital Gains Exemptions
By buying and selling assets under the banner of a holdings company, you open the door for exemptions on any capital gains realised on the sale of these assets. Because the holdings company does not engage in company operations of its own, claiming capital gains under its front will reduce the taxes owing on dispositions of these assets, or exempt them from taxes altogether.
If your holdings company is holding assets for multiple subsidiary companies, any capital losses incurred from other companies will offset realised capital gains.
6. Low-Interest Loan Opportunities
It is generally much easier for a holdings company to secure a low-interest loan than one of its subsidiary companies. This is because, when lenders are evaluating a holding company for risk and capital, they consider all of the shares owned by the company a tangible asset that can be easily transferred to them should the holding company default on the loan. Soliciting funding in this way creates a low-risk scenario for everyone involved.
7. Discrete and Cost-Effective Purchasing
Often, subsidiary companies will use holding companies to purchase and "hold" assets, including inventory. Purchasing under the banner of a holdings company not only keeps assets securely together outside of company operations but also enables companies to discretely purchase assets and inventory under the dissociated name of the holding company.
Keeping a low profile when purchasing creates sales opportunities that the better-known subsidiary company (with a presumably comfortable cash flow) may not have been offered.
Purchasing this way with one holding company for several subsidiary companies in the same or similar industries will also amount to greater volume discounts on wholesale inventory items, effectively boosting profit margins for all associates.
Additionally, companies purchasing in higher volumes often enjoy better terms of sale from suppliers, allowing business savings to accumulate interest for a more extended period.
8. Asset Protection
Registering your company assets and purchasing inventory under your holding company's name will protect your business assets from any risky endeavours that your subsidiary companies undertake. If creditors come to seize your subsidiary company's assets against its debt, they will be unable to do so if you have registered your assets under your holding company and not your subsidiary company.
9. Flexible Functionality
Although holdings companies are characterised by their function to own shares and hold dividends and assets for their subsidiary companies, they are still able to partake in their own day-to-day business operations if so needed or desired. In most countries, holdings companies must maintain a certain percentage of income from subsidiary dividends but are free to supplement the difference with revenue from standard business operations.
This strategy is best applied if your business operates in a low-risk industry (or a lower risk segment of a higher risk industry). It is also an excellent strategy for legitimate income splitting or division between companies.
As you can see, the benefits of a holding company are numerous. Regardless of your industry, you should consider if your business would be better placed implementing such a structure, whereas if you are in a volatile sector, then it is an essential step in securing your company's future.
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