Grouping Your Business: To Group Or Not To Group

Some businesses decide to form a group structure that has a “holding company” to reduce risk and maximise tax efficiency. To group your business can indeed bring a myriad of benefits, there are also some drawbacks that businesses should be aware of before making this decision. Here, we discuss whether to group or not to group your business

What is a holding company? 

A holding company, according to the Companies Act, is when a company holds the majority of the voting rights in its subsidiary company or is a member of its subsidiary company and holds the right to appoint or remove a majority of its board of directors. Whilst a holding company does not produce any goods or services in its own right, its main purpose is to own shares of other companies in order to form a corporate group. The holding company can also own assets such as property and trademarks. By owning these assets, holding companies allow individuals to protect their personal assets and free them from debt liability and other potential risks.

An example of a holding company is Lloyds Banking Group which is the holding company for several businesses including Lloyds Bank, Bank of Scotland and Scottish Widows.

Advantages  

Setting up a holding company has its advantages:

Minimise the risk  

One of the main advantages has to be the minimisation of risk. A single company that is held directly has all its assets fully exposed which comes with an element of risk. Having a holding company structure allows for better asset management overall. Easier distribution of assets is available and the structure can help with loans and borrowing.

For example, if one of the subsidiary companies within the group unfortunately goes bankrupt, the creditors can receive their remuneration from the subsidiary company in question and not its holding company. Therefore, saving the group major financial risk. A group can structure itself so that one subsidiary owns the brand name and trademarks whilst another owns the real estate, another owns the equipment, etc. Having it split like this means that if one subsidiary goes bankrupt, the company as a whole can continue.

Ringfence / safeguarding assets 

Leading on from the previous point, a subsidiary can be used to ringfence assets and therefore liabilities, allowing each company within the group to have limited liability. A group structure is a great method to safeguard the following:

• Fixed assets such as machinery, IT equipment etc
• Property
• Intellectual Property (IP)
• Investments
• Cash Reserves

Diversification  

Having companies within a group structure also can help a company diversify into new ventures. A group structure can not only help from a financial point of view, it allows companies to enter new sectors and try new things without the risk of damaging the brand and reputation of other subsidiaries as they are separate entities.

Group Relief  

As long as the company structure meets the requirements for Group loss relief, you can have the option to offset losses between companies within a group. Losses made by a company within a group can be transferred to another company in a 75% group. This includes current year trading losses, non-trading deficits, excess UK property income, excess management expenses, and excess qualifying donations. If the group also qualifies for Capital Gains Group status, they can also transfer Capital gains or losses between the group companies.

Loan Management  

With a company structure, there is no dependency on a single loan or mortgage provider. Each company within the group can use different loan providers. Whilst the amortisation of a loan is not an option, there is a relief for interest on the payment. Therefore, there is unrestricted use of reserve of one company for any other company within the group with the added advantage to charge market interest rate.

Succession Planning  

One of the major advantages of setting up a holding company is that it allows for business continuation, even after the loss of any key people.

Dividend management  

Dividend paid by a subsidiary company to the holding company is exempt from Corporation tax. This allows more control over the income in a centralised place, rather than having to extract dividends through several subsidiary companies separately.

Shared Costs 

There may be certain administrative tasks that all the subsidiary businesses have to do which can in fact be centralised and sit within the holding company. Central services can therefore be used by all the subsidiary companies and they can share the cost, saving them all money in the long term.

Pre Sale Preparation  

Company owners who are looking to sell their business may want to hold on to certain assets to prevent them from being included in the sale. This is possible by transferring assets (such as Intellectual Property) to the holding company. Alternatively, if they want to trade again in the future, it may be worth them setting up another company within the group and transferring the assets there before selling the original company.

Drawbacks to having a holding company  

Whilst the list above clearly shows there are advantages to having a holding company, there are also inevitable drawbacks when looking to group your business.

Complex Administration  

As you can imagine, wanting to group your business can bring a lot of additional administrative tasks, some of which can be extremely complex. It can be difficult as each subsidiary must record their sales and costs in separate books to avoid the tasks becoming unmanageable

Management  

Whilst it is avoidable, management challenges can become an issue when looking to group your business. Holding companies have influence over the subsidiary companies and if one company does not agree with the holding company’s decision it can lead to management conflicts down the line.

Shared Costs 

To group your businesses can bring a huge financial cost with it. Having said this however, if the structure is run well, it can be tax efficient in the long term.

As this article suggests, there are several advantages and disadvantages to forming a group. It completely is determined by the business’s individual circumstances as to which route is best and most tax-efficient. Having a holding company can often seem like something only large corporations do but this is not the case. There are some significant advantages for smaller business owners to group their businesses as well.

If you are looking to group your businesses, then please get in touch. A member of our specialist team at Wright Vigar will be able to discuss all of your options in more detail to help you decide the future of your company.