Having a holding company sounds professional, but what is it really and why should you start one? One reason may be to protect your capital, another that you are considering selling your business. Find out more here!
What is a holding company?
A holding company, or parent company, is a company that owns shares or participations in other companies. The holding company seldom conducts any of its own operations, but this is done through operating subsidiaries.
In many cases, the holding company’s name contains the word “Holding”, but this is completely voluntary. Otherwise, it’s like any other limited company. When starting a limited company, the articles of association must state what the company is to conduct for operations. In a holding company, it is therefore stated that the company shall own shares and participations in other companies.
5 reasons to start a holding company
- Protect accumulated profits from previous years
By distributing the profits accrued in the subsidiary, this capital can be separated from the risk that it would otherwise have entailed to have the capital left in the operating company. It is important to keep in mind here that only the unrestricted equity in the subsidiary can be distributed.
The subsidiary’s earnings and position as well as liquidity must also not be jeopardized by a dividend. In order to really separate the risk, it is important that there is liquidity in the subsidiary so that the dividend can be settled fairly immediately also in terms of liquidity, since in principle the entire risk remains as long as the holding company has a claim on the dividend on the subsidiary.
- Get more money over if you are going to sell a company
Before an impending sale of a operating company, it may be wise to review what the ownership looks like. Is the company to be sold directly owned by natural persons? Then the taxation can be very high if the purchase price exceeds the owners’ opportunity for capital-taxed dividends. If instead a holding company owns the shares in the operating company, the sale of the subsidiary is, under certain conditions, tax-free for the holding company. Before a sale, my advice is to review your situation in good time so you can optimize your outcome.
- Equalization of results between different companies in the same group
If you have operations conducted in several limited companies today that are not owned by a holding company and thus are not part of a group, there may also be reason to review the structure. By forming a holding company that owns all your limited companies, you can make group contributions between the various companies (must be owned throughout the financial year). If one company temporarily incurs a loss and another with a profit, it is possible to equalize profits between the companies with tax effect if they are part of a group (owned by a joint holding company).
- Borrowing money between different companies in the same group
If you form a group with a holding company that owns all the limited companies, you can, under certain conditions, borrow money between the companies, through the so-called group exemption. The group exemption for loans in combination with the opportunities to make group contributions makes it easier for you to allocate resources and capital between the companies in your group.
- Expand your pension savings
The money you have saved in your holding company can be managed during the time you conduct business in your / your subsidiaries. The surplus and any profits from divestments of subsidiaries are collected in the holding company and can be a complement to other savings, pension insurance and other matters when it is time to retire. Based on current tax rules, there are various possibilities to withdraw capital over time. My advice is to plan your pension well in advance and preferably in consultation with your accountant or a tax advisor.
What do you need to do to start a holding company?
In principle, it is easy to start a holding company. What is needed are some formalities that you can either arrange yourself or get help from your accountant, accounting consultant or advisor.
When the holding company is registered and ready, it must own shares in one or more subsidiaries in order for it to be a holding company. This can be done by starting a new subsidiary with a new business and / or by selling your existing businesses to your newly formed holding company. At this stage, it is important to have all formalities in place such as share transfer agreements and any reversals.
It is also of the utmost importance to have analyzed and calculated the tax situation so that you, as the previous direct owner of the limited companies that are to be transferred, do not lose any accumulated tax benefits. This is handled by calculating and setting an optimal purchase price. Here, too, you can get help from your accountant or advisor.
Forming a holding company can have benefits. But each situation is unique and administering more companies also involves additional work and additional costs. Therefore, my final advice is to get help with analyzing your specific conditions to create an optimal situation and company structure for you and your business.