As your business grows with more staff, more gear, maybe even multiple business arms, protecting what you’ve built becomes crucial. That’s where a holding company can come in. It’s a smart structure that helps you manage risk, reduce tax, and set your business up for long-term success.

What is a holding company?

A holding company is a business entity that exists primarily to own other companies, known as subsidiaries, on behalf of its shareholders. 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 subsidiary businesses. Holding companies will often have a board of directors which is responsible for making critical decisions.

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.

Many business owners create a pure 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. 

What is a mixed holding company?

Not every holding company holds assets in the traditional sense. Some engage in trading activities or operate as part of the business itself. Mixed holding companies own other businesses but also runs their own operations. It combines the role of a traditional holding company with that of a trading business. This structure can offer flexibility for business owners who want to protect assets, manage multiple entities, and still remain actively involved in day-to-day operations.

Let’s say your company owns your warehouse, some high-end equipment, and also hires out those tools to other tradies. That’s a mixed holding company in action; it owns things, runs things, and gives you more control over how your money moves.

Holding company vs operating company

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.

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

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. 

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.

Why do people use a holding company?

People use holding companies for various strategic and financial reasons. One of the main reasons is to establish 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. 

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. 

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.

How are holding companies used strategically?

Let’s say you’re a tradie who’s grown your business. You now have a team, own a warehouse, a fleet of vehicles, and have even developed a custom job management app. Things are going well, but you want to protect what you’ve built.

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.

Back to the example: you set up a holding company to own key assets like your warehouse, vehicles, and the rights to your app. Then, you create an operating company that actually does the day-to-day work, like quoting, hiring, working on job sites.

This way, if something goes wrong in the operating company (like a legal claim or unpaid debt), creditors can’t go after the assets in the holding company because they’re legally separate. It’s a smart way to limit risk.

Protecting intellectual property (IP)

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. 

Say your job management app becomes a valuable tool in your industry. By keeping the IP under the holding company, it’s safe from any trading risks the operating company might face. Even if the operating company gets into trouble, your IP is protected.

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. 

If you decide to start a second business (maybe an equipment hire company, for the sake of our example) and it struggles at first, the losses from that business might be offset against profits from your tradie business. That could reduce your group’s overall tax bill.

Also, if one of the businesses is sold, the holding company structure may allow you to access small business capital gains tax (CGT) concessions, helping you keep more of the proceeds.

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 new ventures or exit from ventures without compromising the core assets and overall business value.

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. If you’re growing your business and want to know whether a holding company could help protect what you’ve built, get in touch with us today. We’ll help you weigh it up and see if it’s worth doing for your situation.

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