Deciding how to structure diverse business activities or different brands requires a great deal of consideration. In such situations, you may wonder whether it’s better to keep your companies entirely separate or bring them together by setting up a holding company.
Perhaps you have two or three different companies serving the same function, e.g. shops or restaurants. Or maybe you have multiple companies with completely different business activities. It may even be the case that you are considering setting up a new company to separate diverse activities that you currently carry out through one existing company.
Whatever position you are in, there are a number of factors you need to think about to determine the best approach for your business. We discuss the benefits of both options below, but we would urge you to speak to an accountant for specialist advice tailored to your individual needs.
Benefits of keeping your companies separate
Whether you already own multiple companies, or you’re planning to set up another one, keeping these businesses entirely separate can offer certain advantages over bringing them together under a holding company.
Maintaining individuality
If your companies operate in unrelated industries, provide vastly different products or services, or are mismatched in terms of culture, branding, and target markets, it is generally easier to preserve their established individuality by keeping them completely separate.
Keeping things simple
Similarly, if your companies have different directors and ownership structures, it is far simpler to maintain them as standalone, unrelated businesses. Creating a holding company with subsidiaries in this type of situation would be incredibly complex. Under certain circumstances, it may not even be a viable option.
Limiting reputational damage
You also need to consider the reputation of each of your businesses. If one company has a poor brand image or issues with creditors, keeping them separate will help to protect your other businesses from reputational damage by association.
Possible tax advantages
Finally, consider your long-term plans. If you intend to sell one of your companies (or part of it) in the future and you want to keep the proceeds for yourself, it may be more tax-efficient to do this where it is not part of a group structure.
This is because proceeds from the sale of a subsidiary go to the holding company. You will then pay yourself dividends from the holding company, which will attract dividend tax of between 8.75% and 39.35%.
- Selling a company as a sole shareholder and director
- An introduction to Capital Gains Tax for small businesses
- Dividend tax – a complete guide
However, if your company is not a subsidiary, you will personally receive all of the proceeds and pay Capital Gains Tax (CGT) on the profit. You may qualify for Business Asset Disposal Relief, which offers a reduced rate of 10% CGT.
Generally, if your companies are very small, it’s more advantageous to keep them separate. Restructuring your businesses as subsidiaries owned by a holding company may simply complicate matters, and bring additional costs for very little benefit.
Benefits of setting up a holding company with subsidiaries
Setting up a holding company would allow you to bring your existing companies together under a single corporate group. Each company would be a subsidiary of the holding company, but they would remain individual legal entities with their own brand image.
Depending on your circumstances and long-term goals, this option can provide a number of benefits, such as:
Offsetting losses
It is possible to offset trading losses in one subsidiary against the profits in another. This is known as group relief. You don’t have the option to do this if your companies are all separate, unrelated businesses.
Protecting business assets
Under a group structure, you can transfer assets (e.g. property, cash, etc) from subsidiaries to the holding company, to protect them from trading risk. For example, if one of the subsidiaries is sued or becomes insolvent, the assets held by the holding company are protected from any claims made against that subsidiary.
Improving reputation
If one of your existing companies is more established, has a strong reputation, or enjoys greater success than your other companies, their association with one another under a group structure could have a positive impact on your newer or less profitable companies.
Minimising risk
A holding company enables you to explore riskier business strategies and opportunities through your subsidiaries, without putting your business assets at risk from their trading activities.
Finance opportunities
With a group structure, you can simplify certain transactions and finance opportunities. For example, bringing in new investors or taking out business loans. If the corporate group has financial strength, it may also be easier to obtain business loans at more favourable rates than you could through a single smaller company.
Tax-free transfer of assets
You can transfer business assets, including property, between companies in a group without any immediate tax consequences.
Substantial shareholding exemption (SSE)
If certain conditions are met, a holding company enjoys exemption from Corporation Tax on any qualifying gain arising from the sale of shares in a subsidiary (or the sale of the entire subsidiary). This is known as the substantial shareholding exemption.
Centralised PAYE and dividend distribution
Rather than running separate payrolls for each of your companies, you can pay your own director’s salary and dividends, as well as any employees’ wages, through the holding company instead. This will simplify your payroll administration and PAYE requirements.
Succession planning
A group structure provides greater options for succession planning, such as passing on the trading subsidiaries to your children, whilst retaining business assets yourself through the holding company.
Disadvantages of a holding company
There are, of course, certain disadvantages to setting up a holding company and running a group structure.
Additional administration
You will have additional administrative duties for the holding company because you will need to maintain another set of statutory company registers, file annual confirmation statements, and prepare a Company Tax Return each year.
More complex accounting
Unless exempt under The Small Companies and Groups Regulations 2008, you will also have to prepare group accounts as well as individual accounts.
- What are the filing requirements of a limited company?
- A guide to annual accounts
- Do I need to file a Company Tax Return?
Your accounting requirements in general will be more complex, especially if you move money and assets between your companies. However, these potential drawbacks won’t cause any issues if you keep accurate records and use an accountant who has experience dealing with group structures.
Overly complex
Ownership of holding companies and subsidiaries can also be legally complex where multiple shareholders are involved. Taking independent legal advice is crucial under such circumstances.
However, if you plan to own and control your holding company and subsidiaries as a sole shareholder and director, it will be much more straightforward.
Thanks for reading
Deciding whether to keep your companies separate, or bring them together in a group structure, is a big decision. Whilst a holding company can be used to protect business assets and improve tax efficiency, it is not appropriate for everyone.
For many small company owners, it may overcomplicate matters and bring additional costs for very little benefit. Unless there are clear advantages to setting up a holding company, it makes more commercial sense to keep your companies as standalone, unrelated business entities.
Whatever your circumstances and long-term goals for your companies, it is important to speak to an experienced accountant for professional advice and guidance.
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