Surf

"The more I practice, the luckier I getGary Player"

Why bother with a holding company?

For business owners, how might a holding company protect your business?

What is a holding company?  

A holding company usually owns all of the shares in its subsidiary companies but it may own just a majority of those shares.

The holding company may also hold certain assets to preserves these assets, in the event the trading subsidiary has financial issues, unless there is other security over them.

Protecting business assets

If a trading company goes into liquidation, it forfeits all of its assets to pay creditors.

These assets can include things like freehold property, the domain name, the website, intellectual property, key hardware/software and physical assets such as tools, equipment, machinery, stock etc.  

You can protect assets against the trading company going into liquidation by firmly locating ownership of such items in a holding company, which then licences the trading subsidiary to use them or hires them out.  

Such an arrangement should be in writing and obviously would terminate automatically in the event the subsidiary went bust, thus preserving ownership for future use.

High risk customers

A company has been trading for years with steady but reliable customers but then you are tempted by a high risk, highly profitable contact.  Usually just before completion of the major contract, the customer goes bust owing you a large sum, often because their principal stops paying.  There are some large companies which make a habit of this kind of behaviour.

From my own experience, both in a former career and with a number of clients, I know these tempting profitable but high-risk contracts are hard to refuse.

However, if you have one company to carry out your day to day work, which has a very low bad-debt risk customer-base, and a separate company for the high-risk customers, you can keep the two separate.  This means that the high-risk contracts are ring-fenced leaving your day to day work safe.

There is no doubt that you may feel the ramifications of such a major loss in other parts of your corporate structure but at least you can isolate things like sub-contractors’ costs and tax liabilities and your main company survives!

Banks and other lenders

The downside of using funds provided by lenders is that the clever devils want complete security before they lend you money.

However, if you can exercise the discipline to isolate your trading company from the holding company or other companies and just provide security to your lender from that isolated trading company, then well done!  You are a good negotiator and you have protected your assets.  As they say, if you don’t try, you don’t get.

Employees

Generally, if your trading company goes bust but you transfer the business to another company, all the employees will follow that business interest, with all their employment rights protected by TUPE.

However, if you decide not to carry on that business, then you do not have to carry forward the employees.  Usually the holding company would not bear any liability.

The employees’ rights are governed by normal insolvency rules, with the ability to recover their outstanding salary, notice pay, holiday pay and statutory redundancy pay from the Government’s Redundancy Payment Service, if claimed within six months of the employer going into insolvency.  These payments even cover sums claimed by an MD who is wholly employed by that company and owns a majority of the shares in it!

HMRC

Normally, unless there has been fraud, sums owed to HMRC such as VAT, NIC or PAYE remain with a limited company which has gone into liquidation.

This is less likely to occur, with real time payment obligations and digital tax payments.  In additional, there is a clear penalty interest charge on unpaid tax.

However, if you are buying the shares in another company, I believe there is also a clear tax advantage in buying as a holding company, in which individuals own shares.  You should consider taking advice from your accountant.  

Conclusion

Although you may roll your eyes at extra cost, this structure comes into its own when you run into the brick wall of a major customer going into insolvency or you find your trading subsidiary over-stretched due to the actions of others, despite your best intentions.

You can create this structure at any time, within reason, and it just makes sense to protect and preserve the “family silver” using this simple, well-recognised and respected structure.

If you would like to discuss this option, please call Malcolm Scott Walby on 01202 888300 or email him.


Article Date: 17/09/2019

< Previous   Return to News List    Next >