What is a holding company
A holding company is a specialised business entity designed primarily to own and manage other companies. In Australia, these entities are commonly utilised for purposes like safeguarding assets, optimising tax structures, and efficiently overseeing a group of businesses under a unified umbrella.
Structure and operations of a holding company
A holding company differs from an operating company, which directly produces goods or services.
Instead, a holding company owns a controlling interest in one or more subsidiary companies, holding their assets and overseeing operations. The subsidiaries, being distinct legal entities, maintain their own assets, liabilities, and legal obligations.
The structure of a holding company can take various forms, such as private companies, public companies, or trusts, tailored to meet the goals of the holding company and the preferences of its owners.
Advantages of holding companies
- Asset protection: Holding companies serve as a shield, separating the assets of each subsidiary into distinct legal entities. This limits the liability of the holding company, safeguarding its assets from potential seizure to settle the debts of subsidiaries.
- Tax planning: Holding companies provide a strategic approach to managing tax liabilities. By consolidating tax losses and capitalising on tax concessions, such as small business CGT concessions, these entities can optimise tax structures and minimise the tax burden on subsidiary sales.
- Simplified management: Consolidating administrative functions and minimising duplication, holding companies streamline operations. This shared-resource approach reduces overheads, simplifies management, and enhances overall operational efficiency.
- Access to capital: Holding companies facilitate easier access to capital compared to individual companies. By issuing shares in the holding company, funds can be raised for expansion, acquisitions, or other investments, providing financial flexibility.
Distinguishing between holding and operating companies
In a dual-company structure, operating companies handle day-to-day business management, while holding companies own assets without participating in operational decisions. The holding company provides an added layer of protection, especially in scenarios like bankruptcy, as creditors cannot pursue assets held by the holding company.