Introduction
It is important to understand how to set up a holding company if you are interested in creating a corporate group or diversifying your portfolio across different companies. To help you out, we’re going to go through three things you should look at when setting up a holding company in Australia. This includes considerations relating to company structuring, shareholders, and assets. Then, we’ll sum it all up for you at the end.
Company structure
The first thing to do when you want to set up a holding company is to consider the company structure. To do this, you need to understand how a holding company is different from a regular company. You also need to consider the legal implications of setting up a holding company.
Holding company v subsidiary company
Firstly, a holding company doesn’t really engage in the operational work of a business. Rather, it tends to have a managerial role over another company which does engage in business. These other companies are called subsidiaries or subsidiary companies. Therefore, in terms of structuring, you’ll want to keep this dynamic in mind. It is really beneficial for establishing centralised control over a group of companies engaging in a variety of activities. However, as a consequence, you’ll also want directors who can effectively oversee subsidiaries. You’ll also want to consider how you can take advantage of this dynamic to minimise tax. You’ll also want to consider how you set up the subsidiary company or companies (see ‘Company shareholders‘ below). This includes figuring out what functions you distribute to the holding company and to the subsidiaries.
Legal implications of a holding company
Once you consider the dynamic between a holding and subsidiary company, you’ll also want to think about the legal benefits and consequences involved. In terms of benefits, you should keep in mind that companies are considered to have their own ‘legal personality’. This basically means that you can separate the liabilities of one company from the liabilities of another. This is really beneficial for reducing risk in business ventures through holding and subsidiary company relationships. At the same time, you should note that a holding company still has to have a valid ABN and ACN. Moreover, sometimes holding companies will also have holding companies. In this case, you should consider who the top holding company overseeing all other subsidiary/holding companies is. This company is called the ‘ultimate holding company’. ASIC requires you to declare them in subsidiary company registrations.
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Company shareholders
In terms of structuring factors to consider if you set up a holding company, the key ones are the share distribution and structure. This is because a holding company can only manage subsidiaries if it has enough shares in them to retain control. Specifically, s 46 of the Corporations Act 2001 (Cth) states that one way a company will be a subsidiary of another body is if the other body owns more than half of the company’s issued share capital. Basically, this means that the holding company will be a majority shareholder/member of its subsidiary company or companies. ASIC requires you to declare shareholders upon registration, and any subsequent changes. This structure is really beneficial in ensuring that a subsidiary company can continue to operate even when key people leave. This is because the highest authority of management of the company’s activities is partially distributed to the holding company.
Company assets
Finally, it’s important to remember that a holding company can do more than just own stock in its subsidiaries. As part of its separate ‘legal personality’ (see ‘Company structure’ above), it can actually own property like any other person. Therefore, a common feature of holding companies is that they hold the key assets of their subsidiaries. A holding company can hold things like intellectual property, real property, and even operational equipment.
Furthermore, a holding company can even deal with this property, including performing investment and management functions. This allows subsidiaries to focus on bringing in new assets, while allowing the holding company to maximise the benefits from and maintain existing assets. It also reduces the exposure of assets to risk in the case that a subsidiary becomes insolvent.
Conclusion
In conclusion, there are three important things to consider in setting up a holding company. Firstly, you’ll want to consider the legal implications of the holding and subsidiary company dynamic. Secondly, you’ll want to look closely at your share structure and distribution for the subsidiary companies. Thirdly, you should consider the asset management function which a holding company can have. These are just some of the key things to do when setting up a holding company. For further assistance, we recommend getting in touch with a lawyer to guide you through the process in more detail.
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