Buying a Business through a Holding Company

A holding company is essentially a parent company that does not directly engage in business operations but instead holds the controlling stock or assets of other companies. Therefore, they do not produce any goods or services themselves, and often their main purpose is to deal with the assets (such as shares, intellectual property or real estate) of subsidiary trading companies. If you are considering buying a business through a holding company, it is important to understand that the holding company owns either the shares of the company or the assets of the business.

As with many business decisions, it is crucial to first understand the potential consequences, benefits and drawbacks of the option being considered before making the decision.

To help you along the way, we have produced a list of some of the advantages and disadvantages of buying a business through a holding company for you to consider.

• Purchasing a business through a holding company can provide financial, legal, and operational advantages that make it a strategic choice for many investors. The holding company and its subsidiaries will be separate legal entities from you, and therefore, your personal assets will be separate from the liabilities of the company. This means that you will not be personally liable for the liabilities, debts or financial obligations of the companies, and so your wealth will be safeguarded should the business face any legal or financial difficulties.
• Holding companies also make it easier to manage multiple businesses because rather than hold the shares directly in each company. You hold the shares in the holding company, which in turn owns the various businesses.
• If structured correctly and with prior approval from HMRC, there can also be tax benefits from purchasing a business through a holding company.  This is because you can defer and control the timing of income distribution, can retain earnings and can reinvest profits within the holding company without immediate personal tax liability.
• Along with the tax benefits, there is also added assets and liability protection. By separating assets into a holding company, they are protected from operational risks that may be associated with the business, essentially protecting the assets from creditors should the operating business go into administration or bankruptcy, provided the proper corporate structures and legal separations are in place.
• Financing options can also be an advantage, as this structure allows you to retain earnings from other subsidiaries to fund acquisitions without personal guarantees (subject to the terms of the financing). As the subsidiary companies are separate, you also have the opportunity to try out riskier investment opportunities, whilst protecting other parts of the company. This gives you more flexibility and opportunities for growth and development of the overall company.

Alongside the various advantages, there are also some disadvantages to be aware of if you are planning to buy a business through a holding company.

• Firstly, it can be complicated and costly! This structure often requires a higher initial set up cost and there are more complex legal and tax compliances, so it is important to have a legal expert by your side.
• Although there is an advantage to tax deferral, it’s also important to bear in mind that personal income withdrawals could potentially be taxed at a higher rate. Furthermore, Governments may impose anti-avoidance rules (such as controlled foreign corporation rules or personal services corporation rules) to prevent tax abuse by holding companies.
• If the business you are buying were to require a loan, some lenders may be hesitant to offer loans to an operating business owned by a holding company, as they may prefer a direct personal or asset-backed guarantee.

Some other factors you should be aware of include:

• Legal structure – an optimal structure for tax efficiency and liability protection is essential
• Agreements – establishing clear agreements between the holding company and the acquired business that define ownership stakes, governance, and decision-making processes
• Debts – will the holding company take on any debt to acquire the business or use its own capital?
• Loans – if structuring and intercompany loans are needed, are you prepared to place personal guarantees that may be required by lenders?
• Due Diligence – financial health checks are always a good way to establish the business targets, financial position, debts and tax filings. It is also a beneficial way to weigh up legal liabilities and operational risks
• Exit strategy – you should always plan for a way out. This could be through selling the subsidiary rather than the holding company as buyers may prefer to acquire the operating business alone.
• Succession – if buying a business through a holding company is part of a long-term investment, planning for succession and how ownership will be passed on is crucial.
• Asset protection – avoid mixing personal assets with business assets. Keeping the holding company as a separate legal entity helps ensure that intellectual property and other key assets remain protected from business liabilities.

Using a holding company to buy a business can be a powerful tool for tax efficiency, asset protection and long-term growth, but it requires careful planning. Our Corporate and Commercial Law team are experts and are here to help you through the process and ensure the right legal protections are in place, preparing you for a successful business purchase!

Contact the team to book your FREE 30-minute consultation to discuss your options in more detail.

This article is for informational purposes only and does not constitute legal advice. Individuals should not act upon the information contained in this article without first seeking professional legal and financial (tax) advice.

Tel:          01245 893400
Email:     info@backhouse-solicitors.co.uk
Visit:       17 Duke Street, Chelmsford, CM1 1JU
Or send us a message through the Contact Us page on this website.