Group structures: Protecting business assets and more

The conditions of the pandemic caused us all to take stock of our circumstances, and consider how we could better protect our businesses and primary assets.

The protection of core assets can make or break the success of a business in the long term, and holding them all within one company’s balance sheet leaves them vulnerable to significant commercial risk. The pandemic has given us all some first-hand experience regarding the difficulties of navigating unforeseen challenges, but even taking carefully considered risks, such as launching into a new venture, can leave your current assets exposed.

A common solution business owners use to protect their business assets is the creation of a group structure with a holding company at the helm. There are multiple advantages to doing this, so let’s dive in.

What is a group structure?

A group structure is a term used to describe a business structure in which one limited company owns at least one other limited company subsidiary. The company at the top of the group structure is then known as the ‘holding company.’ Holding companies can have many subsidiaries (other companies) beneath them that it effectively controls.

There are various reasons why businesses create group structures. Primarily, group structures are put in place to ‘ringfence’ (isolate) assets within the holding company that they most want to protect. When assets are primarily held in the holding company at the top of the group structure, they are protected from many commercial risks, as the majority of operational activities related to the holding company are kept to a minimum and largely carried out via subsidiaries lower down in the group.

Types of group company structures

There are three primary types of group company structures, each with its own key advantages and drawbacks. The three main types are:

Holding company structure

Of all the types of company group structures, the holding company structure is the most commonly used. In this structure, the holding company (or parent company) owns all (or at least the majority) of shares in the lower subsidiary companies.

The primary advantage of this group structure is that it allows for the holding company to maintain complete control over all subsidiaries. One of the main disadvantages is that it can be harder to raise capital, as many investors are reluctant to back companies that are not publicly traded.

Related: A guide to crowdfunding and the best crowdfunding sites

Management structure

Another common type of group structure is the management company structure. In this structure, the parent company does not actually own any shares in the subsidiary companies, only managing their operations and providing them with financial support as needed.

The key advantage of the management structure is that it makes it easier for the parent company to raise capital, although not having complete control over the subsidiaries has its drawbacks.

Joint venture structure

In a joint venture structure, parent companies come together to form a new entity, allowing for the pooling of resources and spreading (and thus minimising) risk. Joint venture group structures are common in the insurance, banking, and property industries.

Benefits of a group structure

There are many benefits to organising your business into a group structure, including:

Protection of assets

One of the primary advantages of group structures is the sheltering of business assets for optimal protection. Without group structuring, a business’s assets are vulnerable to commercial risks, yet many of these assets can be well protected with the right strategy.

Some of the assets that businesses can place with a holding company include capital and property, while equipment such as vehicle fleets or machinery is best held within the separate subsidiaries. It is imperative to correctly structure the group and each business’s assets to optimise the protection available and shield the holding company from suffering any significant commercial risk.

Protecting property is a prime example of the benefits of group structuring, as it is often one of the largest assets a business will hold. If you buy a commercial property to operate your business from, and you purchase it through the company you trade through, it’s vital to consider group structuring to protect it. So long as the existing business retains sufficient reserves, the property asset can be moved up to a holding company within a group structure. There are multiple benefits to doing this, including freeing up the trading company’s balance sheet. Still, it’s imperative that any business considering this move consults with their accountant first. Correct structuring is vital to ensure that the asset is well protected from the risk of being fair game to creditors should the business find itself facing liquidation.

Regulatory benefits

By assigning different assets and an assortment of business activities across multiple subsidiaries, certain administrative and regulatory items can be extended and effectively minimised across the structure.

For example, some regulatory authorisations can be extended across a group structure to reflect that there is a common control interest throughout. In this instance, the group effectively forms one consolidated group from an economic perspective.

Centralised assets and functions

Another common use of a group structure is to create a central holding point when it comes to particular assets and business functions.

For example, in the case of a business operating across multiple sites, forming a group structure can allow for all property assets to be held by the holding company, which can then lease the properties to the subsidiaries as required.

This can also be done with Intellectual Property (IP) as opposed to physical property. In cases where a business utilises a particular IP across a range of products or markets, a holding company can be designated to ‘own’ the IP, and then grant IP licences as necessary to the group’s subsidiaries.

Structuring IP in this way allows a business to start and cease trading particular products or lines with relative ease, as the disposal of a subsidiary that only holds the right to use the IP as opposed to owning it outright makes for a far easier transaction.

Tax advantages

Depending on the particular structure utilised, there are several potential tax advantages to setting up a holding company or otherwise establishing a group structure.

In addition to protecting assets, group structures can save a business tax liabilities by enabling it to offset any losses suffered in one subsidiary company against profits made from another in the group.

Additionally, when moving property or other assets, such as plant and machinery, around in the group (from one company to another), there are no tax liabilities or stamp duty fees to contend with.

Pooling resources

The ability to pool resources across multiple subsidiary companies is a considerable benefit. By enabling a holding company to draw on its subsidiary’s human and financial resources, greater efficiencies can be established, potentially leading to economies of scale and the opportunity for more growth.

Separating income streams

By holding income-producing assets outside of the group, additional income streams and tax breaks can be created.

For example, in the case of a business holding a commercial trading property outside of the group (such as among shareholders or pension funds), an income stream of property rent can be enjoyed by whichever entity holds the property. Meanwhile, the particular business that pays rent on the property will be able to claim a deduction on their corporation tax on the expense.

Business advantages

Once you have created a holding company structure, it is easier for you to add new subsidiary businesses to the group at any time. Once the structure is in place and your business continues to grow as planned, adding additional arms can be done by creating new limited companies within the group structure. This also means that bringing in investors and other shareholders can be easier, as their interests can be apportioned only to the new venture and not the entire group structure.

Related: What are statutory accounts? A short guide

What are the disadvantages of a group structure?

Group structures provide a range of high-value advantages, but that doesn’t make them the right choice for every business. There are some disadvantages that must be considered before setting up a group structure, including:

Additional accountancy fees

For each subsidiary and holding/parent company, there will be a separate set of accounts to manage, and a subsequent corporation tax return to complete for each.

Disposal issues

In the event that you want to dispose of one subsidiary, there may be tax issues and other considerations that need to be addressed. In some ways, group structures can make it easier to dispose of one subsidiary or another, but it all depends on how well the group has been structured. Be sure to consider your exit planning when considering group structuring.

Extra admin

In addition to paying for an accountant to manage separate accounts, in the majority of cases, it will be necessary to keep separate records for each subsidiary. This additional administration will inevitably increase the more subsidiaries are added. Still, there are systems that you can establish to significantly simplify and streamline your administration and record-keeping.

Get in touch if you need help with group structures

Group structures and holding companies might not be the best solution for every business, but there is a range of significant advantages that make them well worth seriously considering. Any strategy that can help you to protect your hard-earned assets has to be investigated as part of mitigating the risks of running a business or businesses.

For more advice on group structures and holding companies, get in touch with one of our accountants or solicitors on 0207 043 4000 or  info@accountsandlegal.co.uk.