Today, many companies are seeking to optimise their corporate structure and maximise their competitive advantages through the creation of a Holding Company. This organisational model offers a number of benefits and strategic opportunities that can drive growth and protect business assets.
In this article I explain the meaning of a Holding Company, the fundamentals and best practices for its creation and also a useful and practical guide for businessmen and entrepreneurs who wish to expand their reach and consolidate their business under a solid legal structure.
What is a holding company?
A holding company is a corporate structure in which one company (called a parent or holding company) owns shares or interests in other companies (called subsidiaries). The parent company has majority control over the subsidiaries and exercises influence over their strategic and operational decisions.
The main objective of a holding company is to centralise the management and control of the different companies that comprise it, thus creating synergies, optimising resources and diversifying risks.
Reasons to set up a holding company
These corporate structures have several advantages and allow for various possibilities for their members, especially if these objectives are pursued:
In case you want to sell a business
Creating a holding company can be beneficial if you plan to sell your business in the future. By creating a holding structure, you can separate the assets and liabilities of the company you wish to sell from other parts of your business.
This facilitates the transaction, as buyers can acquire only the assets related to the business being sold, without being affected by other aspects of the company.
To reduce the tax burden
By having several subsidiaries under a single holding company, it is possible to carry out efficient tax planning and take advantage of tax benefits available in different jurisdictions. This may include reducing taxes on dividends, applying more favourable tax regimes or optimising the taxation of capital gains.
In order to enhance the reputation of the company
The creation of a holding company can help to enhance your company’s reputation and image. By having several subsidiaries under a centralised structure, you can demonstrate strength and diversification, which is attractive to business partners, investors and potential customers. In addition, a well-managed holding company with a solid reputation can build trust in the market and strengthen business relationships.
In companies with cash surpluses
If your company has cash surpluses or surplus cash, creating a holding company can be an effective strategy. You can use these funds to acquire stakes in other companies and diversify your investments. In addition, by having different subsidiaries, you can use the surpluses of one to fund the growth and operations of other subsidiaries, thus maximising the return on your financial resources.
Expanding into international markets
The creation of holding companies can make the process much easier when a company decides to expand into international markets. In this case, you can establish subsidiaries in different countries, adapting to local regulations and standards. By having a holding company structure, you can centralise the management and control of your international operations, providing greater efficiency and consistency in your business activities abroad.
Steps to create a holding company
Each case has its differences and particularities and ideally an expert legal and financial advisor should guide the whole process. However, the general steps that should be taken in all cases are as follows:
Research and planning
The first step in setting up a holding company is to conduct thorough research and carefully plan all decisions. You should analyse the market, identify opportunities and risks, and define the objectives and strategy of your holding company. In addition, it is important to assess financial viability and consider the most relevant legal and tax issues.
Choosing the legal structure
Once you have done your research and planning, you need to choose the most appropriate legal structure for your holding company. This involves determining whether it will be a public limited company, a limited liability company or another legal form, depending on the regulations of the country where it will be established. You should also consider aspects such as corporate governance and ownership structure.
Registration and incorporation of the holding company
The next step is to register and legally incorporate your holding company. This involves submitting the necessary documentation to the relevant authorities and complying with the legal requirements. You must obtain the relevant permits and licences, draft the articles of association and complete the administrative formalities to formalise the legal existence of the holding company.
Financing and capitalisation
The creation of a holding company may require start-up financing and capitalisation. You should assess the financial needs of the holding company and consider options such as investors, bank loans, equity issuance or other sources of capital. It is important to have a sound financial plan and ensure that you have the necessary resources to support the operations and growth of the holding company.
What are the advantages of establishing a holding company?
As I have already mentioned, holding companies offer many benefits, the most important being:
Offsetting financial losses
One of the advantages of establishing a corporate group is the possibility of offsetting the financial losses of one company against the profits made by another company within the same group. This makes it possible to reduce the negative impact of losses on the overall result of the group and to optimise the financial situation.
Inheritance and gift tax reductions
Another advantage is the possibility of accessing tax reductions on inheritance and gift tax. Being constituted as a group, certain tax benefits related to the transfer of shares or participations between group companies can be applied, which can facilitate succession planning and the transfer of assets from one generation to the next.
Corporate tax benefits
The establishment of a corporate group may provide corporate tax benefits. For example, in some countries, special tax regimes exist for groups of companies that allow for the consolidation of results and the application of certain tax deductions or incentives that would not be available to individual companies. This may contribute to a reduction in the overall tax burden of the group.
Wealth tax reliefs
By operating as a corporate group, it is possible to obtain decreases in wealth tax. By consolidating the assets and liabilities of the group, it is possible to optimise the asset structure and, in some cases, benefit from exemptions or reductions in wealth tax that would not be available to individual companies.
Economy of scale benefits
The establishment of a holding company can also provide economy of scale benefits. By having several companies under the same structure, it is possible to share resources, take advantage of synergies and reduce operating costs. This can translate into greater efficiency, better purchasing conditions, greater bargaining power with suppliers and a competitive advantage in the marketplace.
Potential pitfalls of setting up a holding company
All business decisions should be considered carefully and with the help of a professional to advise and facilitate the whole process. In this sense, creating a holding company can also have some disadvantages:
Administrative and legal complexity
The creation of a holding company may involve greater administrative and legal complexity. It is necessary to comply with registration requirements, maintain a proper organisational structure and ensure compliance with all applicable regulations. In addition, managing multiple subsidiaries may require a greater commitment of time and resources.
High start-up and maintenance costs
Establishing and maintaining a holding company can involve significant start-up and ongoing costs. This may include legal, accounting, administrative and consultancy costs to establish and maintain the holding company structure, as well as the costs of operating the subsidiary companies. It is important to conduct a thorough financial analysis to assess the economic viability of setting up the holding company.
Increased liability and legal obligations
By setting up a holding company, those responsible for the holding company assume increased liability and legal obligations. This includes supervising subsidiary companies, ensuring regulatory compliance, looking after the interests of shareholders and making strategic decisions. An appropriate corporate governance structure and legal advice are essential to fulfil these responsibilities.
Difficulty in managing and co-ordinating subsidiaries
Managing and coordinating subsidiary companies within a holding company can be challenging. Each company may have its own needs and objectives, requiring careful planning and coordination to ensure efficient and consistent operation across the group. It is essential to establish clear communication channels and define appropriate roles and responsibilities.
Potential conflicts of interest between group companies
In a holding company, conflicts of interest may arise between the different companies that make up the holding company. This may be due to direct competition in the same market, differences in strategic objectives or discrepancies in resource allocation. Effective conflict resolution policies and mechanisms should be put in place to address these situations and to preserve harmony and collaboration within the group.
Increased exposure to financial and legal risks
Creating a holding company may involve increased exposure to financial and legal risks. By operating in multiple sectors or markets, the group may be exposed to adverse economic conditions, regulatory changes and legal disputes. Proper risk management and a sound financial structure are essential to mitigate these risks and protect the interests of the holding company and its subsidiaries.
Types of Holding Companies that exist
Financial holding company
A financial holding company focuses on the management and control of financial entities, such as banks, insurance companies or investment institutions. Its main objective is to coordinate and supervise the financial activities of subsidiary companies, optimise the management of financial resources and provide specialised financial services.
Industrial holding company
An industrial holding company focuses on the management of companies involved in the production, manufacture or distribution of goods and services. Through the holding company, the aim is to obtain operational synergies, share resources, technology and knowledge, as well as diversify business risk. It can cover different industrial sectors such as manufacturing, construction, energy, etc.
Mixed holding company
A mixed holding company combines characteristics of financial and industrial holding companies. This type of holding company owns both companies related to financial and industrial activities. The objective is to take advantage of synergies between the different sectors and to generate a diversified business approach to maximise results and operational efficiency.
Investment holding company
An investment holding company is dedicated to acquiring stakes in other companies with the primary purpose of earning returns through the purchase and sale of shares. Its objective is to manage a diversified and profitable investment portfolio, taking advantage of opportunities in different sectors and markets.
Control holding company
A control holding company aims to exercise full or majority control over subsidiary companies. This involves owning a majority shareholding or having the ability to make key strategic decisions affecting the group companies. The controlling holding company seeks to consolidate decision-making power and coordinate the activities of the subsidiary companies.
Operating holding company
An operational holding company focuses on the management and control of the day-to-day operations of subsidiary companies. Its main focus is to optimise operational efficiency, coordinate business activities, share resources and know-how and exploit synergies in terms of production, logistics and distribution.
Holding company
A holding company is dedicated to the management and control of assets, such as property, real estate or financial investments. Its objective is to safeguard and manage family or business wealth through the ownership and control of companies and related assets.
International holding company
An international holding company operates in different countries and has subsidiary companies in multiple jurisdictions. It aims to take advantage of global business opportunities, diversify geographical risks and access international markets. It requires a thorough understanding of the regulations and business practices of each country in which it operates.
Conclusions
Ultimately, the creation of a holding company can provide numerous benefits, such as tax optimisation, asset protection, reputation enhancement and a boost to international expansion. However, it is essential to have the right legal advice to structure and establish the holding company effectively. If you are interested in setting up a holding company or need legal advice in this area, do not hesitate to contact lawyer Ignacio García Taboada. Fill in the contact form below and start the process today to empower your company with a solid and successful holding company.
