Company constitutions in many ways represent the company rulebook. They set out how the company…
An Australian Holding Company: What are the Advantages?
Creating a holding company in Australia delivers a range of advantages. In this article Fullstack will examine the benefits of Australian holding companies.
There are many different ways to structure a company in Australia. If you’re currently assessing company structure options, you may have considered setting up an Australian holding company. Before setting up a holding company in Australia, however, it’s best to understand how they work and the benefits they deliver.
Establishing a holding company in Australia can provide a series of advantages depending on the size of your company, including risk minimisation, centralised corporate control, and flexible growth structures.
What is a Holding Company?
A holding company is a company created with the specific purpose of purchasing and holding shares in other companies. In most cases these companies are subsidiaries of the holding company itself. Rather than actually provide services to customers or create and sell products, holding companies own the assets that are used by subsidiary companies.
Many business owners choose to set up holding companies in order to structure their business. Creating subsidiary companies and a holding company can compartmentalise business structures and provide risk protection benefits. Growing businesses or businesses in the process of scaling often set up holding companies to streamline operations.
7 Key Benefits of a Holding Company in Australia
We’ll proceed to break down the 7 key benefits of setting up an Australian holding company:
1. Safeguard Assets
Holding companies can be used to hold and protect the assets of any business. These entities are able to hold property, intellectual property, and equipment. Valuable assets held by a holding company are protected from liabilities that subsidiary companies may incur, such as creditors. Subsidiary companies handle day-to-day operation and trading responsibilities autonomously.
2. Minimize Risk
Australian holding companies generally can’t be legally pursued for the responsibility of subsidiary companies. These entities often hold valuable assets for a subsidiary company as a separate entity — this significantly reduces the risk of asset loss in the case that a subsidiary company becomes insolvent or performs poorly.
It’s important to note that if a subsidiary company become insolvent, it’s likely that the holding company will suffer financial losses. In some circumstances it’s possible that a holding company can be found liable for poor subsidiary company performance it if can be determined that directors were aware of performance issues.
3. Reduce Tax
Setting up a holding company can potentially minimize the amount of tax that the holding company and subsidiary companies pay collectively. These entities for example, can be specifically structured as part of a tax effective strategy. It’s also possible to establish these entities in a country that offers lower tax rates.
New tax laws introduced in 2016 limit the total amount of tax that can be saved due to moving holding companies to international jurisdictions.
4. Centralize Company Control
The subsidiary companies for which a holding company holds assets are typically managed by the directors of the holding company itself. This allows company directors to centralize the management structure that governs their business and can assist with overall business performance.
Establishing an Australian holding company can potentially provide subsidiary companies with favorable financing terms when compared to standalone companies. It’s also possible for holding company directors to follow debt-structuring practices that benefit subsidiary companies.
5. Centralize Assets
An Australian holding company is the centralized holder of all assets within a group. This allows holding companies to manage these assets in a cohesive manner that benefits the group collectively, minimizing the amount of time subsidiary companies must invest in asset management.
6. Growth and Development Flexibility
Centralizing the management of group assets allows the directors of an Australian holding company to diversify in a more efficient manner. By holding valuable assets in a holding company, operating companies are able to invest in new ventures and exit ventures without risk to group assets.
7. Business Continuity
Establishing an Australian holding company presents succession planning benefits — a holding company with a board of directors allows groups of businesses to adapt to the loss or retirement of key people.
Setting up a holding company can reduce the total amount of tax a group of companies must pay, as well as delivering greater control over group assets. If you’re considering setting up this in your corporate structure, get in touch with Fullstack today.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.