12 May What is a Group Company structure
A group company structure may often be useful for a business with multiple income streams.
Should you keep all those income streams within one company or split the different streams into a different structure?
When you start a business you may set out with one product or service income. As time goes on, you may find that you expand into different areas and you may find yourself offering a number of different products or services.
Firstly, you can do nothing and keep all the income streams within one company. Alternatively, you can consider splitting all of your trades into a group structure.
A group company structure is a business model in which a parent company (often referred to as a holding company) with you as the shareholder owning the shares in the parent company.
The parent company then has subsidiary companies underneath it, with each subsidiary having it’s own trade. A holding company does not produce any goods or services by itself. Its main purpose is to own shares of other companies to form a corporate group.
Each subsidiary is a separate legal entity, often with its own separate management and operations teams, but they are ultimately owned and controlled by the parent company.
What are the benefits of a group structure?
- Minimise risk
This is the most important reason for considering a group structure.
The greatest risk with running any company is insolvency. A group structure minimises risk in that it is not obliged to pay for any of its subsidiaries liabilities, providing that it has not given it any corporate guarantees.
The parent company protects the assets of the entire group. A single company with multiple trades has all its assets and business exposed if there are any issues in any part of the business. The group company structure allows better asset management, better distribution of assets and efficient sale of assets. It also helps with loans, borrowings and business growth. The idea is the main ownership of assets and rights sits in the parent company.
If one trade is not performing well, or if something goes wrong with one of the trades and an insolvency claim is raised, the claim would be against that one company. The rest of the business is protected so you can continue without worry. Keeping trades separate ensures that the other trades are protected from business risks such as litigation, financial difficulties or insolvency of operating companies in the group.
With a group structure, you can transfer any excess cash from the subsidiaries to the parent company. You can then choose if you want to use that cash for investment or transfer it to yourself personally, obviously tax will become payable if transferring to yourself.
- Asset Safeguarding
You can keep property and large value assets in the parent company, away from the subsidiaries. This is useful in the event of an insolvency claim as you do not want to risk losing title to your business premises as a result of a large claim.
Other benefits include:
Reputation – a group structure allows a new venture to build its own brand and reputation away from the other trades.
Reporting – if everything is recorded in one business it can be difficult to show exactly how each trade is performing,
Investment – it’s easier to raise capital for one specific trade. With all trades within one company, it is difficult to reliably assure investors that the funds are not being used for other trades. A group company structure can enable better access to finance. A lender might look more favourably upon a larger, more diversified business with a strong record of performance.
Sale – if you have one trade that is performing very well which you are considering selling in the future, it is far easier to sell a trade if it is within its own company.
Tax – a group structure is considered as a whole for tax purposes. If one company is generating a loss, that loss can be offset against another company’s profits.
VAT – you coul;d end up with multiple VAT registrations but you can look into a group registration. This all depends on the VAT status of your trades.
Administration & compliance – the more companies you have, the more compliance is needed. Each company is required to file annual accounts with Companies House and a corporation tax return to HMRC. Each company will also be required to file a confirmation statement each year too. The more companies you have, the higher the accountancy fees will be.
Software subscriptions – due to multiple accounting records being required, each company will require its own accounting software subscription to a product such as Xero.
It’s always advisable to set up your group company structure at the earliest opportunity. However, if you decide that you wish to separate your existing trades and create a group at a later date, this is perfectly manageable, although there will be some professional legal fees involved due to an application process known as a “de-merger”.
Group companies are required to make QIPS (quarterly instalment payments) relating to your corporation tax liabilities, compared to a single company which would usually pay it’s corporation tax liability nine months and a day after the end of the financial year.
This means that the subsidiaries may have to prepay it’s corporation tax upfront in quarterly staged payments. This can be determinantal to cashflow.
Future planning is key so think about your business plans for the future. Setting up a group structure isn’t appropriate for every company. However, there are some circumstances where it makes strong commercial sense to have a group structure in place.
Consider the increased costs of compliance as well as the initial set up costs. There is a lot to manage and consider when setting up a group company structure. They can be complex and may involve multiple legal entities. For this reason, we suggest seeking professional assistance from a qualified tax advisor and legal expert to ensure the group structure is legally compliant and optimised for your business objectives.