If you thought the formation of a corporate group structure was just for big multinationals, it’s time to think again, suggests GRAHAME MAUGHAN It’s a serious option for much smaller businesses too.
When a limited company has built up a significant amount of wealth on its balance sheet – perhaps three quarters of a million pounds or more – and it has a large value of fixed assets, the option of creating a holding company becomes something worth exploring.
Although the formation of a ‘group’ is something you’d more normally associate with large, blue-chip corporations, there’s certainly no reason in principle why smaller companies can’t take advantage of the structure too.
When you create a holding company, you can move spare cash and fixed assets into it from your trading company. The holding business can then rent the fixed assets back to the original company, buying any new assets itself.
Each year, dividends can be paid to the holding company, which is allowed to set up its own directors’ payroll scheme and pay your executives, while charging the trading company for its services.
There are a number of potential benefits to this approach.
First of all, the business owner’s wealth, which has been built up over the years, is protected from a potential disaster such as losses from under-insurance. Creditors can generally only come after the trading company. You may also be able to maintain greater privacy over directors’ remuneration and possibly qualify for a less arduous audit regime.
It’s worth noting too that the creation of the new holding company gives you an opportunity to bring in new shareholders and buy existing ones out.
But do watch out. The new company structure will involve an increased admin burden in relation to year-end accounts, VAT, insurance and so on. And if you end up reducing your trading company’s balance sheet, there may be a short to medium-term hit on your credit rating. But, if you do have spare cash and are paying your creditors on time, this might not be such a big deal.
As you can see, there are likely to be pros and cons of the new arrangement, so the best thing is to talk the options through with your professional advisers. They will be able to look at your specific circumstances and give you appropriate guidance.