What is an Ultimate Holding Company and when should I use one

An ultimate holding company, as the name suggests, is a company that has ultimate control over another company. In short, it is a company that controls another company. An ultimate holding company can have many subsidiary companies, but it can not be a subsidiary itself.

An example of this scenario might be this. Company B has shares which are all held by Company A. Company A’s shares are all held by several individuals (or shareholders even). Therefore, Company A is the ultimate holding company of company B. The ultimate holding company while it is the primary owner of its subsidiary company/ies, it does not have a say in the day to day running of the business. It can however, dismiss managers and company CEO’s if the need should arise.

To put it in layman’s terms, let’s use the Australian Government as an example of the structure. Now the Australian Government isn’t a company, but the structure I am going to use in this example is the same.

In Australia we have the Federal Government, State Government and Local Government (being local councils). Overseeing the Federal Government in a legal capacity is the Governor General and then The Queen (British Monarchy).

If we were to use this structure in our example, replacing the Government entities with company names, it would look like this:

Company A: The Queen

Company B: Governor General

Company C: Federal Government

Company D: State Government

and so on.

Company A,being The Queen, is the ultimate holding company as she oversees the other companies. She has the power to replace people in managerial positions (i.e. The Prime Minister) but she does not have a say in the day to day running of the country. She has a vested interest from a shareholder point of view, but not in a business sense.

Why would a holding company be set up?

Generally a company will become an ultimate holding company if they want to own shares in the subsidiary company. They may also be created to manage the property, and do nothing more than hold, borrow and lend property and make investment decisions. Property examples can include: real estate, patents, trademarks, private stock etc.

Why you would need to set up a holding company?

A holding company is not a requirement of all business set ups. It really comes down to your business structure, revenue and whether you have assets you need to protect.

One of the main reasons a holding company may be established is to protect their assets or to minimise risk. As a holding company is seen as a separate entity, assets held under this company will not be factored in should the subsidiary company face bankruptcy or legal action. Debtors and creditors will not be able to pursue the holding company for remuneration. While this does seem like a big get out of jail free card, it is only the case if the holding company was not aware of the subsidiary company trading insolvent or unable to repay its debts. They can still be held liable if they were involved in the fall out.

Other reasons someone may set up a holding company is for tax purposes to avoid paying higher tax rates, although this loophole has become tightened in Australia since 2016, and for succession planning.

Whether you need to established a holding company is purely down to each individual circumstance. If you would like to know more or enquire as to whether you should set up an ultimate holding company, please contact us. Our experts can go through your individual circumstance with you.