Do I Need to Set Up a Holding Company for My Business?

Oct 9

What Is a Holding Company?

A holding company is a legal entity, usually a Pte. Ltd. or Sdn. Bhd., that doesn’t conduct any typical business operations, it may not even have any employees. Instead, it is used to own, or “hold”, shares in one or more subsidiary companies. It can also hold business assets such as property, vehicles, or intellectual property (IP), and investments such as investments into other companies, and joint ventures.

The purpose of establishing a holding company is not to conduct any new business or operations, but rather to control and protect existing businesses and their assets.

When Should You Consider Setting One Up?

1. You Own Multiple Businesses

If you run several brands, outlets, or lines of business, each with its own risks and liabilities, a holding company can help in isolating those risks and liabilities. By structuring them as separate subsidiaries under the holding company, they become independent legal entities and become conditionally immune to the debts, legal obligations, and financial failures of the other subsidiaries.

For example, you run a retail business and an e-commerce platform, and you have organised them under your holding company. One day, the retail business had its inventory stolen which caused it to suffer a loss and go into debt. The assets of your e-commerce business cannot be sold to pay for the debt since they are separate subsidiaries.

2. You Have Valuable Assets to Protect

If you own high-value assets, such as commercial properties or IPs, a holding company can help in separating these assets from the risks associated with daily operations. You can then lease or license these assets to your operating companies, which use them to generate income but do not own them. If the company becomes in debt or bankrupt, the property and IP will be protected since they belong to the holding company instead.

3. You’re Preparing for Investment, Exit, or Succession

If you plan to change the ownership structure of your company, a holding company allows for easier restructuring by facilitating share transfers, equity splits, and business sales. Business ownerships can be redistributed and their shares can be transferred to investors without interfering with the operating company’s daily operations, avoiding the need to notify shareholders, suppliers, customers, or banks about the change in ownership.

It also allows operating companies to be sold without affecting other companies under the same holding company. This structure also allows you to sell your shares in the holding company to outside investors, letting you exit the business without disruptions to it or conduct family trusts and estate planning for your businesses.

Practical Benefits of a Holding Company

In Singapore, ACRA does not make any distinction between holding and operating companies, meaning that there are no tax benefits to this organisational structure. However, group relief schemes and GST group registration are available under specific conditions. This leads to overall decreased tax liabilities and administrative work.

In Malaysia, SMEs can enjoy less tax liabilities compared to other companies between 15% and 17% of chargeable income under RM600,000 per company, so setting up a holding company and several operating companies may help you optimise your tax efficiency.

In both cases, be careful of transactions between related companies. They must be charged on the arm’s-length principle and be properly documented. This is done to avoid regulatory scrutiny or penalties and committing tax evasion.

Advice from an Accountant’s Perspective

“A holding company may not generate revenue directly, but it adds value to your business by giving it better structure, security, and scaling potential. That doesn’t mean you should rush into it, though. Incorporating a holding company adds additional administrative costs, legal complexity, and compliance requirements. It only makes sense to do so when your business scale demands the extra supportive structure.”

Final Thoughts

A holding company isn’t just a way for large companies to conduct mergers and acquisitions and expand its size further, it’s also for expanding companies with big plans and care for operating efficiency. It allows for early preparation for future operations. With an organised ownership structure, businesses are guaranteed stable, uninterrupted commercial activities that are independent of what happens above, such as foreign investment or restructuring.

However, the timing of this decision matters a lot. Setting up a holding company too early can add unnecessary costs, while setting one up too late can lead to expensive restructuring. Therefore, consult your accountant or a business advisor to help you determine a suitable moment to establish your own holding company.

Mohamed Fazluddin Mohd H https://www.faztheaccountant.com