Group Structures

What is a group structure?

A group structure is when one or more companies are owned directly or indirectly by another company such as a parent company. All companies in the same group are therefore under the ultimate ownership and control of a parent company.

Types of group structures

Group structures can themselves take a variety of forms, from a horizontal group structure, vertical group structure to various forms of hybrid structures.

An alternative is to form a separate standalone company or companies that are owned by the same (non-corporate) shareholder or group of (non-corporate) shareholders. In that case the companies are associated (sometimes referred to as ‘sister companies’), being under the common control of an individual or group of individuals, but they do not form a group.

Another alternative is to organise the business into divisions within a single company.

Owner Managed Businesses come in a variety of forms ranging from sole traders and partnerships to large multi-national corporations.

Holding Structure Entities can be a Limited Company, Holding Company, Subsidiary, Branch, Agent/Principal, Licensing Company, Simple Sole Trade, or any entity which has share capital and can be owned or controlled by another.

Why form a group?
There are a number of benefits in forming a group; commercial, regulatory, legal, management, mitigation of risk and tax. There is no one size fits all and reasons are many.

Some reasons for setting up a group of companies are:

-Family Company Restructure or Management buyout
-Holding Dividend income
-Holding cash and reserves away from trade
-Reconstructions & Amalgamations
-Separate income stream
-Holding income producing assets outside the group
-No shared ownership
-Pension funding
-Claiming tax reliefs multiple times such as Retirement/Entrepreneur Relief
-Incorporation of a Trade Management
-Reconstructions & Amalgamations
-Buy Outs Share Transactions
-Share for Share Exchange
-Share Redemptions
-Holding Dividend income
-Holding cash and reserves away from trade

Asset Protection:

For example, a holding company can be used to hold and protect assets or investments, such as property, intellectual property, investment funds, cash so that they are protected from any trade risks, liabilities and creditors.

Separate Income Stream:

Holding income producing assets outside the group can provide an income stream for the owner. For example, holding the trading property from which the business operates outside the group in the personal hands of the shareholders or pension funds allows the shareholders to extract an income stream from the business by charging rent (and the company will be able to claim a corporation tax deduction for such rental payments). Similarly if any IP is held personally it can be licensed to the group. Any such rental / licence charges should be on an arms length basis.

Impact on a sale:
The impact of holding assets outside the company / group also needs to be considered in the context of any future sale and the likely requirements of any potential buyer.

If the IP is essential to the business or the nature of the business is such that the premises are integral to the business, so that the buyer will either require the shareholders to also sell them the IP or property or grant a new licence or lease to the company / group prior to the acquisition, the likely costs and tax impact of this will need to be assessed. For example, the associated sale of a trading property held outside the group cannot qualify for Business Asset Disposal Relief to the extent that a market rent has been charged by the shareholders to the company. The buyer is also unlikely to bear any tax costs associated with the grant of any new lease or licence or otherwise in putting the assets back into the company / group (this having been a personal choice of the shareholder(s)).

Holding assets outside the group, particularly those assets which are necessary for the proper operation of the business, could therefore potentially increase the overall tax (and costs) payable on any sale and this needs to be weighed against the benefits of providing a separate income stream and ringfencing the ownership of such assets (although there are potential ways this can be achieved within the company/group by way of the relevant class rights attaching to the shares).

Pension funds
Holding assets within a pension scheme rather than personally could potentially ameliorate some of the tax costs in that a) any income stream will not be subject to tax within the pension fund and b) any gain on a sale of the assets by the pension fund will also be tax-free.

If assets are held outside the group within a pension fund there are, however, other practical issues and complexities to consider.