As your business grows and becomes more successful, you may think about establishing a holding company to:

  • make your business more efficient; and 
  • protect your interests. 

At first glance, the structure of a holding company can be a bit complicated. So, this article explains: 

  • what a holding company is; 
  • how it works; and 
  • some potential benefits of this business structure.

What Is a Company?

You may decide to incorporate your business into a company, which means registering it with the NZ Companies Register at the Companies Office. This means that you put it on a public register, where anyone can look up: 

  • who the directors of your new company are; and 
  • who has shares in your company. 

A company is a separate legal entity, which means that it can have rights, obligations and protections in commercial law as a person would. Shareholders who invest in the company are only liable for: 

  • money owing on the shares they purchase; and 
  • personal guarantees they have given to lenders or creditors. 

Each company in New Zealand needs:

  • a unique name;
  • an address of service;
  • a contact office; and
  • at least one share, one shareholder and one director.

Holding Companies

Holding companies have all the same obligations and rights a regular company would have. However, the key difference is what you use a holding company for. 

A holding company, also known as a ‘parent company’, holds the assets of a subsidiary in its own name. That subsidiary company then becomes an operating company and handles the day to day operations of the business. To qualify under the Companies Act, a holding company must:

  • control the makeup of the board of the subsidiary company; or
  • control more than half the votes that can be used at a meeting of the subsidiary company; or
  • hold more than half the shares of the subsidiary company; or
  • have the right to receive more than half of the dividends paid on shares issued by the subsidiary company.

If your subsidiary company has a holding company, you must notify the Companies Office of any such changes in your business structure. This is because there must be transparency in who has control over your company.

Benefits of Holding Companies

Protecting Your Assets

If you use a holding company, it can be a useful way to protect the assets of your business. These assets may include:

  • intellectual property;
  • property;
  • capital; and
  • equipment.

Once your holding company has the assets in its name, the operating company can take on the day to day running of the business. This means that if something goes wrong in the operating company, you have protected your assets in the holding company against: 

  • creditors; and 
  • other potential liabilities.

Reducing Risk

There is an inherent risk in maintaining all of your valuable assets and trading with the same company. 

For example, if an investment falls through, you run the risk of losing your assets and the business all in one fell swoop. 

If you separate your assets with a holding company and keep the daily trading of the business to the operating company, this reduces that risk. 

Central Corporate Control

Holding companies must have control over subsidiary companies, which can manifest in the ways outlined earlier. This means that there is a central system of control running throughout your corporate structure. 

This can be beneficial, as directors of holding companies can implement decisions that affect all subsidiary companies. A process of this nature is far more streamlined. It also means that assets are pooled in one company’s name, so that the company can make decisions about those assets as a whole. This makes the decision-making process much more manageable.

Flexibility for Growth and Development

With valuable assets kept safely concentrated in the holding company’s name, this means that your operating company can: 

  • diversify its practices more efficiently; and 
  • take on new investments and leave investments as need be. 

Succession Planning

Having a centralised control system means that succession planning is easier if key employees leave any of your companies. 

For example, suppose a key employee leaves one of your operating companies. In that case, other employees of that company do not have to take time away from daily business operations to find new staff. Members of the holding company can do so.

Key Takeaways

Adding a holding company into your business structure can be useful for a variety of reasons. Namely, it adds an extra level of protection for your valuable assets because you hold them under a separate legal entity. Meanwhile, the subsidiary operating company takes on the risk of day to day operations of the business. If you would like more information or help with incorporating a holding company into your business structure, contact LegalVision’s New Zealand business lawyers on 0800 005 570 or fill out the form on this page.

FAQs

What is a company?

A company is one method of structuring your business. You create a separate legal entity with a unique name and it can operate under the law much as a person can. It can own property, be liable and conduct business.

What is a holding company?

A holding company is a type of company, defined by its purpose. It generally does not conduct business but holds the assets of a subsidiary company. This means that the subsidiary company conducts the majority of business operations for both companies.

What are the advantages of a holding company?

By holding your assets in a separate company, this means that the subsidiary company can conduct business without the risk of losing its assets if something goes wrong. If your assets are held in a separate company, they are less likely to be claimed by creditors if your subsidiary company becomes insolvent.

Do I need to register my holding company on the NZ Companies Register?

If your company has a holding company that holds a majority of your shares or some other method of control, you need to let the Companies Office know and keep them updated about that status every year in your annual returns. This is because there is a public interest in who controls your company and transparency is important.

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