A holding company is normally set up for the sole purpose of holding stock in another company, but they can trade just like any other registered company. Indeed, some holding companies do engage in trade from time to time. However, there is an exception, which we will consider below.
What is a holding company?
A holding company is essentially a parent company that owns a controlling interest in one or more subsidiary companies. It is defined in section 1159 of the Companies Act 2006 by reference to the meaning of a subsidiary company:
“A company is a ‘subsidiary’ of another company, its ‘holding company’, if that other company:
(a) holds a majority of the voting rights in it, or
(b) is a member of it and has the right to appoint or remove a majority of its board of directors, or
(c) is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it…or if it is a subsidiary of a company that is itself a subsidiary of that other company.”
One of the key purposes of creating a parent-subsidiary group structure is to mitigate risk by protecting the holding company from the liabilities incurred by its actively trading subsidiaries.
The holding company will normally hold the key assets in a group of companies whilst avoiding the risks of trading. If a subsidiary becomes insolvent, the assets held by the parent company will generally be ring-fenced.
Is a holding company allowed to trade?
Holding companies are allowed to trade in the same way as their subsidiaries. Normally, holding companies that trade are referred to as ‘parent’ companies, but the terms ‘holding company’ and ‘parent company’ are interchangeable.
Although there is nothing to prevent holding companies from trading, doing so may defeat the purpose of setting up a holding company structure because it will then become liable for any losses incurred in trading activities. This means that the assets it holds will not be ring-fenced.
It’s worth noting that some trading companies become holding companies by default. This happens if they acquire another company, or buy shares that provide them with majority voting rights in another company. In this scenario, where a group structure was not specifically designed, the holding company may well decide to carry on actively trading.
Can holding companies be dormant?
A company will be viewed as dormant at Companies House if it has “had no ‘significant’ transactions in the financial year”. The definition is slightly different in relation to HMRC, which classifies a company as dormant if it “has stopped trading and has no other income”. Either way, a dormant company should not be actively trading.
When creating a group company structure, sometimes the holding company will be set up as dormant to reduce administrative burdens. In this case, it will merely hold assets (e.g. intellectual property) and will not be allowed to actively trade if it wishes to retain its dormant status.
It is important to note that a dormant company is not necessarily the same as a non-trading company. Holding companies that do not actively trade but do carry out transactions for their groups (e.g. pays directors salaries) are unlikely to be considered dormant.