WHAT IS A HOLDING COMPANY?
A holding company is a business entity that has no operations and does not conduct any activities. It owns assets. These assets could be shares of other companies, hedge funds, real estate, trademarks, patents, or units in partnerships. As the name implies, its purpose is to hold controlling stock or membership interests in other companies. Holding companies are used by businesses of all sizes and in all industries.
Holding companies are designed to acquire equity in other companies. However, this is not the same as buying stock in another company. Equity ownership refers to ownership in a company even if that company does not issue stock.
Following this, if a Founder is worried about losing further equity in his/her Company, he/she can either: o Acquire equity in said Company through a holding company.
o Invest in Company through the holding company – this simply means that Investors can invest in your Company through the holding company without it affecting the current shares of the Company. This means Investors can simply acquire an equity stake in the holding company in exchange for their investment. (Investment Holding Company)
Some Investors are maybe more comfortable investing through a Company situate in a jurisdiction they are familiar and/or comfortable with. This can help resolve the perception of “high risk” from the notion of an unpredictable and unstable legal framework, which is often associated with the investing-in-Africa narrative.
Due to the structure of Nigerian tax laws, Nigerian businesses tend to set up Holding Companies in tax-friendly offshore jurisdictions to hold their Assets and Investments in Nigeria.
INVESTMENT HOLDING COMPANY?
As a Startup seeking to raise finance through equity investments, you will find that a common request of Venture Capital Firms (VCs) and a condition precedent to funding is that you incorporate an offshore holding company in an investor-friendly jurisdiction. The offshore holding company then serves as the VC’s investment vehicle. This type of holding company is commonly referred to as an Investment Holding Company.
An Investment Holding Company may provide a vehicle for multiple investors to pool their funds and collectively invest around a specific investment objective or strategy. Most investment holding companies are created for one, or a mix, of the following goals: managing risk, minimizing taxes, ensuring privacy, or offering a vehicle that investors can use.
An investment holding company generates income by selecting, acquiring, and managing a portfolio of investment assets that provides a return via dividends, interest, capital gains, and so on. That return is then allocated to the investors, based on their individual proportion of ownership in the investment holding company.
WHY CREATE A HOLDING COMPANY?
o The main reasons that business owners consider creating a holding company are to protect assets, reap tax benefits, and have control or influence over other companies.
o Businesses owned entirely by holding companies can all be filed under the same tax return, saving time and money. The value of the holding company itself rises if the value of the stocks it owns in various businesses goes up. By having certain levels of equity in a business, the holding company can help dictate its direction and operations.
o A holding company maintains equity in an operating company, but if the holding company does not co-sign onto the operating company’s debt, it is not responsible for that debt. This can shield assets from creditors. Assets are held by the holding company, which also helps shield those assets from lawsuits and debt liabilities. The holding company is only at risk of declines in worth and capital.
Offshore Entities:
o The offshore entities benefit from a favorable tax climate: For example, in Delaware, there is no capital gains tax on the sale or transfer of shares and, there is no corporate tax on dividends.
o Reduced foreign exchange exposure and risks: Most investments by VCs are made in foreign currency and for this reason, they need to limit their foreign exchange exposure. The offshore entities provide these benefits with limited foreign exchange controls.
o Minimal regulatory oversight: Reduced regulatory interference in the conduct of business.
WHAT ARE THE ADVANTAGES OF THE HOLDING COMPANY-OPERATING COMPANY STRUCTURE?
There are different reasons why holding companies are used.
1. Asset protection: Your investment activities can expose you to liability associated with a particular investment. An investment holding company shields its owner from personal liability and exposure to investment risks. The debts of each subsidiary belong to that subsidiary. A creditor of the subsidiary cannot reach the assets of the holding company or another subsidiary.
2. Tax advantages: Asset protection is one of the biggest benefits of investing in an investment holding company. It also offers certain tax advantages, such as tax-free dividends and pass-through taxation. Any income derived from the various investments can be passed through the holding company (tax-free dividends) to the individual owners, who will then report it on their individual tax returns (pass-through taxation). This will avoid double taxation if the holding company is structured properly.
3. Control assets for less money: A holding company needs to control its subsidiaries but doesn’t necessarily need to own all shares or membership interests. That allows the holding company to obtain control of another company and its assets at a lower cost than if it had acquired all the subsidiary’s ownership interests.
4. Lower debt financing costs: A holding company that has financial strength can often obtain loans for a lower interest rate than its operating companies could themselves, particularly where the business in need of capital is a startup or other venture considered a credit risk. The holding company can obtain the loan and distribute the funds to the subsidiary.
5. Day-to-day management not required: A holding company can own businesses in a variety of unrelated industries. It doesn’t matter if the owners and managers of the holding company don’t know about those businesses because each subsidiary has its own management to run the day-to-day operations.
WHAT ARE THE DISADVANTAGES OF A HOLDING COMPANY-OPERATING COMPANY STRUCTURE?
There are some drawbacks to using a holding company, some of which include:
1. Formation and ongoing compliance costs: The holding company and each subsidiary that is formed require the payment of formation fees. There will also be, in most cases, annual report and franchise tax obligations. Each will also have to comply with the governing Corporation or LLC statute and its individual governing documents. Using a single operating company avoids these additional per-entity compliance obligations and their associated costs.
2. Management challenges: As noted, a holding company does not have to own all the subsidiaries’ ownership interests. That can be both an advantage and a disadvantage. Where it does not own 100%, it will have to deal with minority owners. Sometimes conflicts arise when the interests of the minority owners are different from those of the holding company.
The fact that the holding company’s management does not have to be experts in the operating companies’ businesses can be both an advantage and a disadvantage. It can be a disadvantage because the holding company’s management may be overseeing and making major policy decisions for businesses or industries in which they are not particularly familiar.
3. Complexity: The use of holding companies and subsidiaries adds an element of complexity not found in the single-entity structure. When a publicly-traded corporation uses a holding company structure, for example, it can be very complex, with many subsidiaries to keep track of. For enterprises like that, a good entity management system can be an invaluable tool in keeping track of all the important information, records, and due dates for all of the companies.
It is also important for smaller enterprises to keep the records, assets, liabilities, and properties of each company separate from each other. Failure to do so can increase the risk of a court piercing the veil and allowing a creditor to reach assets beyond the debtor subsidiary.
HOW TO REGISTER A SUBSIDIARY COMPANY IN NIGERIA
A foreign company already incorporated overseas and willing to operate in Nigeria can also incorporate a branch or subsidiary of the parent company in Nigeria.
A subsidiary company is a corporate structure with separate legal personality statuses. It is statutorily regulated and incorporated for profit maximization under the Companies and Allied Matters Act (CAMA), which is the law that regulates the incorporation of companies in Nigeria. A subsidiary company cannot be registered where no holding company is in existence.
REQUIREMENTS TO REGISTER A SUBSIDIARY COMPANY IN NIGERIA
• The first step required by the Holding Company is to choose two suitable proposed names for the company. Where this is done, an availability check will be conducted on the CAC online portal to find out if the name is available and not already in use.
• The objectives of the company must be provided.
• The registered principal address of the subsidiary company must also be provided.
• The details of the parent or holding company with a minimum of an additional shareholder must be provided (under Nigerian law, a company can only be formed by a minimum of two shareholders).
• The share capital and shareholding formula among shareholders will be required.
• The particulars of a minimum of two (2) Directors will be required (a copy of their means of identification such as the international passport or Driver's license).
• Particulars of the company secretary must be provided.
• The Resolution of the parent or holding company authorizing the registration of the subsidiary company must be provided.
• The Memorandum and Articles of Association of the company to be registered, which is advisable to be drafted professionally by a Legal Practitioner.
• The copy of the certificate of incorporation of the holding company to be provided.
OTHER REQUIREMENTS AND OBLIGATION FOR A FOREIGN HOLDING COMPANY
• The applicant will be required to pay the filing fee to the CAC and stamp duty paid to the Federal Inland Revenue Service (FIRS).
• Every foreign-owned subsidiary company in Nigeria must have a minimum of N10, 000,000 (Ten Million Naira) share capital. This capital is not mandatory to be paid up or provided at the point of registration of the company. It is only filing fees and professional fees for incorporation that may be paid at this point.
• Where the filing fee has been paid, the statutory forms will be filled and submitted along with the evidence of payment and other requirements at the CAC.
In conclusion, for a subsidiary company to operate in Nigeria, it must be incorporated for that purpose. The process of registration can be commenced online on the CAC portal. It is noteworthy that a subsidiary company may appoint directors different from the directors of the parent company.
BUSINESS-FRIENDLY STATES IN THE US
There are three (3) main States in the US ideal for incorporating businesses because of their business-friendly rules and privacy. They are:
1. Delaware – very friendly for business in general.
2. Wyoming
3. Nevada
In Delaware and Nevada, you can incorporate and receive tax benefits without living there or operating your business in the state.
WHAT IS A DELAWARE HOLDING COMPANY?
• Holding companies in Delaware are usually formed because of the state income tax law, which makes it possible for foreign companies (those not formed in the state of Delaware) to be partially tax-exempt.
• The tax code of Delaware states that corporations that operate within the state borders only to maintain and manage their investments, intangible property, or trusts that are registered with the Investment Company Act of 1940 as investment companies may be exempt from corporate taxation.
• Due to this taxation treatment for such companies, businesses began setting up corporations in Delaware that would act as sort of tax-exempt boxes to put their intangible assets in (Holding Companies). These intangible assets or investments include things such as:
o Stocks/ Bonds o Notes
o Patents/ Patent applications o Trademarks/ Trade names/ Trade secrets
REQUIREMENTS FOR DELAWARE HOLDING COMPANIES
Holding companies formed in Delaware must be careful to meet all the requirements to help avoid audits and legal issues. The holding company must maintain a separate identity from the parent company and status of good standing with the SOS (Secretary of State).
Some of these critical requirements include:
o Not allowing the holding company to conduct any business beyond simply managing intangible assets.
o Not allowing the holding company to purchase any property that isn't necessary to manage the parent company's assets.
o Keeping the holding company up to date with all fees and filing requirements with the state. o Keeping up with all debt payments required of the holding company.
o Maintaining the right amount of capital in the holding company necessary to manage the parent company's assets.
o Maintaining a separate legal identity from any owners or members of the holding company.
o Maintaining separate records and bank accounts from other companies, including its parent company.
o Filing separate tax returns from those of the parent company.
Delaware holding companies should also be sure to keep up with all the basic requirements for corporations, like holding annual meetings, filing documents with the state, etc.
HOW TO START A DELAWARE HOLDING COMPANY
To start a holding company in the state of Delaware, you'll follow the basic steps for starting an LLC or corporation in the state. The business's main address should be within the state borders. All Delaware holding companies must adhere to state laws regarding their:
o Formation o Operation o Taxation o Contracts.
BENEFITS OF INCORPORATING IN DELAWARE
• Unsurpassed flexibility – The State of Delaware offers businesses lots of flexibility in corporate and board structure, making it easier to set up your organization. Your officers and directors do not have to live in the state to serve your business. You can also run your business solo in Delaware whereas other states may require at least three individuals to be directors and officers.
• Enhanced privacy – In Delaware, you do not need to disclose key details about your officers and directors when you form your business. If privacy is a concern, Delaware could be a good option for incorporation.
• An established and savvy court system – Delaware uses judges instead of juries when it comes to corporate issues. When your case is heard, it will be before a judge with expertise in corporate law, not a jury made up of laypeople. With savvy judges and attorneys, if you do need to head to court in Delaware, you are more likely to experience a fair, impartial, and streamlined process.
• Attractive to investors – Many investors and banks show strong preferences for Delaware corporations. If you are looking for venture capital or are going public, then incorporating in Delaware could give you an edge.
• Tax advantages – With business-friendly tax laws, there are clear financial reasons to incorporate into the state. If you incorporate in Delaware but have your headquarters elsewhere, you will not have to pay state income tax.
DRAWBACKS OF INCORPORATING IN DELAWARE
• Not ideal for small businesses – Most of the benefits offered in Delaware are for big corporations with lots of shareholders, so small businesses may not be able to take advantage of those benefits at all.
• Added expense – If your business is too small to benefit from the corporate-friendly laws there, then incorporating in Delaware will require added expense and trouble without a lot of extra advantages.
If you have further questions or need clarification on the information provided above, please feel free to contacts us.