Difference between a holding company and an operating company



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A dual company structure, the advantages and disadvantages, and a holding company or an operating company.
New Zealand Corporate/Commercial Law
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Many businesses operate with a single company structure, but some choose to adopt a dual company structure for added protection and flexibility. With this approach, you gain better safeguards and risk management, along with increased operational adaptability. This article will explain what a dual company structure is, its advantages and disadvantages, and the difference between a holding company and an operating company.

What is a Dual Company Structure?

A dual company structure occurs when a business operates using two companies. Typically, one company holds all of the following:

While another company takes on business risks by entering contracts and assuming obligations and liabilities.

The holding company owns 100% of the shares of the operating company. This makes the holding company, the parent or “ultimate holding company,” responsible for significant business decisions. That is why a dual company structure is also called a “parent-child relationship,” with the holding company as the parent and the operating company as the child, following the parent's direction.

In a dual company structure, there is usually an IP Assignment and License Deed between the two companies. Under this deed, the operating company transfers its IP to the holding company and receives permission (license) to use the IP for business operations. Any IP created by the operating company is also assigned to the holding company.

Difference Between Holding Company and Operating Company

The table below shows the difference between the dual company structures.

Holding Company Operating Company
Ownership of Assets Owns valuable assets of the business. Enters contracts and assumes risks.
Value Contains the valuable assets and value of the entire business. Usually holds little value, mainly holds a license to use intellectual property.
Profits Distribution May receive profits through intercorporate dividends from the operating company. Distributes profits back to the holding company through intercorporate dividends.
Shareholder Ownership Typically, 100% owner of the operating company. Held entirely by the holding company, usually with a single shareholder.

Where Do Investors Invest in a Dual Company Structure?

When you seek investment from sophisticated investors such as venture capitalists, these investors will aim to make their investment through the holding company. This is because almost all of the business' value resides in the holding company, which houses the IP and valuable assets while also shaping the strategic vision and direction of the entire enterprise.

Moreover, structurally, it is most straightforward when the holding company wholly owns the operating company. This arrangement allows the holding company to closely oversee all operations of the operating company and ensure that the subsidiary reports back to the principal owners of the business (similar to a parent-child relationship). Additionally, the operating company only holds a license to use the IP of the business and does not own it outright. Therefore, in the vast majority of cases, investment is not sought at the operating company level; instead, it is typically completed at the holding company level.

What Are the Benefits of Running My Business Through a Dual Company Structure?

The primary benefit of running your business through a dual company structure is creditor protection and risk mitigation. You can use your operating company to trade more freely, knowing that the risks of the business will be confined to that operating company. Additionally, if your business encounters difficulties, winding up the operating company is a more straightforward process. In contrast, the intellectual property (IP) of the business remains held and protected in the holding company. Without a dual company structure, if your business encounters difficulty, creditors would be able to claim the IP of the business more efficiently, which could disrupt business operations.

Another benefit of running your business through a dual company structure is greater flexibility for future expansion. While an initial restructure can transition a single company into a dual company structure, additional subsidiary operating companies can be added to the structure in the future.

This flexibility can be beneficial for businesses seeking to protect their IP as they expand into different countries. Setting up separate operating companies in each country helps safeguard IP. Additionally, it can be beneficial for businesses looking to separate their business activities into distinct arms. For instance, one operating company can handle the product side of the business while another manages the services side.

Key Takeaways

In a dual company structure, you set up two companies: a holding company and an operating company. The holding company owns the valuable assets and intellectual property (IP) of your business and also owns 100% of the shares in the operating company beneath it. The operating company takes on the risks of the business and typically transfers any IP or value it generates while conducting business back to the holding company. Choosing a dual company structure over a single company setup is often advisable. Still, it is crucial to consult legal and tax professionals before making any changes to your business structure.

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