Associated companies & limited liability
Often, businesses which have a large number of assets or which trade across a range of sectors or areas will find it beneficial to split their activities and assets up amongst a number of different companies trading as a group. Sometimes trading groups develop from the opposite position, where a person owns a number of different companies and wants to bring them all together in a corporate group.
Usually this involves one ‘parent company’ or ‘holding company’ owning all of the shares in a number of other companies, each of which deals with a specialised function or part of the business. Sometime this is used as a risk management strategy. Because each company has limited liability, if any individual part of the business incurs debts or becomes liable for fines, damages or legal costs, only that individual company is affected.
However, company groups can also result in tax advantages as losses incurred by one company can be offset against profits which have been generated by a more successful part of the group. This means that when calculating the corporation tax payable by the companies in the group, the total profit across the group is used as the basis. This is an advantage over owning a number of separate companies where each must pay corporation tax on its full profits and no offsetting of losses is allowed.
Groups of associated companies are open to abuse and so there are a number of complicated regulations about how group finances should be managed and dealt with. These include provisions restricting loans between companies in the same group, transfer of funds and capital between companies and the transfer or assignment of debts from one company within the group to another. In order to ensure compliance with these regulations, it is often necessary to consult a specialist tax advisor.
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