How to create a group structure (UK): holding company, subsidiaries and an IP company

A group structure is a way of organising your businesses so that risk sits in one company and your valuable assets sit in another. You set up a holding company at the top, with wholly owned subsidiaries underneath it, and because each limited company is a separate legal person, a claim against one does not automatically reach the others. Creating one in the UK is a seven-step process: gather your details, check your chosen names, register the holding company first, register each subsidiary with its shares issued to the holding company, and then, if you have a brand worth protecting, set up a separate company to hold your trade marks and license them to the trading company.

What is a holding company structure?

Put simply, a group structure is a group of companies that are interconnected. Usually you have a holding company at the top, often called HoldCo, and then subsidiaries beneath it that are wholly owned, meaning completely owned, by the holding company. You own the shares in HoldCo; HoldCo owns the shares in each subsidiary.

Benefits of a group structure

The main advantage is to separate risk. You have different companies that do different things. For example, you might have a trading company, call it TradingCo, that deals directly with customers and clients. Separately, you have the holding company, which takes on most of the profits.

The reason group structures and private companies work so well together is that each company has what is referred to as a separate legal personality. Human beings like you and me are recognised under UK law as natural persons. A limited company is recognised as a legal person. Like any other person, it can enter into contracts and it can take on loans, and it is responsible for its own obligations. That separation is what allows you to keep the risky activity in one company and the valuable assets in another. If TradingCo is sued, it is TradingCo that is sued, not HoldCo and not you.

How to create a group structure: the seven steps

• Step 1: gather the company details. Make sure you have all the necessary information to hand before you start. I use a short questionnaire, document A, with five main questions covering the details you will need for each company. Once that is complete, the Companies House application is largely a matter of copying the answers across.
• Step 2: check company and trade mark names. Check that your chosen name for each company is actually suitable for use. There are three checks to do, set out below.
• Step 3: go to Companies House. Open the Companies House service to register a private limited company, click "Register now", start a new application and complete the questionnaire with your information. Document A will be very useful here, because the questions on the application largely mirror the details you have already gathered.
• Step 4: register the holding company first. Do not register the subsidiaries yet. The reason is explained below.
• Step 5: register each subsidiary. Once you have the holding company's company number, register each subsidiary to create the group.
• Step 6: issue the subsidiary shares to the holding company. When you set up each subsidiary and issue its shares as part of the application, make sure the shares are issued to the holding company, not to you personally. That is what makes the subsidiary wholly owned by HoldCo.
• Step 7: set up an IP holding company. Create a separate subsidiary that only holds intellectual property, ideally your trade marks. This is covered in detail below.

Checking names before you register (step 2)

There are three places to check each proposed company name:

• Companies House guidelines. These tell you which names are acceptable. For example, it is not acceptable to choose a name that makes you seem like a government body.
• The UK Intellectual Property Office. Run a trade mark search to make sure the name has not already been registered as a trade mark by someone else.
• The Companies House register. Check that no other company has already been registered with the name you want to use.

Doing all three before you apply saves you from registering a company and then finding out you cannot trade under its name. Remember to do this for every company in the group, including the holding company and the IP company, not only the trading company whose name customers will see.

Why you register the holding company first (step 4)

When you register the subsidiaries, Companies House will ask whether each new company is part of a group. If you answer yes, which can be useful for tax purposes, Companies House will then ask for the holding company's company number. You only get that number once you receive the certificate of incorporation, which usually takes between 24 and 48 hours from the moment you submit the application.

So the order matters: register the holding company, wait for the certificate of incorporation and the company number, and only then register the subsidiaries. If you register everything on the same day you will not have the number to give, and you will end up correcting the group details afterwards.

Set up an IP holding company (IPCo)

Your brand is often your company's most valuable asset, and step 7 is about protecting it. The idea is to create a separate subsidiary within the group that holds nothing but intellectual property. I will call it IPCo.

• Register IPCo as a separate limited company within the group, with its shares issued to HoldCo like any other subsidiary.
• Transfer any existing registered trade marks from whichever company currently owns them into IPCo. For this you need a trade mark assignment agreement, and it needs to be properly drafted so that it is legally binding.
• If you have not yet registered your trade marks, do that first. The assignment can only move a trade mark that exists, so registration comes before the transfer.

Trade mark licence agreement with TradingCo

The last step is to put in place a trade mark licence agreement between IPCo and your trading subsidiary, TradingCo. Under that agreement TradingCo pays a licence fee to IPCo for the use of the trade marks. If you want, IPCo then pays dividends up to HoldCo. The money flows up through the group while the brand stays safely in IPCo.

The reason for separating the trade marks from TradingCo is that TradingCo carries the most risk. It is the company that deals with clients and customers, and clients and customers can be quite litigious. If someone brings a claim against TradingCo, the last thing you want is to lose your rights to your brand along with it.

With the trade marks held in IPCo, you can get rid of TradingCo if you have to and start a new trading company under the same brand, benefiting from the same goodwill you have built up. That is a lot harder to do if the trade marks are held in TradingCo itself, because the brand would be caught up in whatever happens to that company. In my experience this is the part of a group structure that business owners most often leave out, and it is the part that matters most when something goes wrong.

Next steps

Complete your details, run the three name checks, and register HoldCo before anything else. Once the subsidiaries are in place with their shares held by HoldCo, deal with the brand: register your trade marks if you have not already, move them into IPCo under an assignment agreement, and license them to TradingCo. Both the assignment and the licence need to be legally binding to do their job, so have a corporate solicitor draft or review them rather than relying on a generic form.