Entrepreneurs in Dubai are always on the lookout for strategies to secure their business assets. While there are several approaches to do so, one of the most effective ones is to divide the business into multiple business entities which are together controlled by a single holding company. In this blog series, we will help UAE business owners understand all that they need to know about the Dubai holding company setup and how it can be useful for them, mitigating potential risks.
A holding company is a corporation or LLC which is a parent business entity that solely controls the stock or memberships interests in other companies. This form of a corporation does not sell any products or services and also does not manufacture anything. In fact, it does not do any business operations at all. However, some of the subsidiary companies that it owns do sell, manufacture or conduct the relevant business operations. Such companies are known as operating companies. On the other hand, the other subsidiaries hold intellectual property, real estate, equipment, vehicles, or anything else of value that is used by the operating companies.
The holding company is responsible to supervise the daily processes of operating companies. The corporation has the right to select and remove the corporate directors or the LLC managers including major policy decisions such as mergers and closure. But it does not participate in the operating companies’ daily decision-making processes.
Usually holding companies are used by diverse kinds of industries and of all sizes. In fact, many of the credible publicly traded firms are holding companies. People buying such companies’ stock do not even realize that they are investing in a holding company and not exactly in the operating company. Typically, holding company structure is followed by large enterprises with several business units. For instance, a large corporation that produces and sells several different FMCG goods including skincare, hair care, baby care and many other products would have a holding company for seamless management. Such enterprises structure with one holding company and multiple subsidiaries than using just one corporation with different divisions.
Under such enterprises, every business unit is operated as a separated subsidiary where the holding company has the power to control. The company’s characteristics, property, and equipment tools may be settled in different subsidiaries. And the operating companies pay to use the trademarks, lease of the equipment, rents of offices.
Moreover, such holding companies can also be used for smaller businesses, even by individual entrepreneurs. For instance, an aspiring business owner who wants to purchase an apartment building for rental income. In this case, there will be two companies required i.e. an LLC that will own the building and a holding company that would own the LLC. Another small business example could be of an entrepreneur who wants to expand its business operations. Such a business owner can sell shares in the holding company and with its earning, he can build a farmhouse and a fast food restaurant. This way, a new subsidiary will be formed for both new investments.
The core aim of a holding company is to run consistent business operations. Such corporations give the leverage to own several businesses where individuals can have the control of business and limit their liabilities. A holding company provides a central point of control over businesses and streamlines the management. These firms can hold an interest of ownership or the assets of other companies, making them strategically act for the operating companies. These companies typically hold equity assets or interests rather than actively being involved in the business operations.
Having humble beginnings, Dubai has come a long way in establishing itself as a successful industrious business center. Soon Dubai transformed from a limited trading community into one of the most vibrant business and social locations in the world in over 20 years. This is exactly why business owners see Dubai as an attractive location to begin their business. They see and analyze how far the city has come in these years. According to Dubai Startup Outlook 2021 report, startups get a 13% year-on-year increase in their business ventures, making this city best in terms of rapid economic growth of business enthusiasts.
The management operating the holding company is also responsible to make the monetary decisions. This corporation decides where all the capital will be invested. When it comes to its own finance, the firm obtains funds to make further investments by either borrowing or by selling equity interests. Additionally, another way to make investments is by earning revenue from payments it receives from its subsidiaries. Some of the forms include interest payments, dividends, distribution, and rents and payments.