A holding company is a business entity, usually a corporation or limited liability company (LLC), that has the primary role of owning and controlling other companies. When considering the question, “What is a holding company?” Alphabet Inc. may come to mind. Google created this holding company to own many of its subsidiaries.
A holding company’s primary goal is to own the assets of subsidiary companies rather than participate in their day-to-day operations.
Business owners use holding companies to oversee many diverse companies under one umbrella. Having diverse companies stabilizes revenue streams and spreads risk across multiple industries.
What is the purpose of a holding company?
A holding company owns other companies and their assets by owning the controlling stock in their subsidiaries and other companies. Holding companies rarely manufacture or offer a product or service. They do not conduct typical business operations.
A holding company and its subsidiaries form a corporate group to provide some protection against financial and legal risks. Since a holding company and its subsidiaries are separate business entities, when one company suffers legal and financial issues, it does not necessarily affect the other companies.
Holding companies supervise the management of their subsidiaries, but they do not engage in their daily operations. Holding companies can make policy decisions, decide on mergers and dissolutions, and elect and remove directors.
Types of holding companies?
Holding companies can be structured in several ways:
- Pure: A pure holding company exists solely to own shares in their subsidiary companies. It does not engage in any business activities on its own.
- Mixed: A mixed-holding company not only controls other businesses but also engages in its own business operations. When mixed-holding companies control business operations in companies that are not one of their subsidiary companies, they are called conglomerates.
- Immediate: An immediate holding company is owned by another holding company. However, an immediate holding company also retains voting stock or control of another company.
- Intermediate: An intermediate holding company is both a holding company and a subsidiary.
How does a holding company make money?
A holding company may own property, real estate, trademarks, stocks, patents, and other assets. They can earn royalties from any patents or copyrights that they own, collect rent, lease equipment or assets, or earn dividends from stocks or bonds they own that pay dividends.
Holding companies can also sell equity in their subsidiaries when they increase in value. By owning a diversified set of businesses, holding companies can save money by centralizing some services and taking advantage of fluctuating markets to strategically sell stock to make a profit.
What are the potential advantages of a holding company?
Since a holding company is a separate business entity from its subsidiaries, one of its major advantages is a level of protection from significant financial losses. For example, if a subsidiary company goes bankrupt, its creditors cannot seek payment from a properly structured holding company.
Holding companies can allow business owners to take advantage of geographical differences in taxation laws. Owning multiple companies also makes it possible for holding companies to lower their tax bills by writing off the losses of one subsidiary to balance the profits of another.
Holding companies can typically secure funding at a lower cost than independent companies can. The holding company can secure funding and distribute it to its subsidiary companies. They can also lower the cost of operating capital by centralizing resource use.
What are the potential disadvantages of a holding company?
The complexity of a large business structure comprising a holding company and its subsidiaries results in reduced transparency for investors and creditors, as well as the opportunity to exploit subsidiary business owners to the benefit of the holding company.
The Corporate Transparency Act requires corporations, LLCs, and other registered entities to file a beneficial ownership information (BOI) report with the Financial Crimes Enforcement Network (FinCEN). Enacted in 2021, this act aims to curb tax fraud, money laundering, and terrorism financing.
The holding company and each of its subsidiaries will need to file annual reports and comply with both the holding company and subsidiary company governing documents.
The holding company and its subsidiaries must keep accurate records of their assets, liabilities, and properties. Failure to keep assets, liabilities, and property separate can increase the risk that a holding company will be held responsible for a subsidiary company’s debts.
How do you create a holding company?
To create a holding company, you need to file articles of incorporation and pay the associated fees in the state or jurisdiction where you plan to register your holding company. In addition to giving your holding company a unique name, you’ll need to identify the business agents who will manage your holding and operating companies.
A holding company can protect your business assets. Business owners may choose to put their intellectual property assets in one subsidiary, their real estate assets in another, and other assets in a third company.
After you create your holding company, you can deposit assets in it and transfer assets from your subsidiary companies to your holding company. The process of creating a holding company is complex, but it can provide financial and legal benefits for business owners.
A holding company can reduce risk and tax burden on your business. Working with a wealth manager who uses a fee-only financial planning structure can ensure you make the best financial decisions for yourself and your loved ones. Ready to secure your financial future? Call us today at 866-395-1786 to get started.
