Holding companies are business structures that have controlling stakes in subsidiaries. Their management does not need to be involved daily or be experts in each operating company‘s industry, unlike direct parent companies which must manage each company directly.
Although a HoldCo is usually associated with large multinational corporations, smaller businesses may also find it helpful. Assessing its advantages and disadvantages will allow your business to decide if this structure is ideal.
Definition
Holding companies are business entities – usually corporations or limited liability companies (LLCs) – with controlling shares or membership interests in other companies, known as subsidiaries. A holding company does not produce or sell its products but serves as an umbrella organization for subsidiaries to operate their daily business within an industry sector.
One significant benefit of creating a holding company is reducing its subsidiaries’ liability risks. Since it owns all assets for each subsidiary, should any experience financial or legal difficulties, they are protected from cascading losses that might otherwise affect other companies under its umbrella.
Holding companies provide access to funds, financing, and resources not otherwise available to operating businesses without this structure in place. For instance, holding companies holding multiple shares can obtain loans at lower interest rates than would be known as individual entities.
Holding companies come in all forms – partnerships, sole proprietorships, or even LLCs can serve as having companies; however, to be considered actual holding companies, they must do more than own and control other entities; instead, they should also monitor the performance of subsidiary companies, make significant decisions like merging or dissolving, as well as participate in daily management without participating in the day-to-day management of subsidiaries.
Many small entrepreneurs use holding companies to acquire ownership in multiple companies without incurring too much financial commitment. For example, an LLC operating company could buy two investments separately (such as fast food restaurant and a thoroughbred horse farm). Subsequently, two separate LLCs could be formed as holding companies for each asset, with operating company owners becoming managers of new holding company subsidiaries. When starting a holding company, it’s wise to seek advice from experienced business advisors in your locality regarding the formation process of such entities.
Purpose
Holding companies benefit small businesses because they help mitigate risk and secure assets. A parent corporation can gain control over multiple industries without investing too much into each one, thus reducing tax liabilities. But creating one takes careful planning, taking into account issues like corporate structure, state law, tax considerations, and management functions.
An individual business owner has various options when forming their holding company: C or S corporation, limited liability partnership (LLP), or family trust. You must decide the optimal structure for your needs; an experienced tax advisor can assist.
Holding companies serve to own and control investments in other companies, known as subsidiaries, which include shares in different companies, mutual funds, real estate, gold, patents, and copyrights. These investments generate income for the holding company while diversifying its portfolio to increase profits.
Holding companies can purchase shares in subsidiary companies and then lease valuable assets back out, creating revenue for themselves while protecting their assets by dividing any financial or legal liabilities between themselves and their subsidiaries.
Holding companies provide more than income. Their financial strength may also be used to assist its subsidiary businesses by offering up assets as collateral against loans that they need for startup businesses or high-risk ventures, possibly at lower interest rates than would otherwise be available from direct lending institutions. This arrangement can be especially beneficial when starting businesses from scratch or providing them with lower rates than would otherwise be available directly.
Parent corporations can make significant policy decisions for their subsidiaries, including setting strategic direction and appointing directors to boards of these companies. Their management does not need expertise in each subsidiary industry – which may be advantageous or disadvantageous depending on circumstances.
Holding companies may sometimes own non-controlling shares and membership interests in other businesses and invest in external assets like property or stocks. This form of investment is known as mixed holding-operating companies and allows the parent corporation to diversify its sources of income.
Taxes
Many of the world’s largest business conglomerates operate as holding companies with multiple subsidiaries. Goldman Sachs, Nestle, Berkshire Hathaway, JP Morgan, and Alphabet (which owns Google) are examples of large corporations utilizing such an organizational structure to minimize shareholder risk while protecting operating businesses’ assets in case creditors ever come under siege.
Holding companies serve a purpose other than conducting actual business by owning shares or other ownership interests in subsidiary companies rather than directly running them themselves. A parent company may own multiple subsidiaries; alternatively, each subsidiary may only need to be relatively small. Holding companies provide various advantages, including consolidating tax returns, reducing taxes, and protection from lawsuits arising from other businesses’ operations.
An experienced business law firm can assist entrepreneurs in determining whether a holding company structure is the most suitable way forward for their particular circumstances. While such systems are typically associated with larger firms, small entrepreneur-owned enterprises have also found them beneficial.
As with any business entity, for a holding company to receive its Employer Identification Number from the IRS, specific requirements must be fulfilled to register correctly with its state. These include filing articles of incorporation and writing bylaws for corporate governance. Once appropriately registered with its shape, its EIN will be assigned, and it can begin conducting operations.
Holding companies offer another advantage by collecting and reinvesting excess earnings from operating companies. By protecting these profits from being claimed against by creditors, the holding company can protect itself from liability claims against these businesses.
Holding companies can take advantage of synergies among their subsidiaries by centralizing services like IT, HR, and administration – thus helping reduce costs and making them more appealing to potential buyers. Furthermore, holding companies can save on taxes by sending profits back into operating companies as dividends rather than giving it all back directly as profits – keeping out creditors while leaving more capital available for investment into other businesses.
Management
Holding companies are businesses, typically corporations or limited liability companies, that own shares in other entities, known as subsidiary entities. While holding companies don’t manufacture products or manage daily operations themselves, they possess all the necessary assets required for successfully running these subsidiaries.
Managers overseeing subsidiary businesses are called managers. Usually, the management team of a parent company (also referred to as the holding company) doesn’t get involved with determining whether their subsidiary businesses make money when they do participate, typically only for new investments or when management teams require additional financial resources of subsidiary businesses.
Holding company structures provides several advantages that help mitigate risk, including isolating parents from the debt liabilities of their subsidiaries’ liabilities and insuring against losses at a subsidiary level that might impact them directly. Furthermore, holding companies may lower financing costs by using assets as guarantees against loans made to subsidiaries.
An investment and creditor are also afforded tax advantages by structuring their investments as holding companies, as money paid out to subsidiaries isn’t considered taxable income for the holding company, even though they still must file annual reports and other necessary corporate filings.
Entrepreneurs with socially conscious intentions can go beyond traditional profit motives by creating holding companies with subsidiary businesses dedicated to supporting specific charitable causes, known as benefit corporations or public benefit LLCs. Such benefits could include protecting endangered animals, combatting gun violence, finding an Alzheimer’s cure, and other related matters.
Local advisors who specialize in such business structures must be enlisted to form a holding company successfully. With many subsidiaries under one umbrella, keeping track of records, due dates, and details can become challenging without proper organization and planning. A holding company management system offers an effective solution.
