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Holding Company

Holding Company

Holding companies are those that own assets or stock of other companies. Most often, holding companies do not produce their own products, nor provide their own services. Rather than do either of these operations, holding companies are formed to own assets of other companies. These companies then work to form a corporate group.

In general, there are two ways in which a larger company can become a holding company of a subsidiary. The first is to create a new corporation and then sell off just enough of the shares to maintain a majority. The second is to purchase enough stock or shares in a company.

When it comes to how the relationship is structured between the parent company and the subsidiary, it is plainly called the parent-subsidiary relationship. In this case, the mother company is the company that is the owner, while the company being acquired is called the subsidiary.

What is the Purpose of a Holding Company?

The purpose of a holding company is to control other companies. This is often set up either as an LLC or a corporation, but it allows you to divide a business into multiple entities. This continues to allow them to be owned by the parent holding company.

Holding companies may own:

  • Real estates
  • Patents
  • Trademarks
  • Stocks
  • Assets

Holding companies control membership interests in other companies, and the primary purpose is to own all or a portion of another company. Some subsidiaries will still continue to sell, conduct business, or manufacture products.

Different Types of Holding Companies

Pure

Referred to as “Pure”, is a holding company formed with the purpose only to own stock in other companies. Although this company will not participate in any other business other than controlling other firms, this is an avenue of business on its own. Pure companies do not market services or any other products.

Mixed

Mixed holding companies control other firms, but also work in industries of their own. This means they will engage in other operations as well. Often this is also referred to as a holding-operating company. When holding companies take part in lines of business unrelated to their subsidiaries this is called a conglomerate.

Immediate

For holding companies that continue to retain voting stock or control of a subsidiary despite already being controlled by another holding company, they are considered immediate. By definition, these are holding companies that are already a subsidiary of another.

Intermediate

Intermediate holding occurs when holding companies are both a subsidiary of another holding company, as well as the holding company of a subsidiary. When it comes to an intermediate holding firm, they may be exempt from publishing their financial records. This offers a layer of privacy not afforded to other structures.

Advantages of Holding Companies

Liability Protection

Because holding companies exercise control over various companies, each company is considered its own entity legally. All of the entities will remain separate, and therefore you will be afforded liability protection. If one company is sued, it will keep each entity separate. Even if one of the companies is sued, the assets of the other companies are protected.

Control Assets for Less Money

Controlling interested in another company is obtained by purchasing only 51% of the company. This means that instead of purchasing the entire company, you can purchase 51%, and allow you to control the entire asset with a much lower investment. This provides you the opportunity to gain more control for a lower price.

Lower Debt Financing Costs

One of the main advantages of a holding company is that holding companies are usually able to secure funding at a lower cost than smaller subsidiaries. This allows the holding companies to pass down loans or funding to their subsidiaries.

Tax Benefits

Holding companies that own 80% or more of any subsidiary can reap tax benefits. This is done by filing consolidated tax returns and allows you to combine your financial records. If a subsidiary encounters a loss, it will offset the profits of the other subsidiaries. This leads to reduced tax liability overall.

Disadvantages of Holding Companies

Complexity

There is an added layer of complexity that goes along with running a holding company. Rather than running one company, you will be running two or more. This means you will need to be extremely organized in hopes of not making a mistake that could cost you.

Compliance Costs

Compliance costs come in the form of running a holding company. This may be due to the structure of your organization, or the state you have formed in. These are usually required to be paid annually and on time.

How to Set Up a Holding Company

In order to set up a holding company, the requirement is to own at least 51% of the voting stock of another firm. Not only does this guarantee larger control, but it also allows complete control. If the parent company even owns 10% of the stock of a subsidiary then it can be a part of the decision-making process in some way. Another way of starting a holding company is through a merger or forming a new entity.

After a transaction is completed the stockholders of the subsidiary will be shareholders in the holding company. This is not a difficult process and is not incredibly expensive. With the privacy it affords while using a registered agent, forming a holding company is always something that you can benefit from.

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