A holding company is a corporation that owns shares in another company. It’s typically positioned between the operating company and the individual shareholder, and it owns the operating company’s voting stock and assets, and controls its management and policies.
It doesn’t usually produce goods or services itself
Asset Protection and Risk Reduction
Although there are a wide variety of benefits that can come from the use of a holding company, the most significant is the increased protection of business assets and the reduction of risk. Because a holding company is a separate legal entity than the businesses it owns, it is difficult for a creditor to pierce through a subsidiary company in order to access the holding company. This makes assets held by the holding company more secure than if those same assets were held in the operating subsidiary.
The use of a holding company limits liability to one subsidiary rather than allowing a creditor or lawsuit to negatively impact all of the companies owned.
A holding company is also generally safe from legal action if one of their operating subsidiaries faces insolvency. This minimizes the risk of losing assets beyond the scope of a specific lawsuit or financial failure, except in some unique cases where the holding company may be held partially responsible due to factors like negligence in the upkeep of the operating subsidiary.
Despite potential tax benefits from a holding company becoming more limited in recent years, there are still benefits to the use of the holding company structure. These benefits can stem from factors such as location or legal structure in ways that an operating subsidiary may not be able to take advantage of on their own.
Ease of Management
By consolidating all of a group’s business holdings under one holding company, the management of a variety of different business tasks and obligations can be streamlined. These optimizations can lead to improved efficiency within the management as well as increased profits when managed properly.
Managing subsidiary companies under a holding company can also have benefits when pursuing new ventures and business opportunities. An operating subsidiary can take actions that may be considered too risky without a holding company, but with a holding company where the liability and risk are more managed, the operating subsidiary can act freely in a way that benefits future profits.
The existing structure offered by a holding company can also make it easier for new subsidiary companies to be added to the business structure without significant reworking of existing companies.
This same advantage offered by holding companies of making change easier also sets up the business for long term success. A successful company can be around for multiple generations and can change leadership and focus along the way. A bunch of independent companies can be difficult to manage and pass to new management due to the lack of a unifying structure. A holding company can act as that unifying structure, and optimize a business’ growth and future transitions, leading to a more successful company through changes of both leadership and operation.