The holding company also is known as Limited Liability Company or limited partnership, is the most popular corporate structure globally. The majority of conglomerates and multinational corporations throughout the world operate as holding companies. These corporations across the world employ almost thirty million people, generating yearly revenues exceeding $9 trillion.
Some of the most recognized holding companies on a worldwide basis include Walmart Inc, Berkshire Hathaway, Volkswagen AG, Ford Motor Company, BMW AG, and Tata Sons Ltd. Well-heeled individuals and affluent families incorporate holding companies mainly to transfer assets to their next generation, reduce tax liabilities, and gain greater control over subsidiaries. Individuals, partners or families form holding companies chiefly to take over other businesses which in due course become subsidiaries of respective holding companies.
The holding companies neither manufacture goods or offer services nor participate in the day-to-day business operations. Rather, the holding corporations exist exclusively for restructuring the different subsidiary businesses while keeping themselves insulated from risks and liabilities. In this blog, we take a close look at the distinct benefits enjoyed by a holding company or an investment holding company.
Perhaps the best benefit that a holding company enjoys is that it is shielded off from risks when one or more of its subsidiaries go bankrupt. Theoretically speaking if a subsidiary company performs poorly or is declared insolvent, the holding firm should be held responsible for the same. However, the holding company’s incorporation rules and regulations limit its liability to the degree it has staked in the subsidiary.
In other words, the creditors who’ve provided funds to the holding company for purchasing stakes in other companies cannot sue it for recovering their dues. The creditors cannot chase the holding company for retrieving their outstanding amount as it exists as a separate legal entity distinct from its subsidiaries. The holding company will not be liable to make good the losses incurred by its subsidiary or subsidiaries.
Another aspect worth noting is that the profit earned by the holding company and its subsidiaries is not subject to taxation in numerous jurisdictions. The capital gains or profits are paid out to shareholders as dividends are normally tax-free almost everywhere in the world. The organization of the holding company enables it to transfer proceeds from subsidiary companies as a secured debt or loan.
So, if one or more of the subsidiaries becomes bankrupt, the holding company can take over their assets which it held as collaterals. The structure of the holding company facilitates in safeguarding the interests of the shareholders, i.e., their investments. Put, the creditors cannot take the shareholders of the holding and subsidiary companies to court for retaking their advances.
Another noticeable advantage of constituting a holding company is that it can maintain full control over its assets. Assets owned by holding companies generally include shares, stocks, copyrights, trademarks, real estate, mutual funds, intellectual property rights, and so on. Holding companies securitize their assets and collaterals for obtaining mortgages to buy out other firms which subsequently becomes subsidiaries.
Various assets held by the family holding companies stay under the firm control of the parent corporation, and cannot be seized by creditors. More often than not, families and individuals that own the holding companies form trusts for shielding their assets from the effects of estate and gift taxes, divorce, and bankruptcy. To put it in perspective, affluent individuals and families form asset protection trusts primarily to protect themselves from governments, courts, and creditors.
An asset protection trust comes in handy for holding companies, allowing them to make an out-of-court settlement with creditors, thus enabling both parties to steer clear of costly litigation. Nevertheless, a holding company has to fulfill several complicated regulatory stipulations for setting up an asset protection trust. It is worth noting here following the formation of a trust for asset protection, the provisos outlined in the manifesto become irreversible.
If at any time, the parties to the trust feel that they need to modify a specific clause, the proposal has to be approved by all signatories. On the other hand, the trust for asset protection contains a spendthrift stipulation. The spendthrift clause is inserted to thwart or discourage the beneficiaries from misusing the assets.
Alternatively, the spendthrift proviso shields the assets of the beneficiaries from being usurped or attached by creditors.
By and large, management and administration of the daily operations of the subsidiary companies and the holding company remain under the latter’s directors. Centralized control by the holding company directors allows for better management of all group companies, ultimately leading to enhanced performance and development. For instance, directors of the holding company could introduce a debt restructuring plan for making the most of the loans available on competitive interest rates.
Debt restructuring could also help the subsidiary companies or holding company to prevent or minimize the risk of defaulting on current debts. Subsidiary companies banking on holding companies stand a better chance of receiving loans on convenient terms and conditions compared to functioning as standalone entities.
Subsidiary companies under the control of a holding company may have to lower taxes compared to what they’d have paid had they operated as independent entities. One of the chief reasons behind constituting a holding company is to obtain relief from the burden of paying corporate taxes, which is quite steep in many countries. Many parent companies register their holding corporations in jurisdictions with relatively low corporate taxes.
Numerous states in the US charge lower commercial taxes in comparison to other states. Many corporations have registered their holding companies overseas or offshore areas regarded as tax havens such as the Channel Islands, Andorra, and Bermuda.
When a holding company holds the assets of subsidiary companies, it has better leverage and control over the entire business. For instance, the holding company can venture into hitherto unexplored commercial segments and move out of loss-making businesses. The holding can make new strides in business without putting its assets at risk.