When you think of holding companies, you probably think of a huge multi-million-dollar corporation. And, for the most part, you are correct.
A holding company is, by definition, "a business entity that exists to own other companies." A holding company maintains oversight of its own companies and/or assets but doesn't participate in its day-to-day operations. In other words, its purpose is to own assets (subsidiary companies).
Instead of manufacturing or selling products and services, the purpose of a holding company is to control companies, or subsidiaries, that offer goods and services. Holding companies own other companies' assets (real estate, stocks, etc.) and do not produce any products or services.
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Examples of Holding Companies
Holding companies are often worth millions, sometimes billions, and they don't even trade goods and services! When a large corporation operates under a different name, it's more than likely a holding company.
Holding company examples include Goldman Sachs, Nestle, Berkshire Hathaway, JP Morgan, Alphabet (which owns Google), and many nationally registered agents with subsidiaries in various states. You can also check out these real estate holding company examples.
When a larger corporation operates under a different name like the ones mentioned above, it's more than likely a holding company.
In today's economy, more businesses are considering a holding company structure to ensure their smaller companies are safe.
Advantages of Holding Companies
Grouping businesses together under a holding company provides prestigious advantages that they would not have when operating as separate entities.
Holding companies are still considered to be their own companies even though they control other companies. This ensures liability protection for members, as well as individual companies and assets of other companies.
More Control, Less Money
A holding company allows businesses to have more control while spending less money. A holding company must purchase 51% of a business to have complete control.
When the correct tax forms are filed, a holding company can write off the losses of one subsidiary against the profits of another. This results in a lower tax bill for all companies involved.
Lower Debt Financing Costs
Securing funding at a lower cost is one of the main attractions of a holding company. A holding company can pass down funding to the subsidiary for businesses with less revenue or new businesses.
Disadvantages of Holding Companies
Holding companies also have their disadvantages. Here's a breakdown of some of the disadvantages.
From registration and state fees to the costs of maintaining business, there are costs specific to holding companies. Depending on the number and types of subsidiaries under a holding company, these costs can add up quickly.
When a larger company owns and controls other companies with different business objectives, it's bound to be a complex process.
Types of Holding Companies
There are different types of categories when it comes to holding companies. It boils down to a company's business operations. Let's take a look at some of the different types of holding companies.
- Pure - A “Pure” holding company is one that will not participate in other business activities. It exists solely to own other companies. It does not explore multiple ways to own other companies.
- Mixed – Mixed holding companies are considered holding-operating companies because they engage in other operations while controlling other businesses. When mixed companies take part in other businesses aside from their subsidiaries, they’re called conglomerates.
- Immediate – Immediate holding companies are holding companies controlled by another holding company. However, this type of holding company continues to retain voting stock.
- Intermediate – Intermediate holding companies are both holding companies and subsidiaries. These types of holding companies come with an added layer of privacy as they’re exempt from publishing their financial records.
How Does a Holding Company Make Money?
A holding company can make money via its subsidiaries, income from assets, royalties, or leasing/loaning assets to 3rd parties or subsidiaries as desired.
- Regular dividends - A holding company can profit from its subsidiary companies from shares of stocks or bonds that pay dividends or interest.
- Intangible Corporate Assets - Holding companies can make money from royalties owed on any patents or copyrights it owns.
Setting Up a Holding Company
There is no one set structure for a holding company.
Depending on the business structure, number of investors, employees, and more, the requirements for setting up a holding company can become tedious and complex.
There are two ways holding companies can form:
- Create a new corporation and maintain the highest number of shares
- Purchase at least 50% stock in another company.
Typically, the process for setting up a holding company is the same as starting any business entity. You must have a unique name for the company, file Articles of Organization, pay associated fees, and meet the other state requirements.
You'll need to register your holding company with the state and provide a unique business name, agent managing the company, and articles of incorporation. You'll also need to open a separate business bank account to keep track of financials.
To open the bank account, we recommend Relay. Relay is a no-fee, online business banking and money management platform that helps small businesses take control of their cash flow and get crystal clear on what they’re earning, spending and saving.
Once all paperwork and fees are finalized, you deposit your assets. This is where subsidiaries will transfer assets to a holding company to protect them.
FAQs About Holding Companies
When someone refers to a holding, the legal definition is any type of property owned by another. Holdings can include a business, stocks, land, or other financial assets.
The purpose of a holding company is to offer liability protection for those who own multiple businesses and lower debt financing costs.
There may or may not be any difference between a holding company and a corporation. A corporation is a type of business entity, and quite a few holding companies are corporations. But a holding company can also be a Limited Liability Company (LLC), another type of business that does not have shareholders.
There may be no difference between a holding company and an LLC, as you can consolidate your holdings in an LLC. An LLC holding company structure will consist of one or more members who manage the company's business operations without having shareholders to report to.
A holding company can be an LLC and vice-versa. Traditionally small investors use LLCs, whereas large companies use Corporations as holding companies.
Depending on your preference, a holding company can be either entity type, as both offer protection from personal liability. However, an LLC holding company will have less stringent reporting and record-keeping requirements than a corporation and doesn't require the need for a board of directors.
On the other hand, you do not want to make your holding company an LLC if you plan to take your holding company public at some point.
The typical holding company structure involves creating a parent company at the top to hold all the subsidiaries' assets. The corporation or LLC holding company structure will then include multiple subsidiary businesses.
Yes. One person can form and own a holding company.
Creating a holding company can happen at any time, whenever you feel like you want to make this move. It's an especially good time to do so if you plan to start a second business soon or if you need to better protect your assets.
LLC holding company taxes can be lower because one subsidiary's losses can offset another's profits. Another major advantage is that the dividends paid to the holding company do not create a tax liability like they would if the dividends were paid to an individual.
A private holding company is not required to have publicly accessible financial statements. However, a holding corporation that has shareholders must file periodic financial statements with the Securities and Exchange Commission.
Yes. A holding company is able to protect assets because it usually doesn't conduct business activities, so there is limited exposure to liability.
Yes. A business holding company will have at least one employee because someone needs to run the company, including signing documents, making decisions, and overseeing the management of its subsidiaries.
Is a Holding Company a Good Idea?
For many business owners, a holding company is a good idea, as it can have some significant benefits. This is especially true for those who own or want to own more than one business.
If you're looking to invest in a revenue-generating business or if you already manage multiple businesses, it's worth looking into starting a holding company. You'll need to examine your business plan and weigh the pros and cons to decide if forming a holding company is the right move for you.
This complex structure is not right for every business. It's an option that business owners should discuss with an attorney to see if it's right for them.
Get Help With Your Business Structure Today
At Wyoming LLC Attorney, we can help you to form any type of company, whether it's an LLC or a corporation. If you're interested in setting up a holding company or any other sort of business in Wyoming, contact us today to see what we can do for you. We make it easy to start a business!