You might have come up with a business idea and formed an LLC with goals and ambitions and seen success. That might inspire you to start other business opportunities, but operating more companies comes with more risks. How can you minimize those risks? You can separate and protect the assets of multiple companies by forming a holding company.
What is a Holding Company?
A holding company owns assets or the outstanding stock of other companies. It doesn’t conduct operations, ventures, produce goods, or services on its own. Instead, a holding company is a business that exists to own the assets or the shares of other companies for the purpose of forming a corporate group. Either an LLC or a corporation can serve as a holding company. Companies controlled by a holding company are known as subsidiaries. The risk of operations is appointed to these subsidiaries rather than the holding company.
What is the purpose of a Holding Company?
Typically a hold company exists to control multiple other companies and to keep the assets of each one separate from each other. A holding company can also own real estate, patents, trademarks, stocks, and many other assets. Separating each company can protect those companies from being held liable in a potential lawsuit with one of the sister companies. In this country where someone can sue anyone for any reason, this separation offers vital protections to your potential business endeavors.
Different Types of Holding Companies
There are primarily four types of holding companies, each with a different goal. You can have a pure holding company for holding stocks in a business, a mixed holding company that owns stock of another company while operating on its own goals, an immediate holding company that owns stock or control of a company and is itself controlled by another entity, and an intermediate holding company which is itself a holding company of another entity and a subsidiary of a larger firm.
If you formed your company for the sole purpose of owning stock in other companies, then you have yourself a pure company. A pure company focuses only on controlling one or more firms and does not participate in the daily operations of the companies it controls.
Immediate holding companies retain voting stock and control of another company, while also being controlled by a separate business entity. Essentially, it’s the type of holding company that’s already a subsidiary of another holding company.
A mixed company (or a holding-operating company) will engage in its own operations while also controlling one or more subsidiaries. If a holding company takes part in lines of business completely unrelated to the goals of their subsidiaries, then it is known as a conglomerate. Alphabet Inc. which is an example of a multinational conglomerate, is headquartered in California and is the holding company that controls Google.
As the name suggests, an intermediate holding company is already a subsidiary of a larger corporation and a holding company of a separate smaller entity. An intermediate company can possibly be exempt from publishing financial records for the smaller group.
Advantages of a Holding Company
Holding companies offer an array of benefits, and you don’t have to commit to forming one at first. Either an LLC or a corporation can be formed as or evolve into a holding company. As your business grows, you may decide to splinter off different factions to focus on different goals. You might also decide that segmenting your assets into different subsidiaries will offer you the ultimate in liability protections. There are many great reasons to form a holding company.
The ability to separate multiple subsidiaries from each other allows each one to operate without assuming the liability risks of other companies under the same umbrella corporation. Unless the parent company had any direct involvement with a subsidiary’s actions, it is unlikely to be held liable in the event one of its subsidiaries is sued. Should a debt be collected, separating entities will create a barrier between them. A collector for one company can’t claim the assets of a sister company.
Control Assets for Less Money
Since a holding company needs only 50% of a company’s shares or interests to have control, this means that you can acquire control of a company for less than if you had purchased all of their interests.
Lower Debt Financing Costs
Each company can also operate in different locations. Strategically shifting the locations of each business can allow each subsidiary the ability to operate where it’s more cost effective.
Disadvantages of a Holding Company
Sometimes all you need is a single-entity structure to get the job done. Forming a holding company adds layers to an already complex system of managing a business. Each new acquisition adds a new layer of legal documents and business taxes to keep track of. You’re going to need a good tool for keeping track of multiple legal entities. If you fail to keep records, assets, liabilities, and properties separate, then you risk a lawsuit piercing through your liability protections, and allowing creditors the ability to gain access to assets you thought were protected.
Each individual subsidiary is still a separate business, and as such is subject to the statement of information biennial report costs, as well as California’s $800 annual franchise tax. Owning or managing multiple businesses in a costly state like California can become expensive, and fast. You can diversify the state you form in, but every state will have an annual cost. You’ll have to know the requirements for each state you form a business in. It might ultimately be less costly to operate as a single company.
How to Set Up a Holding Company
A corporation can become a holding company in two ways. It can either acquire enough voting stock within a company, giving it the power to control activities, or it can be created as a new holding company from the ground up while retaining all or part of the shares of the new company. A mother company can own as little as 10% of stock in a company and still control decision-making processes. Either way, the relationship between the mother company and the companies they control is a parent-subsidiary operation. If the parent company owns all the voting stock of another company, it becomes a wholly-owned subsidiary of the mother company.
How Can a Business Lawyer Help?
Having an experienced lawyer handy to answer questions can help you decide if forming a holding company. is the right move. It might be more beneficial to forming an LLC as your holding company in business-friendly states like Wyoming. Contact us today and we’ll help you figure out the details!