Holding companies own assets or stock in other companies. Although a holding company does not often produce goods or offer services on their own, they do have a purpose, to own assets. Typically these assets or shares of other companies are merged to form a corporate group.
There are two main ways in which a corporation becomes a holding company. The first is by purchasing enough shares in a company to control its decisions. The other method is by creating a new corporation and then holding on to most of those shares.
The Relationship Between Parent and Subsidiary Companies
Most often we associate owning 50% of stock with majority ownership and control. Although owning more than 50% of the voting stock of another company does mean control, it does not mean complete decision-making power. If the parent company owns only 10% of a subsidiary’s stock, it holds decision-making power.
This relationship is called a parent-subsidiary relationship. The holding company is considered the parent company, while the corporation that is being acquired is considered the subsidiary. If the parent company controls all the voting stock of the other firm, then it is called a “wholly-owned subsidiary”.
What is the Purpose of a Holding Company?
Most often a holding company will exist for the sole purpose of controlling other companies. Holding companies have the ability to own property, such as real estate, along with patents, trademarks, stocks, and other assets.
Different Types of Holding Companies
Pure holding companies are formed for the sole purpose of owning stock in another company. These holding companies do not participate in any other business other than controlling and purchasing other firms. This is a holding company at its core.
Mixed holding companies work not only in controlling other firms but also has their own operations. Often a mixed holding company is also referred to as a holding-operating company. Mixed holding companies that are in completely different industries from their subsidiaries are considered conglomerates.
Immediate holding companies are able to retain voting stock in other companies regardless of if that company is already controlled by another entity. Essentially, an immediate holding company is both a parent company and a subsidiary of another.
An intermediate holding is a firm that is both a holding company of another entity and a subsidiary of a larger corporation. An intermediate holding firm might be exempted from publishing financial records as a holding company of the smaller group.
Advantages of Holding Companies in Delaware
One of the largest advantages of a holding company is the ability to exercise control over multiple companies. In this case, the parent company is offered liability protection. This is because each subsidiary is considered its own independent entity.
In the case that one of the subsidiaries were to face a lawsuit, your other subsidiaries and parent company would be completely protected. This lawsuit would have no standing to touch them or hold the parent company liable.
Control Assets for Less Money
By forming a holding company, the owner can control interest in another company without needing to invest in the full price of the company. Parent companies only need to purchase 51% or more of the subsidiary, and it will automatically gain control. Instead of purchasing 100% of the subsidiary, small business owners are able to gain control of more than one entity with a much smaller investment.
Lower Debt Financing Costs
When a holding company has the financial strength, it typically is able to obtain loans at a lower interest rate. This is essential because smaller companies are often in need of capital. Typically a subsidiary is considered a startup or other venture, and these are often seen as a credit risk. The holding company will be able to obtain a loan at a lower interest rate, and then distribute the funds to the subsidiaries as they wish.
Holding companies that own 80% or more of a subsidiary company are able to file consolidated tax returns. Consolidated tax returns bring together the financial records of all the acquired firms, along with those of the parent company.
These provide a number of benefits and require you to with that of the parent company. Such as in the case of a subsidiary encountering losses. By being able to offset the profits of the other subsidiaries, it results in a reduced tax liability.
Disadvantages of Holding Companies in Delaware
Holding companies are far more complex than your average LLC or corporation. They require more staff, more organization, and a variety of legal documents. It is essential that a holding company stays organized or the entire operation could fail and affect the parent company as well.
When forming a holding company, there are formation fees for each parent and subsidiary company. In the state of Delaware, there are also franchise tax obligations. By using a single operating company you avoid these additional compliance obligations and associated costs.
How to Set Up a Holding Company in Delaware
There are a few necessary steps involved in starting a holding company. The first is to evaluate your needs. Decide what you want from this process of creating a holding company.
To form a holding company you will need to register in the state of Delaware. You will be required to provide your business name, articles of incorporation, and the name of the business agent managing the operating and holding company. You can be the agent for both the operating and holding company if you choose to do so.
The articles of incorporation are essential because they provide an outline for the purpose of your company. It will also include the officers, and specify how you plan to make business decisions. You will also need to create a bank account for your holding company because the operating and holding companies must use separate bank accounts to keep track of their bank records separately.
Finally, the process of forming a holding company will be completed by depositing assets. This is because the wealth that your company generates is essentially deposited with the holding company first. The money in this account can then be lent to the operating company as needed. If necessary, you can sell your operating company’s assets to the holding company to protect them.
Forming a Holding Company in Delaware
The process of forming a holding company in Delaware is not difficult, but it is recommended that you use the help of a business attorney. Contact us today to learn more about how to form a holding company in Delaware.