Holding companies own assets or stock of other companies. Essentially, a holding company is one company that owns another. Although holding companies produce revenue, they typically do not produce goods or services. The sole purpose of a holding company is to own assets or the shares of other companies and to form a corporate group.
What is the Purpose of a Holding Company in Florida?
The purpose of a holding company is to control other companies. Holding companies may also own property. This can include real estate, patents, trademarks, stocks, and other assets.
There are two parts to holding companies. The mother (parent) company which is the corporation, and then the subsidiary company. The parent-subsidiary relationship is unique. If the parent company controls all the voting stock of the other firm, then that organization is considered a wholly-owned subsidiary of the parent company.
Different Types of Holding Companies
In Florida, a Pure holding company is considered one that is formed solely with the purpose of owning the stock of other companies. Essentially, the company will not participate in any other business activities other than controlling its subsidiary.
Mixed holding companies not only control their subsidiary companies but also engage in their own operations. These are known as either mixed or holding-operating companies. Those holding companies that take part in a completely different industry of business than their subsidiaries are considered conglomerates.
Immediate holding companies are those that retain voting stock in another company. Although the company itself may already be controlled by a different entity, it can still obtain a subsidiary.
Intermediate holding companies are corporations that are a holding company of a subsidiary, as well as the subsidiary of a larger corporation. Oftentimes intermediate holding firms can be exempt from making their financial records public due to being a holding company of the smaller group.
Advantages of Florida Holding Companies
Holding companies are considered independent legal entities. This means that one of the advantages of a holding company is that there is liability protection afforded for each subsidiary and the holding company, should one of them face a lawsuit. The plaintiffs will never have to a right to claim any assets of the other companies, and the parent company will not be held liable.
Control Assets for Less Money
For companies in the state of Florida, creating a holding company provides you the opportunity to invest without the full amount of the investment. By purchasing 51% or more of a subsidiary company, the parent company will automatically gain full control. Rather than spend 100% of the subsidiary’s cost, a business owner can gain control of many different entities with only a 51% investment.
Lower Debt Financing Costs
For smaller companies, it can be difficult to obtain loans with an attractive interest rate. By obtaining a loan under the name of the parent company, you can do so at a lower interest rate. This financing can then be passed down to the subsidiary.
Holding companies that own 80% or more of a subsidiary are afforded tax benefits. This is done by filing a consolidated tax return which combines the financial records of all the different firms together. Should one of the subsidiaries encounter losses, these losses are offset but the profits of other subsidiaries. Overall, the net effect of filing a consolidated return is a reduced tax liability.
Disadvantages of Holding Companies
Creating a holding company can become extremely complex. This is why having good management in place will provide an easier transition during formation and operation.
The holding company and each subsidiary that is formed will require the payment of several fees. This includes formation fees, as well as annual fees, and other fees associated with running either an LLC or corporation.
How to Set Up a Holding Company in Florida
There are two methods of starting a holding company. One is by acquiring enough stock to be a majority shareholder, while the other is to build a new corporation and retain most of its shares. Although owning more than 50% of the voting stock of another company should guarantee control, parent companies (holding companies) can make decisions for the subordinate company by owning only 10% of its stock.
Setting up a Holding Company
There are four main requirements to forming a holding company. Although it is not an incredibly long process, there are a few specifications you will need to make. First, decide which type of business should be formed. Will it be a corporation, LLC, or another type of entity. This decision will dictate how you are taxed, managed, and how earnings are distributed. This also includes deciding how the entity will be taxed federally.
Next, you will need to decide where you want to form your entity. When forming in the state of Florida you will need to have a registered agent within that state. It is good to note that the holding company and its subsidiaries do not have to be formed in the same state, but you will need to qualify for the other businesses to do business in a new state.
Finally, you will need to choose a name. This must meet the requirements regarding the status of the business entity, and the state of Florida. Always check the availability of the name you wish to reserve, and do so before filing official documents.