When you think of holding companies, you probably think of a huge multi-million-dollar corporation. And, for the most part, you are correct.
Holding companies are often worth millions, sometimes billions, and they don’t even trade goods and services! But this is why they exist. In today’s economy, more businesses are considering a holding company structure to ensure their smaller companies are safe.
In this article, we discuss what a holding company is, what its purpose is, how to start a holding company, and answer more questions that businesses have about holding companies.
What is a Holding Company?
When a large corporation operates under a different name, it’s more than likely a holding company. Holding companies own assets (real estate, stocks, etc.) of other companies and do not produce any products or services.
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 have one purpose – to own other companies. They control other companies by owning property or stock.
There are two ways holding companies can form – either create a new corporation and maintain the highest number of shares or purchase at least 50% stock in another company.
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 a holding-operating company 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.
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 makes it possible for businesses to have more control while spending less money. A holding company must purchase 51% of a business in order 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
Being able to secure funding at a lower cost is one of the main attractions of a holding company. For businesses with less revenue, or new businesses, a holding company can pass down funding to the subsidiary.
Disadvantages of Holding Companies
From registration and state fees to the costs for maintaining business, there are costs specific to holding companies. These costs can add up quickly depending on the number and types of subsidiaries under a holding company.
When a larger company owns and controls other companies with different business objectives, it’s bound to be a complex process.
Clash of Interest
To become a holding company, you only have to own 51% of a company’s shares. This means that other shareholders may disagree with your business decisions, and it could cause internal issues.
How to Set 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.
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.
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. This will profit tax benefits, as well as asset protection.
Determining the need for this structure is the first step in setting up a holding company. Afterwards, 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.
Once all paperwork and fees are finalized, you deposit your assets. This is where subsidiaries will transfer assets to a holding company so that they are protected.
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.