Holding companies are designed to protect assets and have control over other companies. They acquire equity in other companies, which is different than simply buying stock. However, holding companies can own stocks, along with other assets.
The structure of a holding company allows businesses to protect their assets by dividing the company into several business entities and one parent company.
This article helps business owners understand the purpose of a holding company and details how to start a holding company if that’s a strategy you want to take.
What is a Holding Company?
A company that does not produce any goods or services is known as a holding company. Rather than being an active business, the holding company owns assets such as stocks, private equity funds, real estate, or limited liability companies.
Holding companies can own anything with value as that’s how it forms a corporate group. Instead of selling or manufacturing products, the purpose of a holding company is to control subsidiaries (other companies) that offer products and services.
What is the Purpose of a Holding Company?
A holding company exists for the sole purpose of controlling other companies. This process can be done in two ways.
First, the holding company must buy or acquire enough voting shares in a subsidiary to gain control of management. The second way is to start a brand-new company and control its management.
To gain control over another business, the holding company must own 100% stake or gain over half of the voting shares.
Different Types of Holding Companies
There are a few different types of holding companies that you can form in Arizona. Here are the main 4 types of Arizona holding companies.
A “pure” holding company solely exists to control subsidiaries. This company will not conduct any other forms of business except controlling other companies.
“Mixed” holding companies will also control other companies, but it will also perform its own business operations.
A holding company that’s already a subsidiary of another company is called an “Immediate” holding company. It’s a company that keeps voting stock even though the company is controlled by another entity.
“Intermediate” forms are both subsidiaries and a larger holding company. This form of holding company is exempt from publishing its financial records. This element provides protection that other forms do not have.
Advantages of Holding Companies
Here are a few benefits of creating a holding company in Arizona.
In Arizona, a holding company is considered its own company. This means if a holding company owns subsidiaries, and the subsidiary is sued or goes bankrupt, then the assets of that business are safe with the holding company. As a separate entity that does not have business operations, the holding company is generally safe from lawsuits relating to business operations.
If 80% or more of subsidiaries are owned by the holding company, then tax benefits are available. If a subsidiary suffers a loss, the holding company can actually make a profit. With a holding company structure, it’s also possible to eliminate the dividends tax. Rather than paying dividends straight to shareholders, they can be distributed to the holding company.
Control Assets for Less Money
For a holding company to maintain control over subsidiaries, it only needs to purchase 51% of the company. This is a substantially less investment to control and run companies.
Lower Debt Financing Costs
Being a larger company, a holding company has a better chance of obtaining a loan with good interest rates. Once the loan is secured, the holding company can then distribute to subsidiaries. This is very beneficial to riskier companies and start-ups who may not have the upfront financial backing needed.
Disadvantages of Holding Companies
Here are a few of the most common disadvantages of holding companies.
Any time a larger company owns smaller companies, the process will be more complex. This is especially true if a holding company controls several subsidiaries, each with different business objectives.
Costs can quickly add up depending on the number and types of subsidiaries under a holding company. From registration and state fees to the costs for maintaining business, there are costs specific to holding companies.
Clash of interest
You only have to own 51% of a company’s shares to become a holding company. This means if you do not own the entire number of shares, there’s a possibility of other shareholders disagreeing with your decisions.
How to Set Up a Holding Company
It’s important to understand that the structure of a holding company can vary greatly, so there’s not a one-size-fits-all solution on setting up this structure.
The requirements for starting a holding company also depends on several factors like the business structure and number of employees and investors. In general, the process for setting up a holding company is the same as starting any business entity. You must have a name for the company, file Articles of Organization, pay fees, and meet the other state requirements for starting any 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. This will profit tax benefits, as well as asset protection.
This is the first step in starting a holding company – determining the need for this structure. After you’ve determined if this is beneficial for your situation, you’ll need to register your holding company with the state and provide your business name, agent managing the company, and articles of incorporation. You’ll also need a separate business bank account for your holding company to properly keep track of financials.
Once all paperwork and fees are taken care of, it’s time to deposit your assets. This is where subsidiaries will transfer assets to a holding company so that they are protected.
While holding companies have several advantages, such as lessening the risk of losing assets, this complex structure is not right for everyone. It’s an option that business owners should discuss with an attorney to see if it’s right for them.