Texas Holding Company
Summary
A Texas holding company owns and controls other companies, offering benefits like liability protection and control with less investment. However, complexities and compliance costs are drawbacks to consider when forming one. Ownership of at least 51% of the subsidiary is needed for control.
If you have ever seen a large corporation under a different name, then this might be because you were seeing the name of its holding company. Holding companies are formed the same way that any other company is formed. The difference between a holding company and an operating company is that a holding company doesn't make or sell anything itself: It just owns one or more other businesses.
Holding companies are those that own assets or stock of other companies. They typically do not have their own products or services. Instead, they only exist to own other companies. These companies are then used to form a corporate group.
There are two ways to form a holding company. One method is to create a completely new corporation and then sell off a portion of the shares while maintaining the majority. The second method is to purchase at least 50% of stock in a different company.
Holding companies are a relationship between a parent company and a subsidiary. This is called a parent-subsidiary relationship. Holding companies technically own the subsidiary, which is the acquired company.
What Is the Purpose of a Holding Company?
Holding companies fully exist to own other companies. They can own property or stock in these companies in order to control them. Holding companies can also own patents, trademarks, or even real estate.
What Are the Different Types of Holding Companies in Texas?
Pure
Known as a “Pure” holding company, this is a company that is formed with the purpose of owning other companies. This company will not participate in other businesses other than controlling other companies. This is a type of business all on its own. The main designation of Pure companies is that they do not explore any other avenues other than owning companies.
Mixed
Mixed holding companies specifically control other firms, but continue to work in their own industries. Because mixed holding companies engage in other operations as well, they are considered a holding-operating company. Additionally, mixed holding companies that take part in different lines of business than their subsidiaries are called conglomerates.
Immediate
When holding companies continue to retain voting stock or control of a subsidiary, although they are being controlled by another holding company, it is called an “Immediate” holding company. Essentially, these are holding companies controlled by another holding company.
Intermediate
Intermediate holding companies are a subsidiary, as well as holding companies. They are actually exempt from publishing their financial records which provide a layer of privacy not available for other forms of holding companies.
Advantages of Holding Companies
Here are a few reasons a person or a business would form a holding company in Texas.
Liability Protection
Holding companies exercise control of other companies, but they are all still considered to be their own companies. In the state of Texas, they will all remain separate Texas businesses, which ensures liability protection for each. When one company is sued, it will not affect the others, and the assets of the other companies are protected.
Control Assets for Less Money
Most businesses would like to control more of a company by spending less, and this is possible with a holding company. In order to completely control another company, a holding company only needs to purchase 51% of it. This provides the ability to control and run companies with a lower investment.
Lower Debt Financing Costs
One of the main advantages of a holding company is being able to secure funding at a lower cost. This is helpful for new businesses, or those with less revenue. The holding company can pass down funding to the subsidiary.
Tax Benefits
When a holding company owns at least 80% of a subsidiary tax benefits are possible. This is because it allows the holding company to combine the financial records with the subsidiary. Should the subsidiary encounter a loss, then it can lead to lower tax liability.
Disadvantages of Holding Companies
While there are many advantages to creating Texas holding companies, there are flaws with the process. Here are two of the main disadvantages of creating a holding company in Texas.
Complexity
When building a holding company there is another layer of complexity involved. You are no longer running one company but have multiple involved. You must be organized and hope not to make mistakes that could cause issues for either company.
Compliance Costs
Forming a holding company means more compliance costs. Whether this is due to the structure of your organization, or the state you have formed in, Texas specifically requires a franchise tax to be paid by all LLCs making over a certain amount of profits annually.
How to Create a Texas Holding Company
In order to set up a holding company, the parent company must own at least 51% of the subsidiary. This ensures that the parent company has control of the subsidiary. Owning 10% of the stock in a subsidiary means that there is a say, but it is not completely controlled. Another approach to initiate a holding company is by merging a larger company with a smaller one.
Forming a Texas holding company offers various advantages, including liability protection, controlled assets with less investment, lower debt financing costs, and potential tax benefits. However, the process comes with complexities and compliance costs.
If you're considering structuring a Texas holding company and have questions, feel free to contact us through our contact form or call +1 (307) 683-0983. Our team of experienced paralegals is here to guide you through the process and ensure a smooth journey towards establishing your holding company.