Holding companies are business entities, such as corporations or limited liability companies (LLC). A holding company may often be called an “umbrella” or a parent company. However, they typically do not manufacture, sell or conduct business operations. Instead, holding companies are used to control the stock of other companies.
Even though a holding company may own other company assets, it is often limited to only oversight responsibilities. It may review a business’s management decisions and does not actively involve itself in running the company’s daily operations. The holding company holds assets for these other companies are referred to as subsidiaries.
Holding companies are not responsible for the debts of any of their subsidiaries. So, if a subsidiary goes bankrupt, the creditors are not allowed to go after the holding company.
The primary purpose of a holding company is to control other companies. They can also hold the property of their subsidiaries, including any trademarks, patents, stocks, or other assets.
If a holding company completely owns a business, that business is called a “wholly-owned subsidiary.” In this case, a holding company can hire and fire any of the wholly owned subsidiary managers. However, the managers are responsible for their own operations of the company.
As mentioned above, holding companies are not held personally liable for any losses that subsidiary companies have. Nevertheless, the holding company may still experience a capital loss and a decrease in its net worth. However, the bankrupt subsidiary cannot pursue the holding company legally.
This holding company's key characteristic protecting it from liability, is often utilized as an asset protection strategy. This is done by having one holding company owning a subsidiary’s brand name and trademarks and another owning the real estate. This method prevents the exposure of the holding company and its subsidiaries. It also provides the added benefit of lower tax rates if parts of the business are located in areas with lower tax rates.
The holding company must be set up correctly so that any debt liability from one subsidiary does not affect the others.
Holding companies also help to protect an individual business member's assets. These assets are held by the corporation and not by the individual, thereby shielding them from debt liabilities, lawsuits, and other potential risks.
Holding companies lower the cost of operating capital for their subsidiaries. Through downstream guarantees, the holding company can pledge a loan for the subsidiary. This can aid companies in receiving lower interest rates for their loans. Using the financial strength of a holding company can decrease the risk of a subsidiary defaulting on its debts.
The general advantages of holding companies are further listed below.
There are some disadvantages to utilizing a holding company, such as the following:
The holding company's people are ultimately responsible for deciding where to invest their money. There are several ways holding companies can obtain funds by selling equity interests in themselves or their subsidiaries or by taking out loans. Another way it can obtain funds is by receiving payments from its subsidiaries through interest payments, rents, distributions, dividends, and payments for any other functions it provides.