Holding companies are those that are created to own other companies. When it comes to investment holding companies, they are created specifically to own investments. Investment holding companies do not offer products or services. Instead, they simply own other investments and do so to offer protection to the original company and owners. Holding companies are a method of being able to invest with other partners under one company, and offer protection while doing so. It can make estate planning, or transfer of assets, a simple process.
What is the Purpose of an Investment Holding Company?
Investment holding companies are helpful for those who wish to invest their money with other people. It provides a legal business with structure and guidelines, in which to invest money. This not only helps to limit personal liability but also provides a platform with more capital due to the combined nature of the holding company. For those who do not manufacture or provide services, it provides an ability to do business and invest in products or services.
What can investment holding companies invest in?
There are a variety of different investments that can be held in an investment holding company, such as:
- Intellectual Property
- Real Estate
Investment Holding Company Benefits: Why People Create Them
There are many advantages to creating an investment holding company. Unfortunately many business owners and investors are unaware of how a holding company can help them. In this section, you will learn about the benefits of an investment holding company and why you should create one.
One of the main advantages of an investment holding company is that all the investors involved will be under one single control. If the company is set up as a corporation then there will be a board of directors and set rules in place. If the company is set up as an LLC then there will be an operating agreement to govern the members. This makes it easier to invest and also provides the opportunity for there to be structure, and to make larger investments together.
There are various tax advantages that come along with an investment holding company. These include tax-free dividends and pass-through taxation. When it comes to a holding company, it is automatically taxed as a pass-through entity. This means that the owners will receive the income directly to their bank accounts as profits, and then they will pay taxes on this income later on their own tax returns. This helps to avoid double taxation that comes along with a corporate structure.
Asset protection is one of the main benefits that come with many different types of business structures such as an LLC or corporation. Because of the nature of business, your investments can expose your personal assets to being liable. Forming an investment holding company keeps you shielded from personal liability. Whether someone gets hurt on your property and sues your business, or you have an employee that makes a serious misjudgment, your company can be sued in these situations but you, personally, cannot.
Holding company structures offer a lot of flexibility. If you set up as an LLC you can choose to elect taxation, management structure, and a host of other organizations benefits.
More Control for Less Investment
Creating a holding company is a well-known trick in business. Rather than purchasing 100% of something, a holding company can control other businesses and investments simply by owning more than 50% of its stock. This means more control for less of an investment.
5 Steps Starting an Investment Holding Company
Starting an investment holding company may seem overwhelming at first but when you break it down into separate steps it seems much more doable. Here are 5 simple steps you can follow to create an investment holding company.
- Form an investment strategy: Forming an investment holding company is similar to that of other companies. You will need to make a plan and a strategy in order to succeed. This means knowing what types of investments you want to hold, how you plan to obtain the capital to purchase them, and what you plan to do with them after the investment.
- Select a form of business organization: The two most common forms of business organizations are corporations and LLCs within these organizations, there are also subsets such as c-corp and s-corporations. LLCs are one of the more common types of investment holding companies because it allows members (owners) to elect taxation, avoid the double taxation of C-corps, and puts no limit on the number of members you may have.
- Register your business: This will need to be done in your state of formation and will include filing with the secretary of state. This filing should include the name of your business, the name of members or owners involved, as well as the registered agent, and a filing fee (if required by your state).
- Raise Start-Up Financing: If you do not already have capital then you will need to raise this with other members. This is an essential step to starting an investment holding company.
- Build Your Portfolio: After you have your capital secured you can move on to building your portfolio and operating as an investment holding company with minimal liability risk.
It is important to remember the costs associated with starting an investment holding company. Typically these include filing fees (formation fees), as well as annual fees, and the actual costs of the investments.
Should You Start an Investment Holding Company? Is it Right for You?
If you are looking to form a business with other people involved, then a holding company might be an option. Especially if you do not have goods or services to sell. If you are looking to limit your personal liability it is also a good option. For those that manufacture products or provide services, a holding company structure would not make sense. Instead, forming an LLC or corporation to sell those goods or offer those services would be a better idea.