Forming a Limited Liability Company (LLC) or a corporation creates an entity that is provided specific rights. It gives its owner limited liability protections by being recognized as a different entity from its member(s). People can own different types of assets, like land, buildings, tools, and multiple companies. A company that owns assets or stocks of another company is known as a holding company.
What is a Holding Company?
A holding company serves a very precise purpose. If you own assets and stock of multiple companies, you need to protect each one from the risks associated with the others. This type of business structure typically doesn’t conduct operations or produce goods on its own. It aims to form a corporate group that is controlled by one of the companies in the group. A company controlled by a holding company is called a subsidiary, and the risk of operations for each subsidiary is self contained by that entity.
What is the Purpose of a Holding Company?
Holding companies serve to create barriers between separate business entities owned by the same person (or people). This separation protects each company from the risks incurred by other companies under the same umbrella. It can be an LLC or a corporation, and it has the same benefits, like the ability to own stocks, trademarks, real estate, patents, and all kinds of assets, just like the companies it owns.The ability to keep each company under the umbrella separated for liability purposes is the primary reason a holding company exists.
Different Types of Holding Companies
A holding company comes in four variations, each serving a different purpose. Pure holding companies hold stocks in one or more different companies, while immediate or intermediate holding companies operate as an in-between for bigger companies. A mixed holding company can both own another company while operating independently with its own agenda. A pure or mixed holding company is where it starts, but we’ll go over all four types in a little more detail:
A company formed for the sole purpose of owning the stock of other companies is known as a pure company. This type of business entity typically owns one or more firms and is not involved with daily operations of any of the companies it owns stock in. It’s more of a controlling entity.
An immediate holding company is both a company that owns the stock of another company, while itself being a subsidiary of another business. Generally, it still has the ability to make its own decisions while another company owns the stocks associated with it.
A holding-operating, or mixed company, is a company that engages in its own operations while simultaneously influencing one or more subsidiaries. If the goals of a mixed company are unrelated to the goals of the companies it owns, then it is a conglomerate company. Sony Group Corporation is an example of a multinational conglomerate that owns a company formed in New York, Sony Corporation of America.
An intermediate holding company is similar to an immediate company, also being a subsidiary of another company, but that company is generally a larger entity who calls the shots. The best example in New York is Sony Group Corporation is the multinational conglomerate holding company who controls Sony Corporation of America, an intermediate holding company, who controls smaller subsidiaries like Sony Electronics, Sony Entertainment, etc.
Advantages of Holding Companies
A holding company can take the form of any of the four types listed above, while providing all the benefits that come with forming an LLC or incorporating in New York. They don’t all have to start out as a pure holding company. You can start with a typical LLC and eventually grow into separate entities, or your company can collect enough stocks from another company and evolve into a holding company later. It might also happen that you form a single company with multiple goals, and each goal later becomes an isolated company with its own agenda. Here are a few examples of benefits a holding company has over basic LLCs and corporations:
Capital Loss and Liability Protection
Segmenting companies into different entities provides protections for each company in the group. If a single company goes bankrupt, creditors and investors of that subsidiary cannot pursue losses from sister companies, or the parent company, as long as none of those companies have any direct involvement with the duties of the bankrupt business.
Lower Debt Financing Costs
Depending on the type of business, there may be a location that is more affordable to operate. You can diversify business locations based on where each one might earn the most profits or receive the most tax relief.
Control Assets for Less Money
If you’re looking to purchase control of a company that provides a service, instead of building a new company from the ground up and covering 100% of the costs, you can instead find an available company that provides that service, and as long as you own 51% or more of it, you can have the control you want. You can limit the amount you invest into a company, instead of purchasing all of it.
Disadvantages of Holding Companies
A holding company may not be right for everybody. A single-entity structure might suffice, and owning multiple companies straight off the bat can be very expensive. Keeping track of all the necessary taxes and annual report deadlines can be overwhelming.
If all you need is to protect your personal assets, then forming an LLC is probably sufficient. A holding company adds more to the stack of things to keep track of when managing a business entity. Each new subsidiary adds a new set of legal documents and taxes to monitor. If you don’t have a tool or person who helps keep track of all the deadlines, then you risk a breach of your liability protection.
Each business has a unique identity and each comes with the cost of operating that business. If you’re forming businesses from the ground up in New York, you’ll have to pay publication costs and advertise each business.
How to Set Up a Holding Company
In order to establish a holding company, a company can either acquire voting stocks of a company until it has enough to control that company’s activities, or a holding company can be formed from the ground up as a pure holding company. A mother company doesn’t need to own a majority of an entity to have complete decision-making authority. The relationships between the mother company and the ones owned by that company is a parent-subsidiary kind. A mother company can own as little as 10% of the stock of the subsidiary to have control over it, and if it owns all the voting stock, that subsidiary becomes a wholly-owned subsidiary.
How Can a Business Lawyer Help?
Having a business lawyer at your disposal to answer questions when forming any kind of company is highly recommended. Knowing what is the right kind of business for you is exactly what a consultation Reach out today and we’ll find the right business for you! Want to know more? View our article on what is a holding company?