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Utah Holding Company

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In Utah, you can find a bunch of holding companies, the majority of them are located in Salt Lake City. These business owners recognized the benefits being a holding company would give them, and made the necessary steps to become one. Continue reading to discover more about what exactly a holding company is, and if that type of model would suit your business needs.

What is a Holding Company?

A holding company is a business entity that owns assets, and/or the majority of stock of other companies. They typically do not produce goods or services themselves, instead they focus on forming parent-subsidiary relationships with other companies that would execute these operations for them. As the parent entity, a holding company could oversee the management decisions of a variety of companies without having to partake in the day-to-day procedures each subsidiary performs.

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What is the Purpose of a Holding Company?

To reiterate, a holding company’s main purpose is to control assets of other companies. These assets can be in the form of property (eg. real estate), patents, trademarks, stocks, and whatever would give them a controlling share of a business. Large businesses consider creating a holding company when they have a lot of operations to supervise. For example, a large toy corporation that sells different categories of products like dolls, card games, toy cars, and plushies could leave the daily minutiae of these fields to different subsidized companies to manage. This is sometimes a preferable option over creating divisions under one business. A small business would also be interested in creating a holding company if they decide to expand their business, or if they want to form benefit companies that have a positive impact on social and environmental issues.

How does a holding company make money?

Holding companies are in charge of choosing how to invest their money. It can gain investment funds by selling or borrowing equity interests of its companies. The subsidiaries can provide revenue to the parent company in the form of distributions, rents, dividends, and other payment methods in exchange for the support of the parent company.

Different Types of Holding Companies

  • Pure: Holding companies are pure when they are created ONLY for owning stock in other corporations. They would not engage in any business outside of controlling other businesses.
  • Mixed: Much like the name suggests, this type of holding company would be a combination of managing other companies and performing their own operations. This company is alternatively known as a holding-operating company.
  • Immediate: When the holding company controls stock of other companies, but is also a subsidiary itself, that is considered to be an immediate type.
  • Intermediate: An intermediate holding company is one where it is the subsidiary of a larger corporation, but it also is a parent company to another business entity. It lies in the middle of the chain of command.

The Pros of Holding Companies

  1. Protection From Liability: Each subsidiary underneath a holding company is considered its own legal entity. This is beneficial to business owners when a subsidiary is facing a lawsuit because the plaintiff would be unable to claim the assets of the other subsidized entities. This also means that the holding company is highly unlikely to be held liable for the independent actions of its subsidiaries. This liability shield applies to bankruptcy as well. If a subsidiary goes bankrupt, the holding company may lose net worth and capital, however the creditors of the bankrupt company cannot legally ask for remuneration from the holding company.
  2. Save Money On Assets: A holding company owner can save money when controlling interest in another company. Instead of purchasing the whole subsidiary, they only need 51% or more of the assets to gain control of that entity. That reduction in cost compounds into considerable savings when acquiring multiple entities.
  3. Better Loan Options: Typically, a financially strong holding company has better access to loans with lower interest rates than their operating businesses would have access to. This is especially true when the subsidiary in need of capital has a credit risk like being a startup company. Holding companies can more easily get these loans and distribute the money to its subsidiaries.

The Cons of Holding Companies

With every system, there are some flaws to watch out for as well. Please keep the following in mind if you are considering making a parent-subsidiary business model.

  1. Complexity: Managing a holding company and its subsidiaries presents an extra layer of difficulty that wouldn’t normally be an issue when operating as a singular business entity. That is why it is important for corporate bodies like that to use good management systems to keep track of important deadlines, paperwork, and information regarding each subsidiary.
  2. Management Challenges: When you only control about 51% of a company, managers may have to bump heads with the minority owners over conflicts of interest.
  3. Compliance Costs: There are additional startup fees, annual reports to manage, and additional tax information associated with the formation of a holding company and its subsidiairies. These fees can be avoided when operating as a single company.

Registering a Holding Company

Businesses in Utah can submit an initial registration form to the Department of Financial Institutions that you can find online at their government website. This document is also used to file annual registration to renew your holding companies.

Filling out the registration form will require important information about your business such as:

  • Financial statements
  • Auditing information
  • List of banks the registering identity has control over
  • An organizational chart detailing ownership of assets from the bank to the top tier holding company.
  • Certificate of good standing from the state of Utah
  • A copy of your business's Articles of Incorporation.
  • Lists of individuals and entities with percentages of outstanding voting stocks in the registering entity.
  • Other various contact information and details.

For seasoned companies who are looking to grow their franchise, they should already have the majority of paperwork needed to become a holding company so it shouldn’t be as arduous a task. However, it is not ideal for newly created startups to jump straight to being a holding company when they could benefit from the simplicity of a single operating company. Especially if they do not plan on expanding the scope of their products.