Mark Pierce, Esq.
The holding company definition is "a business entity that exists to own other companies." A holding company maintains oversight of the companies and/or assets it owns, but it doesn't participate in its day-to-day operations.
What Is the Purpose of a Holding Company?
The purpose of a holding company is to offer liability protection for those who own multiple businesses and lower debt financing costs.
What Does the Term "Holdings" Mean?
When someone refers to a holding, the legal definition is any type of property owned by another. Holdings can include a business, stocks, land, or other financial assets.
Is a Holding Company a Good Idea?
For many business owners, a holding company is a good idea, as it can have some significant benefits. This is especially true for those who own or want to own more than one business. You'll need to weigh the pros and cons to decide if forming a holding company is the right move for you.
What Are the Advantages and Disadvantages of a Holding Company?
The advantages of a holding company include:
- Reduced legal risk
- Potential for dividends to be tax-free
- Centralized authority and decision-making
- Ability to make capital purchases in bulk and get better terms for financing
- Diversification of financial risk
Some of the disadvantages of forming a holding company include:
- Potential for competition between owned entities
- Increased distance between ownership and the market
- Decreased liquidity
- Possibility of antitrust issues
How Does a Holding Company Make Money?
There are two major sources of revenue for holding companies. One major source of revenue is regular dividends from the companies they have a stake in. The other source of revenue is intangible corporate assets such as patents and copyrights, for which other companies may need to pay royalties to the holding company.
What Is the Difference Between a Holding Company and a Corporation?
There may or may not be any difference between a holding company and a corporation. A corporation is a type of business entity, and quite a few holding companies are corporations. But holding companies can also be LLCs, another type of business that does not have shareholders.
What Is the Difference Between a Holding Company and an LLC?
There may be no difference between a holding company and an LLC, as you can consolidate your holdings in an LLC. An LLC holding company structure will consist of one or more members who manage the operations of the company, without having shareholders to report to.
Should a Holding Company Be an LLC or a Corporation?
A holding company can be either a corporation or an LLC, depending on your preference, as both offer protection from personal liability. However, an LLC holding company will have less stringent reporting and record-keeping requirements than a corporation. On the other hand, if you plan to take your holding company public at some point, you won't want to make your holding company an LLC.
What Are the Types of Holding Companies?
Types of holding companies include:
- Pure holding companies, which only exist to own controlling stakes in their subsidiaries
- Intermediate holding companies, which own other companies but are also owned by a holding company
- Mixed holding companies, which are a hybrid of a holding company and a regular company: A mixed holding company does operate its own business, selling goods or services, while also owning one or more other companies.
How Do You Structure a Holding Company?
The typical holding company structure involves creating a parent company at the top to hold all the assets of the subsidiaries. The corporation or LLC holding company structure will then include multiple subsidiary businesses.
Can One Person Own a Holding Company?
Yes: One person can form and own a holding company.
When Should You Start a Holding Company?
Creating a holding company can happen at any time, whenever you feel like you want to make this move. It's an especially good time to do so if you plan to start a second business soon or if you need to better protect your assets.
What Are the Tax Advantages of a Holding Company?
LLC holding company taxes can be lower because the losses of one subsidiary can offset the profits of another. Another major advantage is that the dividends paid to the holding company do not create a tax liability like they would if the dividends were paid to an individual.
Do Holding Companies Have Financial Statements?
A private holding company is not required to have publicly accessible financial statements. However, a holding corporation that has shareholders must file periodic financial statements with the Securities and Exchange Commission.
Does a Holding Company Protect Assets?
Yes: A holding company is able to protect assets because it usually doesn't conduct business activities, so there is limited exposure to liability.
Can a Holding Company Have Employees?
Yes. A business holding company will have at least one employee because someone needs to perform the functions of running the company, including signing documents, making decisions, and overseeing the management of its subsidiaries.
Get Help With Your Business Structure in Wyoming Today
At Cloud Peak Law Group, we can help you to form any type of company, whether it's an LLC or a corporation. If you're interested in setting up a holding company or any other sort of business in Wyoming, contact us today to see what we can do for you. We make it easy to start a business!
Frequently Asked Questions
A holding company is designed to hold assets including, but not limited to, other companies, real estate, crypto, bonds and alternative investments. It should not manage assets or employ people as those bring liability.
Holding company examples include Nestle, Berkshire Hathaway, JP Morgan, Alphabet (which owns Google), and even many national registered agents which have subsidiaries in various states.
A holding company can make money via its subsidiaries, income from assets, royalties, or leasing/loaning assets to 3rd parties or subsidiaries as desired.
A holding company can be an LLC and vice-versa. Traditionally small investors use LLCs, whereas large companies use Corporations as holding companies.
When you think of holding companies, you probably think of a huge multi-million-dollar corporation. And, for the most part, you are correct.
Holding companies are often worth millions, sometimes billions, and they don’t even trade goods and services! But this is why they exist. In today’s economy, more businesses are considering a holding company structure to ensure their smaller companies are safe.
In this article, we discuss what a holding company is, what its purpose is, how to start a holding company, and answer more questions that businesses have about holding companies.
What is a Holding Company?
When a large corporation operates under a different name, it’s more than likely a holding company. Holding companies own assets (real estate, stocks, etc.) of other companies and do not produce any products or services.
Instead of manufacturing or selling products and services, the purpose of a holding company is to control companies, or subsidiaries, that offer goods and services.
Holding companies have one purpose – to own other companies. They control other companies by owning property or stock.
There are two ways holding companies can form – either create a new corporation and maintain the highest number of shares or purchase at least 50% stock in another company.
Different Types of Holding Companies
Pure - A “Pure” holding company is one that will not participate in other business activities. It exists solely to own other companies. It does not explore multiple ways to own other companies.
Mixed – Mixed holding companies are considered a holding-operating company because they engage in other operations while controlling other businesses. When mixed companies take part in other businesses aside from their subsidiaries, they’re called conglomerates.
Immediate – Immediate holding companies are holding companies controlled by another holding company. However, this type of holding company continues to retain voting stock.
Intermediate – Intermediate holding companies are both holding companies and subsidiaries. These types of holding companies come with an added layer of privacy as they’re exempt from publishing their financial records.
Advantages of Holding Companies
Grouping businesses together under a holding company provides prestigious advantages that they would not have when operating as separate entities.
Holding companies are still considered to be their own companies even though they control other companies. This ensures liability protection for members, as well as individual companies and assets of other companies.
More Control, Less Money
A holding company makes it possible for businesses to have more control while spending less money. A holding company must purchase 51% of a business in order to have complete control.
When the correct tax forms are filed, a holding company can write off the losses of one subsidiary against the profits of another. This results in a lower tax bill for all companies involved.
Lower Debt Financing Costs
Being able to secure funding at a lower cost is one of the main attractions of a holding company. For businesses with less revenue, or new businesses, a holding company can pass down funding to the subsidiary.
Disadvantages of Holding Companies
From registration and state fees to the costs for maintaining business, there are costs specific to holding companies. These costs can add up quickly depending on the number and types of subsidiaries under a holding company.
When a larger company owns and controls other companies with different business objectives, it’s bound to be a complex process.
Clash of Interest
To become a holding company, you only have to own 51% of a company’s shares. This means that other shareholders may disagree with your business decisions, and it could cause internal issues.
How to Set Up a Holding Company
There is no one set structure for a holding company.
Depending on the business structure, number of investors, employees, and more, the requirements for setting up a holding company company can become tedious and complex.
Typically, the process for setting up a holding company is the same as starting any business entity. You must have a unique name for the company, file Articles of Organization, pay associated fees, and meet the other state requirements.
If you’re looking to invest in a revenue-generating business or if you already manage multiple businesses, it’s worth looking into starting a holding company. This will profit tax benefits, as well as asset protection.
Determining the need for this structure is the first step in setting up a holding company. Afterwards, you’ll need to register your holding company with the state and provide a unique business name, agent managing the company, and articles of incorporation. You’ll also need to open a separate business bank account to keep track of financials.
Once all paperwork and fees are finalized, you deposit your assets. This is where subsidiaries will transfer assets to a holding company so that they are protected.
This complex structure is not right for every business. It’s an option that business owners should discuss with an attorney to see if it’s right for them.