An investment holding company may provide a vehicle for multiple investors to pool their funds and collectively invest around a specific investment objective or strategy, e.g. real estate. Alternatively, investment holding companies may be wholly owned by one person, an asset protection trust, or a family. In each case the purpose is the same: to limit risk, minimize taxes, maximize returns and enhance privacy.
Is a parent company the same as a holding company? Yes, they are the same, it's simply a matter of differing terminology. You may either have parent companies with children below, or holding companies with subsidiaries, but in either case they refer to the same concept. A parent company is the same as a holding company.
This pooling of funds provides investors opportunities for diversification and access to investments not otherwise accessible. Forming a holding company also allows you to to shift income between subsidiaries. This is referred to as income shifting.
An investment holding company is a company, usually an LLC or Corporation, that exists for the sole purpose of holding investments. It does not provide any financial services, nor any other product or service, to the public. Further, the holding company structure can minimize personal liability for the company’s members or shareholders.
Instead, an investment holding company generates income by selecting, acquiring, and managing a portfolio of investment assets that provides a return via dividends, interest, capital gains, unrealized appreciation/depreciation, and/or lease or rent payments. That return is then allocated to the investors, based on their individual proportion of ownership in the investment holding company.
Holding Company Investments
An investment holding company can be used to invest in a variety of different assets:
Those who own and operate multiple properties often use an investment holding company strategy in much the same way that the owner of a single business uses a corporate or LLC structure to create separation between his or her business activities and personal affairs.
Holding Company Examples
It is common for well known conglomerates to be holding companies, e.g. Berkshire Hathaway or Wells Fargo. These holding companies are parent companies, generally structured as limited partnerships, LLC or Corporations. They own and control their subsidiaries, but are not liable for their actions.
In this case, the holding company owns the business. The investment holding company can also own a range of other assets, which they then lease to their subsidiary or child company. These include things like trademarks, copyrights, patents, trade and brand names, bonds, real estate, hedge funds, stock from other corporations, other partnerships that are limited or LLCs, equity funds of a private nature, and more. Essentially, the purpose of a holding company is holding investments.
Holding companies may exist solely for the ownership of specific asset types. Or it can exist to own a range of asset types. One example of a large company that is actually a holding company is Johnson & Johnson. This holding company has the majority ownership stake for more than 265 different companies, all of which focus on pharmaceuticals, medical devices, or consumer health care.
Holding Company Benefits
Most investment holding companies are created for one, or a mix, of the following goals: managing risk, minimizing taxes, ensuring privacy or offering a vehicle that investors can use.
Asset protection - Your investment activities can expose you to liability associated with a particular investment. An investment holding company shields its owner from personal liability and exposure to investment risks. For example, if you have invested in rental property, you may get sued if someone gets injured on the property. If this happens and you own the property in your own name, you may be held personally responsible and liable to compensate the injured party. On the other hand, if the property is owned by an investment holding company that you own, only the investment holding company and the assets it owns may be held liable to the injured party, not you and your personal assets.
Note: If you own multiple investments in one holding company, all of the investments in that holding company will be exposed to any lawsuit filed against it. For this reason, many investors hold each investment in its own separate company, underneath the investment holding company, to add another layer of asset protection.
Tax advantages - Asset protection is one of the biggest benefits of investing through an investment holding company. But, it also offers certain tax advantages, such as tax-free dividends and pass-through taxation. Any income derived from the various investments can be passed through the holding company (tax-free dividends) to the individual owners, who will then report it on their individual tax returns (pass-through taxation). This will avoid double taxation if the holding company is structured properly.
The term wholly-owned subsidiaries refers to businesses that a certain holding company fully owns. This situation means that the given holding company can hire management for the company or even terminate it. In turn, those managers control the company’s operations. The holding companies will not participate in daily business operations for companies that they own. Even so, it should understand those operations so it can evaluate prospects and performance.
How Does a Holding Company Make Money
From an investment perspective, investment holding companies will receive profit from things such as dividends, interest, profit (and losses) from realized investments, leases, royalties, tax minimization from income shifting and minimizing losses due to failed investments.
Investment holding companies place a strong emphasis on controlling risks and managing cash.
How to Start a Holding Company
Starting an investment holding may seem extremely complicated at the start, but the process is really rather simple. You and your attorney can simply form a new business entity, which will require you to:
- Choose a suitable business name for your holding company;
- Register the company by filing the appropriate filing documents along with the filing fee (only $100 in Wyoming);
- Request a tax ID number from the IRS;
- Draft an operating agreement or corporate bylaws; and
- Obtain any other permits or licenses that may be required.
In either nomenclature, the investment holding company acts as the parent company. This holding company supports subsidiaries, or children companies, by the ability to reduce capital costs via power and strength. This can be done by issuing stock at rates that are rock bottom or lending money with rates that are much better than those commonly available.
Those who wish to form investment holding companies will typically find it simpler to do so with legal assistance. A knowledgeable lawyer can also help clarify the various aspects of an investment holding company to confirm this solution makes sense in your situation.
Holding Company Business Model
An investment holding company is simply a means by which an individual or any number of individuals can pool their money and make investments from a legal business entity that provides structure, a means of easily transferring financial assets, and a layer of liability protection when making highly-speculative investments.
Therefore, an investment holding company is best for any individual or group of individuals who desire to enjoy asset protection, while investing their money and/or pooling funds to be collectively invested based on a specific investment objective or strategy.
There are many ways to structure an investment holding company, such as S-corporations, C-corporation, LLC, etc. An experienced Wyoming business law attorney can help you determine which structure is best for you, considering your investment objective and the strategy you plan to implement.