What’s a holding company?
The holding company is generally a corporation or LLC. Holding companies seldom manufacture, market, or operate other businesses. Companies control other enterprises’ equity. Holding corporations possess other firms’ assets but generally oversee them. While it may review management choices, it does not actively engage in the subsidiaries’ daily activities. A parent or “umbrella” corporation is a holding business.
Knowledge about Holding Companies
Holding businesses usually exist to control other enterprises. Holding corporations may possess real estate, patents, trademarks, stocks, and other assets.
This structure limits the controlling company’s and its subsidiaries’ financial and legal liabilities. It may also decrease a corporation’s tax obligation by strategically locating some operations in lower-tax areas.
Holding companies own “wholly-owned subsidiaries.” A holding corporation can recruit and remove the management of its firms, but it also runs its operations.
Holding Company Pros and Cons
Advantages
Holding firms profit from loss protection. When a subsidiary firm fails, the owning company may suffer a capital loss and a decrease in net value. Creditors of the failed firm cannot sue the holding company.
As an asset protection technique, a parent firm may arrange itself as a holding company with subsidiaries for each business line. One subsidiary may possess the parent corporation’s brand name and trademarks, while another owns its real estate.
Holding corporations is straightforward to form or alter. If a jurisdiction imposes high business taxes, the holding company can relocate to a more business-friendly climate while maintaining operations in the original location.
If a holding company is structured correctly, one subsidiary’s debt responsibility or bankruptcy won’t affect others.
Holding corporations helps subsidiaries reduce operational capital costs. The parent firm can guarantee a subsidiary debt using a downstream guarantee.
Disadvantages
Owning subsidiaries through a holding company has drawbacks. Investors and creditors may struggle to assess the holding company’s financial condition. Unethical directors might disguise losses by spreading debt among companies.
Holding firms might abuse subsidiaries by pressuring them to pick directors or acquire items at higher costs. They may also make subsidiaries sell below-market items to each other.
Holding businesses may compel their subsidiaries to lay off a considerable staff or steal their acquisitions for saleable assets. Known as “vulture capitalism,” these techniques can boost the controlling company’s revenue while hurting the subsidiary.
Pros
- Holding firms shield parent companies from subsidiary losses.
- Holding corporations can give subsidiaries cheaper operating capital.
- Moving the holding company and subsidiaries to other countries lets parent corporations take advantage of regional tax legislation.
Cons
- Holding firms can restrict transparency, making it more challenging for investors and creditors to evaluate the company.
- Abuse can occur when parent corporations force subsidiaries to trade at non-market prices.
- Parent businesses can also force subsidiaries to nominate directors or modify policies.
Holding Company Types
A holding company’s business operations determine its classification. Some have only one subsidiary, while others operate other businesses. Below are the types of holding companies:
- A pure holding company is a corporation that owns other firms alone. These firms engage in no other business.
- A mixed-holding company manages subsidiaries and operates its own business. She also called it a holding-operating firm.
- An immediate holding company is a corporation that owns other companies inside a larger entity. A holding company owns these holding businesses.
- Intermediate holding companies, like immediate holding companies, are subsidiaries of a more prominent organization.
How Holding Companies Profit
Depending on their portfolio, large holding corporations may have many revenue sources. The easiest method to gain money is through subsidiary equity. Holding firms can profit from subsidiary dividends and selling shares in growing enterprises.
Holding firms often benefit from subsidiary synergies. A holding company can concentrate on IT, HR, and administrative services and sell them to subsidiaries. Holding corporations might concentrate equipment or other assets for all their firms to lease.
Example of Holding Company
Berkshire Hathaway, a major holding corporation, controls over 100 firms, including Dairy Queen, Clayton Homes, Duracell, GEICO, Fruit of the Loom, RC Wiley Home Furnishings, and Marmon Group.
Berkshire also owns small stakes in Coca-Cola, Goldman Sachs, IBM, American Express, Apple, Delta Airlines, and Kinder Morgan.
What is a holding company’s purpose?
Holding corporations possess and control real estate, stocks, and enterprises. Using a holding company separates assets from owners and decreases owners’ responsibility if one holding fails.
How do I form a holding company?
To form a holding company, file the articles of incorporation in the state or jurisdiction where you wish to register it. You must also identify the owners and operational firms’ business agents. This may be tricky; therefore, larger organizations should use a lawyer.
A personal holding company?
A personal holding corporation has at least 60% passive income and 50% ownership owned by five or fewer people.1
The Verdict
A holding corporation serves one purpose—owning other firms. Some holding corporations are multi-industry conglomerates, while others control a single company. Holding corporations can shield owners from losses or decrease taxes.
