Holding companies do not exist to create products or provide services. Instead, holding companies own other companies or primary stock in other companies. Holding companies can also own real estate or property such as stocks and trademarks. All of these aspects come together to form a corporate group with subsidiaries as its assets.
In many cases holding companies also have the responsibility of investing money into other companies, and for other companies. These funds are made by selling equity, and then investing either within its own company or into its subsidiary companies. In return, revenue can be accessed via interest, payments from subsidiaries, or even rent.
Holding companies own assets or stock of other companies. Typically, although they can, a holding company does not produce goods or services itself. Instead, the purpose of a holding company is to own assets or shares of other companies. Holding companies may also own property, including real estate, patents, trademarks, stocks, and other assets. Then, the holding company forms a corporate group with said subsidiaries or assets.
Usually, the holding company’s management is also responsible for the investment of the money. In this case, the holding company can obtain funds by making investments after selling equity interests. This can either be within itself or its subsidiaries or even by borrowing. It can also earn revenue from payments that it receives in the form of dividends, distributions, interest, rent, or payments from subsidiaries.
What is the Purpose of a Holding Company?
Holding companies specifically exist to control other companies. They often own property, patents, even stocks of other assets. The one specific thing that all holding companies have in common is that they typically do not sell products or services. They act specifically in the interest of controlling other companies.
What are the Different Types of Holding Companies?
There are different types of holding companies. If you are creating a holding company you will need to choose which type of holding company you will be. There are 4 different types of holding companies:
When a holding company is “Pure,” it means that it only holds stock in other companies. It is a classic type of holding company and will not do any other type of business other than that of controlling other companies.
When a holding company owns stock and control of other firms, but also sells products, or services, it is called a mixed holding company. This can also be named a holding-operating company. If a holding company is mixed and works in an unrelated field, it will be referred to as a conglomerate.
Immediate holding companies control stock in other companies, while also being a subsidiary of another.
Intermediate holding companies are the holding company of one entity, while also are owned by another company. In some cases, an intermediate holding firm will not need to publish its financial records of the subsidiary.
Advantages of Starting a Holding Company
Holding companies are a great way to reduce risk while maintaining ownership. If you are wondering why people prefer to start holding companies, here are 3 key reasons to start a holding company.
Here are a few advantages of setting up a holding company.
Holding companies are able to limit their liability by using subsidiaries as a liability shield. When a subsidiary encounters debts, they will belong to each individual company, not that of the parent company. The parent company’s assets will be safe from that of creditors.
By placing operating companies and their assets into separate entities, it creates a liability shield. This means that the debts of each subsidiary belong to that subsidiary. Creditors of subsidiaries will not be able to reach anything owned by the holding company, nor a different subsidiary.
Control Assets for Less Money
When it comes to controlling a subsidiary company, a parent company is required to hold at least 51% of that subsidiary. This makes it a lot cheaper than purchasing 100% of a company. Instead, it allows business owners to purchase and control multiple entities for less of an investment.
Even though a holding company controls its subsidiaries, it does not mean that they are required to own all of the shares or interests. By owning over 50% of the company, the holding company can control another company at a lower cost than if it acquired all of the interests.
Lower Debt Financing Costs
Although debt financing can be expensive for small or new businesses, using a holding company can help to reduce this. This is because larger or more seasoned companies typically have the ability to obtain loans with low-interest rates. In these cases, a holding company can provide capital at a low rate for its subsidiaries.
There are holding companies that have financial strength which allows them to obtain loans at lower interest rates. This is typically more than that of its operating companies. Especially, when a business is in need of capital, is a startup, or if it is considered a credit risk. Then the holding company can obtain the loan and distribute the funds to the subsidiary.
Disadvantages of Starting a Holding Company
Holding companies have a lot of advantages but they can be difficult to create and continue to manage. Here are a few of the most common challenges and disadvantages of starting a holding company.
Here are a few disadvantages of setting up a holding company.
Starting a holding company can be complex. This is one of the largest disadvantages of starting a holding company. As compared to a standard business structure, it can be a lot to keep track of.
In some cases having a good management system can prove to reduce the complexity of a multi-faceted holding company situation. In any case, having good records regarding all aspects of the business can help to reduce the negative impact of complexity.
The use of holding companies and subsidiaries does add an element of complexity. This is one that is typically not found in the single-entity structure. When a public traded corporation uses a holding company, it may be difficult to keep track of many subsidiaries.
When a holding company is formed, each subsidiary will be required to pay formation fees. This may include annual reports, franchise fees, as well as LLC or corporation fees that are required in the state of formation. By using one single company you can avoid these and the extra costs.
The holding company and each subsidiary that is formed will need to pay formation fees. In many cases, there is also an annual report and franchise tax obligation. In this case, each will need to comply. Typically a standard operating company avoids these additional per-entity compliance obligations and additional costs.
How to Set Up a Holding Company
Starting a holding company from scratch can be an overwhelming process but when you break it down it’s actually pretty simple. To create a holding company you must register the holding company in the state that you live in, as well as providing your business’s name.
You will also need to file all the appropriate paperwork, as well as articles of incorporation, and operating systems. Finally decide on a registered agent, who can be a part of your holding company or a third-party provider.
If you need help setting up a holding company, we can help. We specialize in forming holding companies, LLCs, and corporations and can help you!
Creating a holding company is not as simple as making the decision to do so. There are many variables that come together when deciding how to form. One option is to bring together two business entities, but it can also be more. There are a few important decisions to be made when setting up a holding company such as,
Type of Business Entity
When it comes to forming a holding company you will need to decide whether you wish to form as a corporation or LLC. There are various factors when it comes to deciding what type of entity you would like to form. Although both corporations and LLCs offer limited liability, there are also differences as well. You will need to weigh areas such as how profits are split, how management is done, and taxation.
Choose a Name
Depending on the industry that you operate in, picking a name can be difficult. Many business owners immediately think to use their own first and last name as the LLC name. Despite this, this fully removes any sense of privacy that you might have. Choosing a name that explains what your company is about while also keeping it original is essential. Your LLC name cannot have the same name as any other business, and will also need to include LLC or another variation in the name such as “limited liability company.”
When forming a holding company the method in which you form as an entity will dictate your taxation as well. If you form as an LLC you will be able to choose how you want to be taxed. As a corporation, you can attempt either s-corp or c-corp status. Another option you have to choose is whether you want to form as a separate taxed entity or as a pass-through entity.
Although a holding company can be formed in any U.S state, when forming in a state other than your own, you will need to have some sort of presence there. What is great about holding companies is that the holding company and its subsidiaries do not have to be formed in the same state. Despite this, you will need to ensure that you obtain proper permits to do business in a state other than the original formation state.
The choice of a Registered Agent is something that will allow you to form in various states and have more freedom. The registered agent receives service of process and all legal communications for the business. Although this can be an owner, it can also be an employee, a lawyer, or a third party business that acts as a paid Registered Agent.
Where to Start a Holding Company
Although forming a holding company can be filled with complexity and added compliance costs, overall it will keep your assets protected and provide you with many other benefits. Hiring a business lawyer is the best way to get started and ensure that you are compliant with all laws and regulations. Contact us today to learn more about forming your holding company.