A holding company is a company that has a controlling interest in subsidiary companies. Learn the benefits and how to form one.
What Is a Holding Company?
A holding company is a parent organization—usually a limited liability company (LLC) or a corporation—that has controlling power in other businesses. A holding company doesn’t sell services or products, manufacture goods, or conduct business operations.
As the name suggests, its responsibility is to hold the membership interest or the controlling stock in other organizations, called subsidiaries. A holding company owns most assets like real estate, trademarks, and hedge funds in subsidiary businesses.
Benefits of a Holding Company
With the majority of control, a holding company’s main purpose is to oversee management decisions in a subsidiary organization. A holding company offers more management scale, as you can run different subsidiary businesses independently that aren’t directly related. Plus, the liabilities in one subsidiary organization won’t affect other subsidiaries.
Setting up a holding company lets you enjoy protection from serious losses. For example, the holding company will only incur a decline in net worth and capital loss if a subsidiary organization goes bankrupt. The creditors in the bankrupt organization cannot sue the holding company for payment.
Apart from the advantages of limited liabilities, starting a holding company protects assets and uses them optimally. You reduce risks by diversifying resources. For example, one subsidiary may use a holding company’s trademarks and name, while other subsidiaries use the company’s real estate to generate profit. If one subsidiary fails, you can still rely on the other to generate profit.
In addition to diversifying resources, a holding company helps divert tax liabilities. That’s because you can strategically establish particular parts of the holding company in jurisdictions with lower tax rates.
Example of a Holding Company
What Changed for Boards in 2022?
How to Form a Holding Company
Starting a holding company follows the standard procedures of launching any business. It involves assessing the company’s goals, selecting a business structure, and completing a series of legal activities. Read on to learn about each step.
1. Assess Business Goals and Objectives
Well-chosen objectives and goals drive a holding company in the right direction. When forming a holding company, your business goals most likely include:
- Protect assets through diversification by focusing on different industries
- Reduce the tax burden by establishing certain company parts in a jurisdiction with lower tax rates
- Own many businesses under one company while limiting liability and streamlining management
2. Select a Business Structure
Your business structure influences your tax burden, fundraising ability, personal liability, and the paperwork you must file with government agencies. While it’s possible to switch to a different business structure in the future, switching comes with complications. For example, you will face specific restrictions depending on your location, unintended dissolution, and tax consequences. The common business structures for holding companies are:
- Limited liability company (LLC)
Limited Liability Company (LLC)
Setting a holding company as an LLC protects you from personal liability. That means your personal properties—like houses, vehicles, and savings accounts—will not be at risk should the holding company go bankrupt or face lawsuits.
A corporation is a legal entity that is entirely separate from its owners. A corporation also protects its owners from personal liability.
Unlike LLCs with limited life in many states, a corporation has an independent life. If a shareholder leaves or joins the company, the corporation can continue doing business without having to dissolve and reform as an entity with new memberships.
However, a corporate structure is more expensive than other business structures. They also need more extensive operational processes, record-keeping, and reporting.
3. Submit Business Application
After assessing your business’s purpose and selecting the right business structure, you must register your company to make it a distinct legal entity. Where and how you register your business depends on the structure and location.
You will need to submit state documents. The information you need includes:
- Business location
- Business name
- Ownership, names of directors, and management structure
- Number and value of shares
If your holding company is an LLC, you need to submit one or both of the following documents depending on your state:
- LLC operating agreement
- Articles of organization
If your holding company is a corporation, you need to submit one or both of the following documents depending on your state:
- Bylaws or resolutions
- Articles of incorporation
Master Corporate Governance With OnBoard
While creating a holding company offers many benefits, it’s a complicated process that requires best-in-class governance tools and legal assistance. OnBoard helps boards engage with the long-term strategic direction of their companies by maximizing the value of time the board spends together and making discussions more meaningful and actions more deliberate.
About The Author
- At OnBoard, we believe board meetings should be informed, effective, and uncomplicated. That’s why we give boards and leadership teams an elegant solution that simplifies governance. With customers in higher education, nonprofit, health care systems, government, and corporate enterprise business, OnBoard is the leading board management provider.
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