Holding Company Structure and Benefits

holding company structureA holding company is a firm that owns the outstanding stock of other companies. The term usually refers to the company that does not produce or manufacture goods itself, but owns the shares of other companies that produce goods and services. Holding companies reduce the risk of owners and allow the ownership of multiple companies. You can turn your business into a holding company for the purpose of owning property such as patents, estates, trademarks, and other assets. There are numerous benefits of forming holding companies. The primary benefit is that the holding company is itself protected from loss. You can structure a major corporation as a holding company by basing certain parts of business in jurisdiction with lower tax rates. Get an insight into the legalities of setting up a company with this course.

Starting a Holding Company

The holding company can be organized with the purpose of acquiring other companies. If a company acquires another company completely, it is referred to as a wholly owned subsidiary of the holding company. If you are looking to start a holding company, the below points will provide a step by step guide to start a holding company:

  • Determine the fields and domains that you want to focus on and look for markets that are ripe for consolidation. There are numerous small banks that could be combined by reducing the staff and increasing profitability.
  • Develop an appropriate business plan that defines the acquisition strategy of your business. You can learn more about defining a differentiated, successful business strategy with this course. Set goals like how large a holding company you want to create over the next 10 years, how many staff members and how much capital you need and so on.
  • Make a corporate entity by taking help of legal and accounting firms that can facilitate the acquisition process. Make sure that you are in compliance with the laws and regulations of tax. Choose advisors who are experienced with acquisition process and can provide ongoing advice as you proceed with the closing transactions.
  • Arrange the finance sources by presenting your business plan to equity partners. The owners of the companies you need to acquire require the assurance that you have the capability of completing the transactions.
  • Create a website that presents the preferences of your acquisition along with the details of your contract. Send a new release announcing the launch of the new holding company to encourage intermediaries.

A holding company is a special type of business that owns all investments such as stocks, gold, silver, mutual funds, real estate, patent, licenses, private, copyrights, patents etc. The term holding company comes from the fact that states that your business has a job to hold the investments. Holding companies such as Allegheny, Walton Enterprises, Loews, Cascade Investment, The Marcus Corporation, Berkshire Hathaway, etc. created history with their operations. A number of banks and financial institutions are holding companies as they own a number of other small businesses.

Holding companies basically come in two forms.  One, wherein the company serves as an investment vehicle for investors and the other wherein the company serves as a risk management tool for large companies. For investors, a holding company can provide the ability to make an investment in a broad array of assets that include minor stakes in the business. A lot of multinational companies use this structure and have IP holders located in low tax rate countries, because the income paid to it by the companies will be charged a lower rate. It is very important that you use the most qualified accountants and attorneys as the rules that surround investment are very complex. In addition to the above said, a holding company is the preferred vehicle of a true investor as it allows business owners to open an office and have it devoted to nothing but finding places to invest the money. Our course in business management will help you build a strong focus in skill transfer for further growth of your business.

Holding Company Structure and Benefits

A holding company structure can minimize your tax liabilities in a very desirable way. Holding company benefits in a number of ways with corporate tax planning, which in many cases is a crucial factor that helps companies reach their business goals and maximize profits for shareholders. The holding company structure precludes it from manufacturing, selling or distributing goods of the subordinate company.   It does not get engaged in any business operation, which enables the holding company to reduce the responsibility of owning a business. As the holding company owns maximum outstanding shares of another company, the holding company is considered as a legal entity.

If we have a look at the benefits of a holding company structure, we will find that a majority of companies are creating holding companies to reduce tax liabilities. The jurisdiction under which the holding company runs, may even give additional tax benefits. Creating a holding company enables a business to maximize the expenses. The normal corporate tax in any country ranges between 20- 25%. There is a possibility that no tax will be triggered when the capital shares are converted into business shares.  As a holding company is like a regular business, they come under auspicious tax laws. In addition to this, holding companies can be formed without any stamp duty, which makes the process of creating a holding company less complicated. Visit our online course on Corporate Finance for Business Managers for more insights. The advantages of the holding company structure for owner operated business are as below:

  • As the assets are segregated into separate companies, claims can be limited to single subsidiary assets. Risky operations can be segregated similarly, which results in effective risk management.
  • Business owners can create 100% owned subsidiaries for tax purposes. This means no tax return needs to be filed, yet limited liability protection can be maintained for business purpose.
  • Licensing of patents can be broken down by the industry, which can be licensed for multiple entities.
  • The holding company structure provides an easy sale of product or service line, wherein a single line is sold by selling the subsidiary.

Using a holding company to protect the assets of your business should be a well planned strategy that helps to limit the risks of liabilities in your business. With a holding company structure, business owners can reduce or eliminate the liability for personal debts as well as business debts.  The limited liability company can emerge as two best choices for different types of organizational forms available to the business owner, in terms of limiting the liability structure of your business. This helps one to avoid the loss of business assets in case of financial difficulties.

If your business runs into financial crisis, the LC will be superior to the corporation for small business owners, where tax ramification should be considered carefully.  If you want to protect your assets from business as well as personal creditors, the best method is to accomplish both the objectives simultaneously by proper funding and structure of the business. To know more how to structure a holding company, visit our course in how to create a business strategy that is ideal for small business owners. 

The holding company operations consist of overseeing what the company owns. It can even hire and fire an employee, if necessary.  Although the holding company does not manage its day to day operations, the owner should still understand how these companies operate to evaluate the performance of the business and prospects on an on going basis.