A holding company is a business entity that owns shares of another company. Learn about the different types of holding companies here!
What is a domestic LLC?
A holding company can be defined as a company that doesn’t conduct business ventures, operations, or any other active tasks for itself. Instead, it is created only to own assets. In other words, a holding company does not engage itself in any selling and buying of services and products. It is designed purely to hold other companies.
What is a parent company?
While some people may confuse a holding company with a parent company, but that’s not entirely accurate. A parent company is a different business structure than a holding company, and understanding the difference between these two can help you diversify your business and reduce the risks and liabilities attached to your business.
A holding company, as discussed earlier, is an inactive company, and it does not involve in any ventures. On the other hand, while a parent company also holds and owns other companies, it is an active platform, and it typically has its business ventures. A parent company also purchases subsidiaries for purposes related to investment or to help in its operations.
How is a holding company formed?
The process to form a holding company does not involve any complex procedure. All you have to do is to register your holding company in your state along with its business name and articles of incorporation. The process also involves registering your agent, who will manage all the official documentation related to your holding company. If you so choose, you can also become the registered agent for a holding company that you own.
The articles of incorporation of your holding company outline the purpose of your holding company and how it will be operated. It also enlists all the crucial designations with the names of relevant officers in the holding company. You will also need to register a business account for your holding company, which will only be dedicated to your holding company.
What types of holding companies are there?
There is a long list of different types of holding companies, and we will discuss some of the essential types of having companies here:
- Primary holding company
A primary holding company is a holding company that is not a subsidiary of any other holding company. The default holding company is a direct holding company.
- Consolidated holding company
It is a holding company that is formed by consolidating existing holding companies. The primary purpose of this holding company is to ensure easier legal and financial compliance.
- Operating or mixed holding company
Operating or mixed holding companies are a special kind of holding company that owns a subsidiary and provides at least one type of sales or services.
- Proprietary holding company
It is a holding company that owns the entire stocks issued by its subsidiaries. Generally, holding companies hold more than 50% stocks of their subsidiaries.
- Intermediary holding company
This one acts as an agency through which a primary company controls a subsidiary. This is a holding company of a subsidiary but is itself owned by another holding company.
- Investment holding company
An investment holding company can be described as a company through which an individual or any number of individuals can pool their money and make business investments. Investment holding company provides a legal structure for such investments and works as a means of efficiently transferring financial assets. It also offers a thin layer of liability protection when individuals are making highly speculative investments.
- Finance Holding Company
A financial holding company (FHC) is a type of bank holding company formed to offer financial but non-banking, including, but not limited to, offering insurance underwriting and various types of investment advisory services.
Top reasons for starting a holding company
Holding companies are used worldwide for a variety of benefits that they have to offer related to business. Here are some of the most significant advantages that holding companies have to offer, and they are also your reasons to start your holding company:
- Asset Protection
It is probably one of the most significant advantages that a holding company offers to its owners. Holding companies are widely used for an additional level of protection of assets by transferring some of the help of your functioning business to your holding company. Since these assets then become separate from your actual business, they are protected from the creditors if you fail to pay them.
- Tax benefits
Another significant advantage of owning a holding company is the tax benefits that come alongside it. Assuming that your holding company owns a specific percentage of outstanding shares of your actual operating company, your operating company then can pay tax-free intercorporate dividends to your holding company.
It is also possible to gain tax savings further with the help of holding companies by investing these excess profits corporately instead of supporting them personally. If you do not have a holding company, the shareholder would then be entitled to receive any extra profits paid in the form of dividends and eventually pay personal income tax, which will leave less left over to invest further.
Disadvantages of a holding company
Holding companies, while with all the advantages that have been discussed above, do come with some real headaches for owners. Some of the downsides of a holding company are:
- Over capitalization
While overcapitalization defines the core of a holding company, it is not suitable for shareholders of the company. Since the capital of a holding company and its subsidiaries are generally pooled together, overcapitalization and shareholders do not get a fair return on their investments.
- Compliance costs
Having a holding company anywhere in the United States can be an overall great thing to possess when growing and diversifying your business. However, you would have to deal with the initial set-up cost for a holding company and its ongoing compliance, which is not cheap.
Holding companies come with additional set-up costs and later expenses that come on the way with owning a secondary company, including, but not limited to, the prices of companies’ annual corporate tax compliance. Given a minimal activity in a holding company, however, these compliance costs may not be as high, and generally, the benefits of the holding company outweigh compliance and other expenses.
Mixing business and personal assets
As the owner of a holding company, generally, you will be dealing with much fuss related to the assets. But it’s imperative that you keep your assets separate from your business assets and vice versa. Separate your assets, and you can ensure the long-term success and growth of your company. However, if you fail to do so and maintain a distinct separation between the person and the company, you could face a raft of consequences.
Even when starting a holding company, it’s essential to keep a clean record of your business and what is of your business, and then it is vital never to blur that line.
Examples of holding companies
Nearly all the big media conglomerates operate mainly as a holding company, and their local media outlets operate as their subsidiaries. The leading holding company earns revenue from the production and distribution of the content sold on its subsidiaries. CC Media Holdings, for example, owns iHeart Radio (a music-themed social media app), Clear Channel Broadcasting (a broad network of radio stations), and Clear Channel Outdoor Holdings (major billboard advertiser).
Similarly, the Walt Disney holding Company owns assets ranging from various TV networks (ABC, ESPN, Disney Channel) to other entertainment providers (Muppets Studio, LucasFilm, Marvel Entertainment) and its film production facilities (Pixar Animation, Walt Disney Studios).
The other famous holding companies can be found in investment and banking, advertising agencies, and real estate investment trusts. These two, on top of media conglomerates, form the more significant part of holding companies.
Holding company vs operating company
As the name would suggest, a holding company is a company that holds the entirety of the shares in a subsidiary company. This structure is not unusual with many startups, and it is often referred to as a dual company structure in the USA. Entrepreneurs often use this structure so that their holding company can fully own valuable assets of the business, which also includes, but is not limited to, cash and equipment, intellectual property, and keep these belongings separate from the principal subsidiary operating entity.
An operating company, also known as a subsidiary of the holding company, involves all the trading and is considered the primary active company. The operating company is the one that enters into business contracts, responsible for hiring employees and dealing with business customers. Your operating company can be named the face of the dual structure, and it is generally responsible for all the payables and liabilities of your actual business. As a result, we can say that an operating company is at a higher risk of being held responsible if there is something wrong in the industry.
Llc holding company structure
A business entity can quickly become a holding company in two ways: either by owning every bit of the subsidiary or by owning enough voting stock to make sure that it has power over all the business activities. This latter can be easily ensured by holding at least 51% shares of the subject subsidiary company. Still, it can also be a much smaller share percentage in a subsidiary company with many shareholders.
There are two ways that a corporation or LLC can take the shape of a holding company. As in other businesses, the first is by acquiring the required percentage of voting stock in a given subsidiary company. The second option in an LLC is for the holding company structure to create an entirely new subsidiary company from very scratch. It will ensure that it maintains the required ownership shares.
Frequently asked questions
- Is a holding company an LLC or an S Corp?
A holding company can be both an LLC and a corporation. One of the examples would be where an S Corp forms a holding company to own an LLC. Similarly, an LLC can create a holding company to hold various corporations, including S corps.
- How do I make my LLC a holding company?
When you have established more than two LLCs, you can easily make one of the existing LLC the sole ‘member’ of both of your companies – so that it functions as the Holding Company. It would help if you were careful in establishing subsidiary LLCs with operating Agreements appropriate to the holding company ownership that you envision.
- Can a single-member LLC be a holding company?
Yes, a single-member LLC can be a holding company without any fuss. It also ensures that you are independent in making your all-important decisions related to your business without consulting anyone else.
- What is an investment holding company?
An investment holding company can be described as a company through which an individual or any number of individuals can pool their money and make business investments. Investment holding company provides a legal structure for such investments and works to transfer financial assets efficiently. It also offers a thin layer of liability protection when individuals are making highly speculative investments.
- Can a holding company be an LLC?
Yes, a holding company can be a corporation or an LLC. A holding company is just a business entity used to own valuable assets and other companies, also known as subsidiaries. A holding entity of the business does not engage itself into any business of its own. Instead, its subsidiaries engage in risky business ventures so that the holding company, or in this case, the holding LLC, remains well beyond the access of creditors.