Benefits of a Holding Company (Complete guide)

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benefits of holding company

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You’ve probably heard of a holding company. You might have heard companies advertise themselves as holding companies. You have listened to holding company statements on the radio. These statements mention holding companies, parent companies, subsidiaries, or wholly owned subsidiaries. These statements are for legal positioning. Companies create holding companies to achieve strategic goals. Small and large companies use holding companies to distribute liability, protect business secrets, and get tax advantages.

Holding companies don’t do anything. They are not involved in operations. They are legal entities to hold controlling interests in their subsidiary companies. Holding companies manage high-level decisions and legally separate themselves from the subsidiaries. This separation is done for a good many strategic business reasons.

Wikipedia’s definition says, “A holding company is a company whose primary business is holding a controlling interest in the securities of other companies.” A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies to form a corporate group.”

Holding companies are also known as parent, or umbrella, companies. A major component of such an entity is to reduce risk and liability. Companies can also gain tax benefits from this corporate structure. Holding companies can control several different companies.

 Some of the advantages of forming a holding company are:

  • Protection from losses of the subsidiary companies
  • Asset protection. Holding companies separate companies, operations, or properties into different subsidiaries. Liability incurred by the subsidiaries does not transfer to the holding company. There have been recent rulings in Canada, for example, where the holding company incurred the subsidiary’s liability.
  • Easy to control and change – moving a holding company to a business-friendly location easily with internal documentation.
  • Holding companies support their subsidiaries. Holding companies lower the cost of operating capital by pledging assets. They give a downstream guarantee on behalf of the subsidiary.
  • Avoid competition: holding companies can buy small upstart companies to avoid competition in the future.
  • Secrecy. Ownership is centralized, and only a few high-level personnel can access sensitive information. Holding companies control sensitive information and strategy.
benefits of holding company

A holding company can be the legal entity that holds things such as:

  • Patents, trademarks, copyrights
  • Stocks, hedge funds, private equity funds
  • Limited partnerships, LLCs, corporations,

There are some disadvantages to holding companies.

  • Real estate Investors and creditors find it difficult to understand the overall financial health of an organization. Holding companies distribute debt easily throughout subsidiaries, allowing directors to manipulate the company’s financial position.
  • Holding companies can force subsidiaries to appoint personnel or buy products or services at higher prices. They may also influence or force subsidiaries to sell at artificial prices.
  • Vulture capitalism is a term used to describe a holding company that plunders assets to increase the holding company’s valuation. These strategies can inflate the holding company’s overall numbers at the expense of the subsidiary.
  • Monopoly: Large holding companies can eliminate healthy market competition by purchasing competing companies.
  • Subsidiaries are not allowed to make independent decisions.

Tax Advantages

  • A holding company does not have to file different tax returns for each subsidiary company.
  • Generally, subsidiaries can pay dividends to the holding company without creating a tax liability. After the holding company receives the cash, disbursements could be allocated to the stockholders/members of the holding company or better investment opportunities in the other subsidiaries.
  • Losses in a subsidiary are offset against the profits of the other subsidiaries. The net result is a lower tax bill for all companies.
  • 100% owned subsidiaries are treated as disregarded entities for tax reasons. Corporate safeguards are maintained for business reasons.
  • Small business owners can diversify operations without taking unnecessary risks.
benefits of a holding company

Types of Holding Companies:

  • Pure Holding Companies: A pure holding company only owns other subsidiaries. These companies do no other business.
  • Mixed Holding Company: A mixed holding company has operations. They also manage subsidiaries. This is a holding-operating company.
  • Immediate: An immediate holding company holds subsidiaries but is owned by another company.
  • Intermediate: These are holding companies also subsidiaries of a larger corporation.

Conclusion

A holding company is a type of financial organization that owns a controlling interest in other companies. Junior companies are subsidiaries. Holding companies can retain anything of value. They lend to, borrow from, and manage the decisions of other subsidiary companies. Holding companies do not manage the day-to-day operations of subsidiaries. Holding companies are protected against losses and liability. Organizations create holding companies for comprehensive business strategy.

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