Benefits of a Holding Company (Complete guide)

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benefits of holding company

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You’ve heard advertisements mention holding companies as; subsidiaries, parent companies, or wholly owned subsidiaries. These statements are for legal positioning and are in the fast talking statements at the end. Parent organizations form holding structures to achieve key strategic goals. Companies use holding these structures to limit liability, protect secrets, and gain tax benefits.

Holding companies themselves do nothing, they are but a part of the company structure. They don’t engage in any business activities. They’re legal entities that control subsidiaries. Holding companies make high-level governance and oversight decisions with help from the board of directors.  A business entity separates itself from subsidiaries for important strategic business reasons.

As Wikipedia defines, “A holding company is a company whose primary business is owning a controlling interest in the securities of other companies.” In other words, a holding company usually produces no goods or services. Its purpose is to own shares of other divisions to form a corporate group under its control and direction.

Holding companies are also known as parent or umbrella companies. A key goal in forming a holding company structure is reducing risk and liability. Organizations can also gain significant tax benefits from this type of corporate structure. A parent company can control and manage subsidiaries operating in different industries.

 Some of the advantages of forming a holding company are:

  • Protection from losses incurred by the subsidiaries. Organizations separate divisions into subsidiaries so their losses do not transfer to or impact the company. There have been some legal rulings that show that these organizations aren’t immune from liability.
  • Asset protection. The company structure of these businesses can separate their structure, operations, assets, or properties into distinct subsidiaries. Any subsidiary liability would generally not transfer to the holding company. • Easy to control and change as needed. Moving a holding company to a new location or jurisdiction with the proper legal documentation is easy.
  • Parent companies can support their subsidiaries. A parent corporation can lower operating capital costs for subsidiaries by pledging their assets as collateral. They can also provide a downstream guarantee on behalf of the subsidiary if needed.
  • Ability to avoid future competition. A commercial interest may buy small upstart companies in the same industry to avoid potential future competition..
  • Centralized secrecy. Ownership and control of the subsidiaries centralize at the holding company level. Only a few high-level personnel on the board of directors may have access to sensitive information. A holding company can control sensitive information and overarching business strategy.

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

  • Patents, trademarks, copyrights, and other intellectual property
  • Publicly traded and privately held stocks, hedge funds, private equity funds
  • Limited partnerships, a limited liability company (LLC), corporations, and other business entities
  • Real estate and property 
  • And more

But, there are some potential disadvantages to consider as well:

  • 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.

There are also significant tax advantages to a holding company, including:

  • Holding operations don’t have to file separate tax returns for each subsidiary company. It can file a single, consolidated return.
  • Subsidiaries pay dividends to the holding company without creating more tax liabilities. The holding company allocates cash to its stockholders or invests it in other subsidiaries.
  • Losses incurred by one subsidiary can offset profits earned by other subsidiaries. The net result is a lower tax bill for the consolidated group.
  • Wholly owned subsidiaries are considered “disregarded entities” for tax purposes. This allows the holding company to merge them while maintaining corporate safeguards.
  • • The holding company structure allows small business owners to diversify their operations. They do this without facing the administrative burden of extra tax filing requirements.

There are a few common types of these company structures:

benefits of a holding company

There are a few common types of these company structures:

  • Pure holding companies only own subsidiaries and do not conduct any other business operations.
  • Mixed holding companies have business operations and own and manage subsidiaries. These are also known as holding-operating companies. 
  • Immediate holding companies hold subsidiaries but are owned by another parent company.
  • Intermediate holding companies are subsidiaries of a larger parent corporation. They can also hold subsidiaries.

Conclusion

In summary, a holding company is a type of financial organization that owns a controlling interest in other operations. The other organizations are subsidiaries. Holding companies can hold and keep almost any asset or entity of value. They can lend to and borrow from their subsidiaries and manage operational decisions. But, they do not manage the day-to-day business operations of their subsidiaries. The holding company structure provides significant benefits. The benefits are; protection from liability, consolidated control and management, and tax advantages. Commercial interests form a parent company to develop comprehensive business strategies. They gain greater control and oversight over their operations.

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