In this article we ask, what exactly is a holding company? We explore the benefits that holding companies provide and the various types of holding companies in popular use today.
Done correctly, the use of holding companies can help to make your business operations more competitive, while helping to protect your business assets and reduce taxes – especially if you decide to go offshore.
At Nomad Capitalist we help create over-arching offshore solutions designed to make your business operations more competitive, encompassing everything from legal tax reduction to offshore company formation, staffing and banking.
What Is A Holding Company? TL;DR
A holding company is a type of business entity which maintains majority ownership interests in smaller companies, known as subsidiaries.
Generally these subsidiaries are autonomous. The assets of each subsidiary belong to the holding company but without the holding company’s management playing a direct role in their running.
A parent company, on the other hand, is a type of holding company that takes a more hands-on approach to day to day operations,
An LLC holding company, or similar holding corporation structure offering limited liability, helps ensure greater liability protection, while also allowing for the possibility of lower overheads and less taxes.
Holding companies are a popular means of holding and protecting a broad range of assets, including intangible assets like parents and other IP.
They can also, in turn, leverage these assets to raise capital with which to fuel further expansion and acquisition.
What Is A Holding Company? – Overview
Holding company definition: A holding company is a specific type of business entity which is established for the specific purpose of owning and operating other companies.
Typically, the most common structure for a holding company is a limited liability company, or LLC.
A holding company owns shares in the companies it controls, known as subsidiaries, and may also purchase shares in other companies to gain a controlling interest.
This means that a holding company can exert some managerial control over its subsidiaries, in terms of goals and policies, though not necessarily in their daily operation.
Purpose Of A Holding Company
The primary purpose of a holding company is to own other companies by maintaining a controlling interest in them.
In doing so the holding company owns not only the companies, or subsidiary businesses, but also all of their assets. These may take the form of financial assets, or they may instead be physical assets such as real estate holdings, machinery and equipment or inventory.
In addition, a holding company also owns any intangible assets that belong to its subsidiaries, including brand goodwill, trademarks, patents and IP rights.
Benefits Of A Holding Company
Creating a holding company has many overlapping benefits allowing you to place various disparate companies and their assets beneath a singular, overarching control structure.
That control, however, need not necessarily be exerted directly, allowing the management of various subsidiaries to perform their duties autonomously, while still being ultimately accountable to that of the holding company itself.
Since holding companies retain ownership of their subsidiaries by controlling stock, all that is required is to hold a majority of stock within each subsidiary. This can be done gradually or swiftly, for example when the stock price is lower.
By buying up equity interests in this way, a holding company is able to acquire multiple businesses along with all their assets, associated brands and IP.
This is not only a more cost-effective way of promoting growth and expansion, it can also help cut R&D costs. It is therefore common in many industries, in particular high tech industries, for larger companies to use holding company structures to acquire smaller companies, in particular start-ups, to gain ownership of key technologies and / or patents.
This also allows the holding company to acquire smaller competitors, as well as new companies in other verticals, and integrate them all into a new, more cohesive company offering.
All of this can be achieved with minimal operating costs and ideally with as little restructuring as possible.
The ultimate goal of any holding company is to allow each subsidiary to continue to generate revenue and growth with as little interference as possible.
Since holding companies may also hold a considerable cache of highly valuable assets, they may be able to leverage these to enjoy lower debt financing costs, which can, in turn, be used to buy more equity, fuelling further expansion and acquisition.
At the same time, by cordoning off assets in separate subsidiary legal entities, assets are shielded from creditors. So, while each subsidiary may be independently liable, a creditor or litigator cannot come after the assets of another subsidiary or the holding company as a whole.
Tax Benefits Of A Holding Company
Employing a holding company can help to reduce your overall tax liability while also making the entire tax process much easier to manage.
The main benefit is that, although the holding company retains control, each subsidiary can manage its own taxes and prepare its own tax returns separately.
Each of the subsidiaries’ profits and losses are then reported on the holding company’s tax return.
It is fair to say that some subsidiaries may perform better than others. In this way, though not an ideal prospect when taken in isolation, the losses of one subsidiary (e.g. a subsidiary which incurs high R&D costs) may be inadvertently beneficial by helping to reduce the overall tax liability of the holding company.
Indeed subsidiaries need not be based in the same location, or even the same jurisdiction, as the controlling holding company. As such, different tax structures can be taken advantage depending on where each is located.
If established correctly, such a setup can allow both holding company and its subsidiaries to enjoy significant, fully-legal tax reductions.
It may also be possible to transfer assets from the holding company to an individual subsidiary tax-free, depending on the structure you have created.
This, of course, is where having an expert in cross-jurisdictional offshore company formation comes in.
And it is just one of the areas where Nomad Capitalist can help you, as just one component part of your personally-tailored Action Plan.
Using A Holding Company For Asset Protection
The holding company structure, whereby the holding company controls a number of limited liability subsidiaries which are all legally separate entities, has clear advantages, not just from a tax perspective, but also from an asset protection point of view.
Just as each independent entity can result in tax advantages, regardless of each subsidiary’s independent performance, since all subsidiaries are insulated from one another, loss-making subsidiaries need not pose any danger to other companies within the business.
This ensures that the debts of one subsidiary does not have any negative impact of any of the other subsidiaries, or indeed the holding company.
This prevents both creditors or litigious parties seeking to gain control of assets they may otherwise end up becoming legally entitled to.
In much the same way, legal rulings against a subsidiary affect that subsidiary only, and therefore, that legal exposure will not extend to other subsidiaries or to the holding company itself.
This is a particularly important advantage if you have concerns about predatory parties looking to gain control of your business assets.
These may take the form of liquid assets, to pay off creditors, or physical assets such as real estate which can also be sold off, but they may also take the form of other forms of valuable assets – i.e. intangible assets such as patents or IP which could prove hugely valuable to predatory competitors.
Typical Holding Company Structure
A typical holding company business structure consists of the holding company and its various subsidiaries.
In this, the most simplified form of holding company structure, the holding company has a controlling stake of its subsidiaries but is not, itself, involved in the daily business operations of the subsidiaries.
A subsidiary which manages itself autonomously – i.e. its daily operations, payroll, purchases, sales, invoicing, etc – is known as an operating company.
Conversely, a holding company which not only owns a controlling interest in its subsidiaries but also exercises that interest to make direct decisions as to the running of those businesses, is known as a parent company.
In this structure, subsidiaries have far less autonomy than under the standard holding company structure, but the advantage is that subsidiaries also gain more support and backing both in the financial and managerial sense.
A parent company is essentially a more hands-on type of holding company exercising greater control over its various subsidiaries.
Of course its possibly that parent companies can be, themselves, subsidiaries, of a larger holding company with each of the parent companies responsible for different divisions, for example different regional markets, different areas of the business .
These types of holding companies are known as intermediate holding companies, and the parent company may have different ones in operation as it makes more sense than clustering otherwise unrelated industries.
A subsidiary company is a company where the controlling interest is held by a holding company.
In the case where the holding company controls the entire subsidiary outright (i.e. a full 100% stake in the company versus, say, a majority state of 51%), the subsidiary is known as a wholly owned subsidiary.
It is normal for a holding company to own several subsidiaries, many of which may be wholly-owned while others are only partly-owned subsidiaries.
LLC HoldingCompany Structure
An LLC holding company is the most common type of structure despite its complex structure, offers enhanced liability protection.
Specialist Holding Companies
In addition to the above examples, various other types of specialist holding companies exist.
In fact, holding companies are so flexible they allow businesses to set up structures for a variety of purposes, depending on their exact requirements.
A mixed holding company, for example, is a hybrid structure that acts as a holding company but may also take part in other business operations in much the same way as an operating company.
An intellectual property holding company which, as its name suggests, exists to own, protect and manage intellectual property rights and other intangible assets such as patents, copyrights and trademarks.
These holding companies, first and foremost, are able to shield the IP from outside parties, but they may also opt to licence out the IP to other businesses for a profit.
Holding Companies – Advantages and Disadvantages
The main holding company advantages are the various means of flexibility provided.
Structuring a limited liability company in this way allows for significant tax savings as well as enhanced protection of assets, while also helping you to mitigate risk by keeping your various business operations more compartmentalized.
On the flipside, however, with holding companies, that flexibility can also equal complexity, which means that the only real disadvantages of a holding company is the time and effort required to set them up properly, to ensure everything is working exactly as required.
Find The Best Jurisdiction For Your Holding Company
Ultimately, using a holding company can make your business more competitive – provided you choose the right business structure and the right place(s) to base your operations.
While many business owners still prefer to keep their operations local, an increasing amount of entrepreneurs recognise the value of setting up an offshore company, to enjoy legal tax reduction, greater competitiveness and less heavy-handed government regulations.
At Nomad Capitalist we can help you do just that, advising on everything from tax reduction to offshore holding company formation, to the formation of trusts and other structures to also protect your personal assets. We then combine all of these things together into an interlocking strategy known as an Action Plan.
Holding Companies – FAQ
A holding company is a company which holds the majority stake in other companies (known as subsidiaries) allowing it to own and control those companies.
A subsidiary is a company where the majority stake is held wholly, or in part, by a holding company.
A parent holding company is the main controlling company which controls all the various subsidiaries underneath it.
The parent company (also sometimes known as a parent corporation) holds enough stock in the subsidiary companies to control the subsidiaries and, unlike more traditional holding companies, also exercises actual administrative control.
Famous parent holding company examples include Berkshire Hathaway, as well as Alphabet, the parent company of Google and its various entities, such as Google, Android, etc., within Google’s corporate structure.
An operating company is a subsidiary which carries out all of its own operations, rather than having it managed by the parent company. Operating companies are a common type of business entity as it means they can operate independently without too much managerial or administrative complexity.
Operating companies may also be overseas subsidiaries or they could be companies recently acquired by the parent company but allowed to operate independently, while still remaining under the main parent company’s overall control.
A pure holding company is, as its name suggests, a holding company in its purest form. This type of business entity controls other subsidiaries through stock but does not have any direct involvement in the daily operation of any of its subsidiaries.
Unlike the above, a mixed holding company is a type of holding company which may also have, to varying degrees, a direct operational hand in some or all of its subsidiaries.