You may hear about a holding company if you are getting started investing in corporate securities like common stocks, preferred stocks, or corporate bonds or if you are thinking about investing in your own business.
What Is A Holding Company?
A holding company is an organization that merely holds other companies' assets and does not conduct any business on its own. In its place, the holding company is the legal owner of the underlying assets.
Shares in other companies, LLPs, PE funds, Hedge funds, stocks, bonds, properties, song rights, brand names, patents, trademarks, copyrights, and just about anything else of value can be considered corporate assets.
A Holding Firm Is What Exactly?
The term "holding company" refers to a parent company (typically a corporation or an LLC) that does not engage in producing, distributing, or retail selling its own goods or services. As its name suggests, a holding company's primary function is to amass voting shares or membership interests in another business.
How Does A Holding Company Get Its Money?
The holding company's management also makes investment decisions. The holding company can raise capital for its investments through the sale of equity in the company or its subsidiaries and through borrowing. It can also generate income from dividends, distributions, interest, rent, and fees for back-office services provided to its subsidiaries.
For What Purposes Does a Holding Corporation Exist?
Companies of all sizes and in all fields use holding companies. Many well-known publicly traded firms are holding companies, and many investors in these companies do not understand they are purchasing shares in a holding company rather than the running business.
Holding Company Benefits
Holding businesses can serve a variety of purposes. Some examples are given below.
Safety From Legal Consequences
Creating a legal wall between running firms and their assets is a good idea. The parent company is not responsible for the subsidiary debts. The holding company and other subsidiaries are off-limits to a subsidiary's creditors.
Budget-Friendly Asset Management
A holding company doesn't need to hold all of the shares or membership interests in its subsidiaries so long as it exercises sufficient control over them. Holding companies can purchase a majority stake in a subsidiary and all its assets at a reduced price by using this method.
Decreased Interest on Debt Financing
Substantial holding corporations are better positioned to secure low-interest loans for their operating companies than those firms, especially if the running company is a startup or any other type of business seen as a credit risk. The parent business might apply for the loan and then pass the proceeds on to the subsidiary.
The Drawbacks of Forming a Holding Company
Using a holding company and subsidiaries is not without its drawbacks, however.
The Price of Getting Started and Staying In Compliance
Each newly formed subsidiary and the holding company must pay a formation fee. Additionally, there will typically be a requirement to file an annual report and pay a franchise tax.
In addition to following the letter of the law, each corporation or limited liability company must adhere to the specific provisions of its bylaws. These per-entity compliance obligations and costs can be avoided by using a single operating company.
The Problems of Management
A holding company need not hold 100% of the voting stock of its subsidiaries. That can work in either a positive or negative way. As with any business it does not own outright, it will have to negotiate with minority shareholders. When minority shareholders' goals diverge from the holding company, tensions can arise.
Complexity
The use of holding companies and subsidiaries increases the complexity of the business structure beyond that of a single entity. For example, if a publicly traded company uses a holding company structure, many subsidiary companies will likely be.
Organizations with multiple subsidiaries often benefit significantly from employing an entity management system to centralize and standardize their companies' vital data, documents, and deadlines.
Create A Holding Company Via What Steps?
After deciding to use a holding company-operating company structure, the next question is how to establish this structure. This necessitates the establishment of at least two separate legal entities, and quite possibly even more, in the case of a brand-new business venture. Several crucial choices must be made to construct any corporation.
Conclusion
Summing up, a holding company is a type of corporate entity that does not engage in producing or providing goods or services. Instead, it operates through the enterprises it owns and controls. Companies of all sizes and sectors use holding and operating companies. Doing so helps firms in several ways, including protecting their assets from being taken by creditors.
