The purpose of holding company is to allow those who own several businesses a way to limit liability and maintain ownership over each business.3 min read updated on February 01, 2023
The purpose of holding company is to allow those who own several businesses a way to limit liability, create a streamlined management, and maintain ownership over each business. A holding company provides a central point of control over the businesses.
A corporation or limited liability company that maintains a controlling interest of ownership or the assets of other companies is a holding company. The holding company will typically hold equity interests or assets rather than actively being involved in business operations. A holding company is also called a parent company. Any company underneath the parent company is known as an operating company or subsidiary.
Advantages of a Holding Company
Three of the main advantages of using a holding company include:
- Centralized control.
- Limiting investment.
- Limiting liability.
Centralized control gives the owner the ability to maintain direction over the subsidiaries. Each subsidiary has the holding company as the owner. The owner can then choose an executive management team to help manage each company.
Limiting investment allows interested equity investors the chance to choose which company they want to invest in. If it was one large corporation, an investor would be investing in all divisions and segments of the company. With a holding company, they can focus on the business of their choice. By limiting investment, you can raise capital and create partnerships for each business on its own.
Limiting liability is an important advantage. Any assets of a subsidiary can be owned by the holding company, then leased to the subsidiary. If the subsidiary is the subject of any creditor or legal judgments, the subsidiary wouldn't lose the assets because did not own them. If needed, it is possible for the subsidiary to declare bankruptcy and close. The holding company can then establish a new subsidiary that leases the same assets.
Disadvantages of a Holding Company
There are also disadvantages to be aware of when using a holding company. They include:
- Each subsidiary must follow the formalities that come with being its own business. These includes:
- Having a separate business bank account.
- Having separate financial statements.
- Keeping a minute book of all meetings.
- Having its own employees, managers, officers, and directors.
- The business structure may be confusing or difficult to explain to partners, employees, or other interested parties. The confusion stems from not understanding the separation of entities and their purpose.
- In cases of infringement, an intellectual property holding company may not be eligible for lost profits that stem from issues with infringement. They may receive a royalty that is deemed reasonable, but not the full lost profits.
An Intellectual Property Holding Company (IPHC) is created to own and manage the rights of patents, trademarks, and copyrights. The IPHC will create a license arrangement with the subsidiaries to provide use of the intellectual property for a royalty fee. The license arrangements will be set for an agreed upon period of time.
How Do Holding Companies Make Money
A holding company can make money from:
- Any profits or dividends made from the subsidiaries of the holding company. This includes the interest and earnings of stock shares or bonds that pay dividends and/or interest.
- Offering services to the subsidiaries.
- The sale and purchase of assets, including buying and selling stocks.
The holding company will draft and sign an agreement with the subsidiary that states the following:
- How much the subsidiary needs to maintain their operations. This can be stated per year and per quarter.
- What the cost will be to purchase services from the holding company.
- The cost of selling to a sister company, if a sister company exists.
The holding company may be very involved in the management of the subsidiary's budget and operations, while others will only intervene if there are issues. The budget will be set before the start of the fiscal year and will state what is needed for investing, purchasing, and other budgetary concerns. By using a budget, this will allow the holding company to see which subsidiary is performing as expected. If there is excess cash, the holding company will decide whether they will keep it in the subsidiary or move it. This will vary by location.
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FAQs
Many holding companies don't manufacture anything, sell any products or services, or conduct any other business operations. Their sole purpose is to hold the controlling stock or membership interests in other companies. This type of holding company is called a pure holding company.
What is the main purpose of a holding company? ›
A holding company is a parent company—usually a corporation or LLC — whose purpose is to buy and control the ownership interests of other companies.
What was the purpose of the holding company model? ›
A holding company is a financial vehicle for owning and controlling other assets, such as real estate, stocks, or companies. Using a holding company creates legal separation between the assets and the owners, and reduces the liability for the owners if one of the holdings encounters financial trouble.
What is a holding company answers? ›
A holding company is a company that has a specific function of controlling subsidiary companies. It won't usually provide services or products like a normal business. Instead, its only purpose is to control and manage other companies of which it holds the majority shares.
What is holding company with an example? ›
When a large corporation operates under a different name, it's more than likely a holding company. Holding company examples include Goldman Sachs, Nestle, Berkshire Hathaway, JP Morgan, Alphabet (which owns Google), and many nationally registered agents with subsidiaries in various states.
What is the main object of a holding company? ›
The primary aim of a holding company is to manage other companies, whether they be other companies, limited liability partnerships, or limited liability companies. Holding companies can also own properties, such as immovable objects, patents, trademarks, securities, etc.
What is the main activity of a holding company? ›
Many holding companies don't manufacture anything, sell any products or services, or conduct any other business operations. Their sole purpose is to hold the controlling stock or membership interests in other companies.
What is the purpose of the ultimate holding company? ›
Having an ultimate holding company ensures your assets are protected. It separates your business assets from business operations and liabilities, therefore providing your business with greater protection. If you do establish such a company structure, you must notify and update ASIC of any changes.
What is the tax purpose of a holding company? ›
The main tax advantage of a holding company is that it 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.
What is the purpose of a holding company for real estate? ›
A real estate holding company is a legal entity designed to protect business owners from the risks that come with owning investment properties. Real estate holding companies, also known as limited liability companies (or LLCs), do not participate in business operations themselves but own different assets.
On Holding AG engages in the development and distribution of sports products such as footwear, apparel, and accessories for high-performance running, outdoor, and all-day activities.
Why use a holding company for LLC? ›
If your business engages in legally or financially risky activities, you might consider using a holding company to keep valuable assets separate from potential liabilities. Setting up a holding company can be costly. In addition, a holding company needs to be well managed in order to maintain its legal protections.
What holding company stands for? ›
Key Takeaways. Holdco is an abbreviation for "holding company," which is a firm that exercises control over other investments, such as stocks, bonds, other firms, and anything that has value. A holdco earns money by collecting the dividends from the shares of firms in which it owns a controlling interest.
What is the point of a holding company? ›
A holding company is a type of business that deals specifically with business assets, investments, and management. A holding company will not produce any goods or services itself. Often its main purpose is to split off assets from trading companies.
What is an example of a holding company today? ›
| Rank | AMB# | Company Name |
|---|
| 1 | 058334 | Berkshire Hathaway Inc. |
| 2 | 058106 | UnitedHealth Group Incorporated |
| 3 | 058180 | Anthem, Inc. |
| 4 | 051149 | Centene Corporation |
21 more rows1. - Luxembourg: Often considered a favorable jurisdiction for holding companies due to its extensive double tax treaty network, low withholding taxes, and flexible corporate laws. Luxembourg is also known for its political and economic stability.
Do holding companies pay taxes? ›
Corporate income tax: Holding companies are typically subject to corporate income tax on their income, which may include dividends, interest, rental income, and capital gains from the sale of assets.
Why does a bank need a holding company? ›
Most banks have bank holding companies ("BHCs"). BHCs have been formed primarily to facilitate additional nonbanking activities, issue capital instruments not deemed capital for banks, and/or greater corporate, financial, and operational flexibility.
