A holding company can be understood by imagining a company that doesn’t offer any service or produce any goods but holds the reins of other companies. In simple words, holding companies do not have to operate the business. The only thing they do is derive power by owning stakes in the other businesses. Therefore, these companies are known as holding companies and have become key players in the corporate setting. Holding companies promote innovation and provide strategic benefits to businesses.
Holding companies have been a significant part of the corporate world. They are of various types and provide multiple advantages and disadvantages. If you are planning to start one of your own, then there isn’t a better article for you. Let’s dive deep into the details of the workings of holding companies, their types, and structure. This article also contains a few examples of some successful holding companies.
What is a Holding Company?
A holding company is a business entity that usually doesn’t conduct business operations, create a product, or offer any services. It holds the controlling stocks of other companies. These companies are also termed parent companies or umbrellas. The structure of these companies is generally a corporation or Limited Liability Company (LLC). The companies in which these holding companies hold stocks are known as their subsidiaries.
Although a parent companies own the controlling stocks of a company, it might not actively participate in running the business. However, it may oversee the management decisions of the company. A holding is safe from the losses accrued by its subsidiaries. This means that the holding company is not liable to pay the creditors of its subsidiaries in times of bankruptcy or business loss.
How Does A Holding Company Work?
Let us discuss how a holding company operates in the market.
Ownership Structure
Starting with the basics, a holding company owns a part of the company’s stocks. A holding company acquires and manages ownership stakes in other companies. This makes it the parent company of that company. And that company becomes the subsidiary or affiliate of the holding company. However, there are two major levels of ownership: majority shareholder and minority shareholder.
- Majority Shareholder
A holding company becomes a majority shareholder when it owns more than 50% of the company’s stocks. A majority shareholder has greater control over the operations and decisions of the company.
- Minority Shareholder
A holding company becomes a minority shareholder when it owns less than 50% of the company’s stocks. Thus, this minority shareholder will have limited control over the company’s decisions but still enjoy financial benefits.
Operating Model
As mentioned above, a holding doesn’t participate in the day-to-day operation of its affiliates. Its primary focus is on strategic oversight and financial management. A holding company guides its subsidiaries to reach the desired goals. It helps them set long-term objectives for growth and profitability. Parent companies review performance and offer financial support to its affiliates. It also ensures that the subsidiaries align with the strategies of the parent company.
Holding companies offer legal guidance to their affiliates so that they meet the regulatory requirements. This keeps them, as well as their subsidiary company, free from penalties and liabilities under the law. Strategic direction and corporate resources of holding firms promote the benefits and improvement of the subsidiaries. They also receive dividends or capital gains from their affiliates. It is almost impossible to overstate how effective they are at managing risks and reinvestments. They diversify their investments across multiple industries to minimize risks. Concentrating on reinvestment of profits into the subsidiaries or acquiring new businesses also increases the chances of growth and future profits.
Types of Holding Companies
Holding companies are of different types depending on the tasks they perform.
Advantages of Using a Holding Company
The benefits of holding are as follows:
1. Limited Liability
Holding companies enjoy the benefits of limited liability. It saves the holding companies from paying any compensation to credit holders if their subsidiaries face any financial difficulties.
2. Tax Advantages
Holding companies enjoy tax benefits such as reduced tax rates and deferred taxation. A tax-friendly location like the USA makes it profitable for you to form a holding company there.
3. Asset Protection
Another great advantage of using a holding company is asset protection. Holding companies can protect their assets by isolating them into several subsidiaries. This protects critical assets from lawsuits and creditors when they target a specific subsidiary.
4. Investment Diversification
Market fluctuations can impact the profits earned by holding companies. This can be countered by diversifying the company’s portfolio by making investments in different industries. Therefore, it will give a stable earning opportunity even during market fluctuations.
5. Strategic Growth
Holding companies stand tall when it comes to matters concerning acquisitions and mergers, strategically. This kind of strategic growth provides funds to their affiliates, which implies they can grow their operations and, in the process, increase their value propositions.
Disadvantages of Using a Holding Company
Here are the few disadvantages associated with holding a company.
1. Complexity
Managing a holding company can be a little complex. The regulatory compliance and reporting requirements are increased with many subsidiaries under the holding company. This makes the management of holding companies tricky and lengthy.
2. Double Taxation
Another disadvantage of using a holding company is double taxation. The dividends distributed to holding companies might be taxed again even if they have been taxed as profits for their subsidiaries. This leads to double taxation in some scenarios.
3. Loss of Control
As subsidiaries operate independently, holding companies might not be much involved in the operations. This might result in a loss of control for holding companies.
4. Increased Regulatory Scrutiny
Certain industries might require holding companies to submit additional documents. This has extended regulatory authority to some industries like banking, investment, insurance, and finance. It forces them to stick to strict laws; this brings operational costs to the company.
Examples of Famous Holding Companies
Let’s look at the examples of successful holding companies for a better understanding:
1. Berkshire Hathaway
Warren Buffett owns a global conglomerate called Berkshire Hathaway. It owns stakes in various companies like Geico, Coca-Cola, and Apple.
2. Alphabet
Alphabet is another example of a successful holding company. It is the parent company of the globally recognized company Google. It also has a diversified portfolio of innovation and tech-based businesses.
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Holding a company is a good concept for all those organizations who are looking forward to a stable earning scheme. The leading companies have the major role of supporting the functioning of their subsidiary companies by offering them the necessary consultation and capital. This, in turn, increases the probability of growth and profitability for the affiliates. Pure holding companies, operating holding companies, conglomerates, and financial holding companies are the major types of holding companies. A holding company provides limited liability, asset protection, and tax benefits. However, managing a holding company is quite complex. The benefits and drawbacks of using holding companies are given in detail in the above article.
If you want to establish a holding company and enjoy the benefits of this company structure, then you can contact IncParadise. IncParadise offers a wide spectrum of services to help you establish and operate a successful holding company. The services provided by IncParadise include business formation, registered agent services, accounting and bookkeeping, mail forwarding, and many other services.
