Typically, a holding company doesn’t manufacture anything — it also doesn’t buy or sell products or services. In addition to holding controlling shares in other companies, it may own real estate, intellectual property, and other assets.
Holding companies usually oversee their subsidiary companies but don’t actively manage their day-to-day operations. Each subsidiary retains a separate management team.
Holding companies may also be known as “umbrella” companies. In certain jurisdictions, the holding company business definition is the same as what’s called a “parent” company. The entities they control are known as subsidiaries. If the parent company controls 100% of the subsidiary’s stock, the subsidiary is known as a “wholly owned subsidiary.”
The primary benefit of holding companies is that they shield the umbrella company from the legal and financial liability of its subsidiaries. So, if one subsidiary gets sued, the person or entity filing the lawsuit generally won’t be able to go after the assets of the holding company or its other subsidiaries.
Likewise, if a subsidiary goes bankrupt, its creditors won’t be able to reach the assets belonging to the holding company or the other subsidiaries. Sometimes a business owner will also use a holding company to shield their personal assets.
If the holding company owns at least 80% of each of its subsidiary corporations, it may file a consolidated parent-subsidiary federal income tax return. Doing so allows the holding company to offset the profits of one subsidiary against the losses of another on its taxes.
A subsidiary that might be a risky investment by itself can get financing with the backing of a holding company. Of the many holding company advantages, a major one is the downstream subsidiary’s ability to obtain a better interest rate when the holding company makes a pledge on the loan.
The holding company model can be problematic if the management of the parent company disagrees with decisions made by the subsidiary’s management team.
Individual customers and investors may not realize that the company they’re doing business with is held by a holding company. As a result, there could be a lack of transparency when it comes to investments and other dealings because they don’t realize who ultimately may make decisions for the subsidiary.
Alphabet is a well-known holding company that controls 12 subsidiaries, including Google, Waymo, Google Fiber, Wing, and X Development. This example highlights a further benefit to holding companies. By limiting liability, a holding company is able to fund more risky ventures like X Development. Supporting these cutting-edge businesses can lead to the development of groundbreaking new technologies.
In addition to all the benefits we’ve explained, a holding company allows you the ease of managing businesses in different industries under one umbrella. And because the holding company and subsidiaries don’t have to be in the same state, you can form them in whatever state offers the best tax advantages. We can help you compare different scenarios for business taxation.
The first step in launching your holding company is forming the umbrella entity. With formation services starting at $0 (plus your state’s required fee), we can help you set up your LLC or corporation today.
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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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