Start a Holding Company

Summary: You might be operating several businesses and at a loss on how to contain your assets so that they are adequately protected. Have you considered forming a holding company?

In addition to risk protection, you can get several other advantages in doing so. Read on and discover the benefits of forming a holding company.

Definition of a Holding Company

A holding company can be a parent company that owns majority of the shares of another company or a company that conducts no business but holds the assets of one or multiple operating companies. The latter is a “pure” holding company because there are also holding companies that, themselves, operate. Usually, it happens that after operating successful businesses, the owner would decide to form a holding company.

Advantage of a Holding Company – Liability Protection

There are several reasons why people start a holding company -- one being that it protects the assets by minimizing exposure to risks and by keeping creditors at a distance. The protection lies in the fact that the holding company performs no transactions and therefore doesn't move properties and cash around. The liability remains in the operating companies – those that produces goods and services and retain employees. The holding company is exposed to the risk only to the extent of its investment in the operating business. And when the holding company lends money to the operating company, it usually secures a priority lien on the collateral for the mortgage. In this scenario, the holding company becomes a secured creditor and thus has priority to get what it loaned when collection time comes.

Advantage of a Holding Company – Tax Benefit

Another advantage of forming a holding company is the possibility of tax reduction in that a holding company that owns at least 80% of a subsidiary's voting stock may benefit from tax consolidation, which allows tax-free dividends to the holding.

Other Advantages of a Holding Company

As add-on, the holding company shares in the subsidiaries’ goodwill and reputation while not directly bearing the risks that they have. And it can operate while being isolated from taxation, accounting, and legal problems faced by entities operating in other jurisdictions.

And in this form, it is in a better position to raise capital from the securities markets than its smaller members. Management-wise, it permits a centralized control of policies governing the operating entities without intruding into their operations.

Holdings v. Merger and Consolidation

A merger or consolidation also offers the same possibility of containing a smaller entity within a bigger one, but the formation of a holding company is seen as advantageous in that it allows the holding to control a significant part of the operations with only a fraction of ownership and relatively minimum investment. It is also less complicated and costs less because the process would only require simple purchases of stock, and won’t involve shareholders having to decide whether or not they favor a merger or consolidation.