What is a holding company and what do holding companies do exactly? The short answer is that a holding company is a corporate entity that owns shares or a controlling interest in other businesses, known as subsidiary companies. There are several different types of holding companies, which may be structured as corporations or limited liability companies (LLCs).
A holding company structure has several benefits, including tax, financial, and corporate advantages. Below, learn more about holding companies and whether structuring your business entity that way is good for you.
What is a Holding Company? Our Definition
Many businesses organize themselves as holding company structures. Our holding company definition: a corporate structure or legal body created to hold stock in many companies. The holding firm owns a controlling interest in one or more other businesses. Essentially, a holding firm is a company that owns other companies.
The holding company works like a parent corporation that owns the business assets or shares of other businesses. These other businesses are known as subsidiaries. If the parent owns 100% of the shares or interests of the other business, then the other business is known as a “wholly owned subsidiary.”
You may wonder what does “holdings” mean in a business name? For example, “Acme Holdings” would just be a holding company meaning that Acme owns a controlling stake in subsidiary businesses.
What is a shell company? It’s not the same thing as a holding company. Instead, a shell company has no significant business assets or operations (learn more about a shell company vs holding company).
What Does a Holding Company Do?
What do holding companies do? The function of a holding company depends on its structure. But for the most part, holding companies simply own controlling stakes in their subsidiaries. This allows the holding company to function as an operating company with a say in the daily operations of the subsidiaries’ management.
Why have a holding company? The main purpose of holding company is to protect the assets, including real estate and intellectual property (e.g., copyrights, trademarks, and patents), of a business.
For example, imagine a company called “XYZ Packaging.” XYZ Packaging operates within multiple industries. Its most profitable segments are its shipping operations and plastics manufacturing division. In this business structure, both divisions are part of the same company – XYZ Packaging.
Imagine the manufacturing division suffered a major loss due to an equipment malfunction, and it fell behind on its debts. Because the shipping operation continued turning a profit, the manufacturing division’s debtors sued XYZ Packaging to recover its losses. So even though it was the manufacturing division that suffered losses, the entirety of XYZ Packaging was affected by the creditors’ lawsuit.
Instead, the owners of XYZ Packaging could organize the business structure as a holding company called “XYZ Holdings.” XYZ Holdings owns a controlling stake in XZY Shipping and XYZ Manufacturing, which are two independent businesses. This time, when XYZ Manufacturing falls apart, only XYZ Manufacturing is affected. XYZ Holdings may even be able to rescue it by shuffling around the holding company’s profits or by underwriting a business loan.
What are the Holdings of a Company?
As the name suggests, a “holding company” holds something. But what? The holdings of a company are called its subsidiaries, controlling interests, stocks, or something related.
Just like explained above, a holding company is used to hold the assets or controlling shares of another business entity, whether it’s a small business or large corporation. The holding of a company is therefore its interest in the smaller businesses it owns.
The different holdings may include property, such as real estate, leases, property options, intellectual property, cash, or other valuable assets. Company holdings allow the parent company to manage its subsidiaries.
The 5 Different Types of Holding Companies
Holding companies take many forms. While they go by multiple names, the following represent usual types.
1. Pure Holding Company
A pure holding company does not produce any goods or provide any services of its own. Rather, it simply owns the valuable assets or controlling interests in its subsidiaries.
2. Mixed Holding Company
On the other hand, a mixed holding company operates its own businesses (i.e., produces goods or provides services). It also holds shares in other companies. This is an example of a parent company. So while a parent company is also a holding company, a holding company isn’t necessarily a parent company.
When the parent company owns subsidiaries in unrelated industries, it’s called a conglomerate. A classic example is Berkshire Hathaway, one of the most successful companies in the world. Berkshire Hathaway has an interest in famous companies including Dairy Queen, Clayton Homes, Duracell, and GEICO.
3. Immediate Holding Company
An immediate holding company differs from each of the above in that it owns stocks in another business that’s already owned by a third company. This holding company has voting stock or voting interest in another company, even though that other company is owned by a third entity.
4. Intermediate Holding Company
An intermediate company is a holding company that exists within a chain of several other companies. This intermediate holding company is owned by a larger holding company, but also owns smaller subsidiaries.
For example, Holding Company 1 has a controlling stake in Holding Company 2, which owns Companies A and B. Therefore, Holding Company 2 is an intermediate.
5. Offspring Company
Finally, the offspring holding company is an entirely new company formed to take over another business.
Holding Company Structure Examples
A business owner can structure a holding company in several different ways. Holding company examples include a parent company, a conglomerate, a corporation, a limited liability corporation (LLC), or even a partnership.
Real Holding and Subsidiary Company Examples
In any structure, the holding company and subsidiary are organized like a hierarchy. A parent company structure has its own business(es). For example, Manufacturer ABC could produce aluminum parts for heavy machinery. However, Manufacturer ABC could also own a controlling interest in Subsidiary 1 and Subsidiary 2, which both produce related manufacturing metals. But if Subsidiary 1 were a chain of fried chicken restaurants and Subsidiary 2 were a computer manufacturer, then Manufacturer ABC would be a conglomerate.
An example of a holding company is Sony Corporation. As a holding company, Sony’s subsidiaries include Sony Electronics, Inc., Sony Global Manufacturing & Operations Corporation, Sony Interactive Entertainment Inc., Sony Pictures Entertainment, and several others.
Another major holding company with a parent company structure is Johnson & Johnson. J&J owns subsidiaries like Cordis Corp., Ethicon, Inc., Janssen Biotech, Inc., McNeil Consumer Healthcare, and others.
Is There a Difference Between a Holding Corporation and an LLC Holding Company Structure?
Yes! These two structures are different.
Let’s start with the corporation offers:
- Rigid operating structure
- State-mandated reporting and recordkeeping requirements
- Easy to transfer shares or ownership interests
- Simple to authorize additional shares
- Requires a board of directors and at least one annual meeting
On the other hand, the LLC structure offers:
- More flexibility — no board of directors or annual meeting requirement
- Each owner has a membership interest rather than a share of stocks
- Operating agreement required — details how the business is to be run and how to deal with new or departing members
- May structure as member-managed or certify one partner as a general manager
- Tax classification depends on structure (e.g., single-member, S-corp status, C-corp status)
Holding Company Advantages and Disadvantages
In some ways, holding company advantages and disadvantages blend together. The advantages of a holding company can become disadvantages if mismanaged.
Holding Company Benefits
The benefits of a holding company include its tax structure, reduced liability, decreased capital expenses, and improved innovation.
Holding Company Tax Structure
Accounting for holding companies can be complex. But when organized properly, a holding company is tax advantaged. If the holding company is a corporation that owns subsidiary corporations, that means the holding company will receive dividends from those subsidiaries. These dividends can then be re-invested in the subsidiaries or holding company, or even paid out to the holding company’s shareholders.
Similarly, a holding company can offset losses of one subsidiary by using the profits of another. This allows the holding company to reduce its tax burden by writing off the losses as capital losses.
Reduced Liability
Another holding company structure advantage is reduced liability. The debts of each subsidiary belong to the subsidiary alone and not the holding company or the other subsidiaries. This means that if one subsidiary fails or experiences a loss, the remaining businesses are insulated. You could also separate each of the valuable assets of the holding company into various subsidiaries.
Decreased Capital Expenses
One of the next advantages of a holding company is the decreased capital expenditure. For example, a holding company that controls its subsidiaries but doesn’t have to own all of the shares or the membership interests – just the majority. Therefore, these assets are owned at a lower cost.
A holding company with good credit and a positive financial record can also obtain loans at a lower interest rate than could the subsidiary alone. When a subsidiary is a startup or other risky business, the holding company’s capital abilities are absolutely essential.
Improved Innovation
The holding company’s ability to access cheaper loans allows the holding company to finance startups. This was reportedly one reason Google reformed itself as a subsidiary of the new company Alphabet, which owns not only Google but also companies working in robotics, medical sciences, and other technologies.
Drawbacks of Holding Companies
One positive of a holding company is that it has a say in the daily operations or management of its subsidiaries. This can also be a disadvantage when managing the subsidiary requires subject matter knowledge that the holding company’s management just doesn’t possess.
Another disadvantage is that the formation of each new subsidiary requires the payment of several fees. This can include annual report fees and franchise taxes. You must also comply with other reporting and tax issues mandated by state law.
Need Help with Holding Entity Formation?
Creating a holding company is a complex legal and business process. You’ll need to determine what corporate structure best fits your needs, how to comply with state law, what tax considerations matter to you, and several other issues.
If you need help with holding company formation or are beginning to think about how to create a holding company, Cueto Law Group’s experienced legal professionals can help.
Contact us for a consultation.
Key Takeaways on the Use of a Holding Company
What is a holdings company? A holding company owns a controlling stake in its subsidiaries, which are other businesses that have their own operations.
What is a holding company useful for? A holding company is great for asset protection, reducing your tax liabilities, and insulating the business owner’s personal finances.
FAQs
Is a holding company an investment company?
A holding company can be an investment company, but it doesn’t have to be. You could create an LLC to buy an apartment complex that you then rent out to tenants. Then, a holding company could buy the LLC – in this case, the holding company is not an investment company.
Can a holding company have employees?
Although a holding company doesn’t always have its own business operations, the holding company itself can – but doesn’t have to – have employees. These could be as few employees as necessary to manage the subsidiaries, or enough to run an entire business unit. This creates another source of income.
Can a corporation be a holding company?
Yes. You can organize a holding company as a limited liability partnership or a corporation. If you choose the corporation route, you must comply with your state’s laws governing corporations. This usually requires a board of directors and an operating agreement that controls the corporation’s functions.
How does a holding company make money?
A holding company can make money in several ways. First, the holding company derives profits from its subsidiaries. This can be in the form of stock dividends or excess cash on hand. Second, the holding company itself could be a profitable business operating independently of its subsidiaries.
Holding company vs parent company: What’s the difference?
When considering a holding vs parent company, the two are related but not the same. A holding company typically has no business operations and simply owns subsidiaries. A parent company, conversely, usually is a large conglomerate like General Electric with its own business units that also own several subsidiaries.
