Starting a business involves making numerous critical decisions, and one of the choices that often arises is whether to establish a holding company. A holding company is a legal entity that holds the shares or ownership stakes in other businesses, known as subsidiaries. While holding companies can offer various advantages, they may not be suitable for every business owner. Connect with a seasoned corporate attorney to help you determine if one is right for your business.
What is a holding company?
Before we dive into the legal aspects, let’s clarify what a holding company is. A holding company, also referred to as a parent company, is a corporation or limited liability company (LLC) that exists primarily to buy, own and otherwise control the ownership interests of other businesses, known as subsidiaries. These subsidiary companies can be in the form of other corporations, LLCs, or even partnerships. The holding company, in most cases, does not engage in operational activities itself but instead controls and oversees its subsidiaries.
What are the benefits of a holding company?
- Limiting liability: The primary benefit of a holding company is to further limit your liabilities. With a holding company structure, the obligations of each subsidiary are confined to that specific entity, meaning that a creditor of one subsidiary cannot lay claim to the assets held by the holding company or any other subsidiary.
- Protecting assets and IP: Another legal advantage of a holding company is the ability to separate assets. Each subsidiary typically operates as a distinct legal entity, and their assets are separate from those of the holding company and its other subsidiaries. This separation can help protect the assets of one subsidiary from the legal issues or financial troubles of another. For example, a holding company should hold ownership over important intellectual property assets like trademarked logos and business names to shield those assets from claims against the subsidiary.
- Transacting business in several locations: With a holding company structure, your subsidiaries can be formed in the state that each does business. Generally, this allows your holding company to avoid seeking a grant of authority to transact business in each state. Instead, your holding company may limit its scope to one state, preferably one like Delaware, with favorable business laws and expedient courts specialized in corporate disputes.
- Encouraging investors: Investors prefer to invest in holding companies, where there is less risk than investing in startups or other more risky ventures. When Google changed to a holding company-operating company structure in 2015, one of their reasons for doing so was that shareholders were concerned about the company’s investments in areas like robotics and medical research. By restructuring, those investments were separated from Google’s core and profitable functions.
- Centralizing management: One of the primary purposes of a holding company is to control subsidiary companies. The holding company usually holds a majority of the shares or ownership interests in these subsidiaries, giving it significant control over their operations. This control can be beneficial for strategic decision-making, financing, and long-term planning.
- Maximizing tax benefits: One of the most significant legal considerations when establishing a holding company is the potential tax benefits. Holding companies can facilitate tax planning and optimization, such as tax deferral and tax consolidation.
How should I structure my holding company?
Holding companies can take on various legal structures, including corporations and LLCs. The choice of legal structure depends on factors like liability protection, tax implications, and regulatory requirements. Here’s a brief overview of the two most common types:
- Corporation: Forming a holding company as a corporation typically offers strong liability protection. Shareholders’ personal assets are shielded from the company’s debts and legal obligations. However, corporations often face double taxation, where both the company’s profits and shareholders’ dividends are taxed.
- Limited Liability Company (LLC): Holding companies structured as LLCs also provide liability protection, but they have more flexible tax options. LLCs can choose to be taxed as pass-through entities, where income is only taxed at the individual level, potentially reducing overall taxation.
Conclusion
While holding companies offer several legal advantages, such as asset protection, tax benefits, and centralized control, they may not be suitable for every business. Consulting with legal and financial professionals can help you navigate the complexities of forming and operating a holding company. If you would like to discuss whether establishing a holding company aligns with your business goals and the legal and regulatory environment in which you operate, reach out to a member of our team for next steps.
