Starting a holding company could be the solution you’ve been seeking. This is everything you need to know about holding companies and how to start one for yourself.
When you think of holding companies, you might think of large corporations like Warren Buffett’s Berkshire Hathaway Inc or MetLife Inc. After all, these businesses are worth billions and billions of dollars. Would it surprise you to discover that these companies don’t trade goods or services?
Holding companies don’t exist to trade; they exist for several other relevant reasons. Since COVID-19 has destabilized the world, more small business owners are considering the holding company structure to secure their small operating companies.
Here we’re going to define what a holding company is, why it exists, and answer some other pertinent questions that small business owners might ask. Consider this your crash course in understanding and starting one of your own.
What is a Holding Company?
A holding company is a business entity created for the sole purpose of owning and controlling other companies. It acts as a financial organization that lends, borrows, and manages the interests of its own operating companies, though it never trades in goods or services itself.
The operating companies that belong to the holding company are called subsidiaries. These are usually managed by a parent company (corporation or LLC) within the corporate group controlling interest or equity in the other companies. The two terms—holding and parent company are often interchangeable, though they can mean two different things.
The main difference is that a holding company can own multiple subsidiaries without directly trading, while any operating company with controlling equity can be called a parent company.
The holding company is usually the overseer, while the parent company participates in its subsidiaries’ day-to-day operations. Often called an “umbrella company,” these companies were made to own things, holding assets for other businesses in their group.
Some 80% of small businesses are already LLCs, and these limited liability companies or corporations are the ones that can become holding companies. If your small business decides to start one, it will begin with an LLC structure.
What Are Some Assets That a Holding Company Controls?
When starting a holding company, the main goal will be to deposit assets there. These assets can come from any of the subsidiaries in your corporate group.
Here is a list of what your holding company can hold:
- Multiple subsidiary companies
- Corporate equity, shares, and stocks
- Intangible assets like patents, copyrights, trademarks, trade secrets, and other intellectual property
- Tangible assets like real estate, vehicles, and equipment
- Mutual funds, hedge funds, stocks, securities, and bonds
Berkshire Hathaway, for example, owns assets in hundreds of private and public companies. These include Duracell, Delta Airlines, and The Coca-Cola Company. There is no restriction on the industry; if the holding company has paid for equity, it possesses a percentage of these businesses’ assets.
What Are the Benefits of Owning a Holding Company?
The main reason why someone would start a holding company is to reduce risk. If one business fails, the others are protected. Umbrella companies provide asset protection for their subsidiaries, and they also offer business owners better tax rates and lending benefits.
Because a holding company owns diverse businesses, they can often borrow money from financial institutions at lower rates, which makes lending it to their subsidiaries cheaper. It means the subsidiary gets the benefit of reduced operating capital, which reduces the chance of loan defaults.
At the same time, the holding company can directly own large assets that other businesses use. For example, if Berkshire Hathaway owned a few Coca-Cola factories, and the company was sued and went bankrupt—the factories would not be lost because they belong to the umbrella company.
Protection from creditors, business liabilities like lawsuits, and economic recessions are a few other major benefits! The economic downturn that is happening because of the coronavirus pandemic has changed how people live.
By starting a holding company of your own and making sure that it doesn’t co-sign for any of your operating companies’ debts—you can protect yourself from unstable economic conditions caused by the global pandemic. It’s an attractive option for many multi-business owners right now.
Do You Need a Holding Company Structure for Disaster Mitigation?
COVID-19 is still around, and there are no signs of a vaccine just yet. It’s safe to assume that small businesses will be managing the economic fallout of these seismic shifts for many months, even years, to come. The question is—should you start a holding company to mitigate risk?
Holding companies are not just for large corporations. In fact, many smaller companies use them too. Even lone entrepreneurs use them to protect their business investments or make sure subsidiaries are managed according to the owner’s wishes.
For instance, sustainable companies do this regularly to make sure all subsidiaries are operating ethically and in line with their sustainability goals.
So, there’s a pandemic, and you think that forming a holding company might be the right step forward. For small businesses that are mainly operating online, there is no real reason to form an umbrella company. It will cost money, and, ultimately, not provide enough benefit in return.
Instead, you could consider forming individual LLCs for each of your companies, form one LLC and then file trade names (DBA: “doing business as”) for each company operating under that core structure. However, if you own several small companies with considerable assets, then a holding company may be a good move.
How Do You Start a Holding Company?
Starting a holding company begins with a decision about your legal entity. As mentioned earlier, the two most common entities used when forming umbrella companies are LLCs and corporations.
It’s easier for a small business to set up an LLC, so it is a good idea to start there. An LLC will allow you to bring in other investors and business owners should you need to in the future, while keeping your taxes simple. It’s important to always speak to a lawyer because they can help you make the right decisions regarding your tax and legal structures.
If you set up a holding company in another state than your operating companies are in, for example, you can tap into tax benefits. You will need to decide if your holding company will be a trading parent corporation or a traditional, ownership-only structure.
From there, establishing a business is like any other. You’ll need a business plan that outlines your equity acquisition strategy and financing to get the company up and running. Make sure that you research a number of holding company investment models before launch.
Speak to your legal representative about tax and liability concerns before establishing your holding company. Professional advice is a good idea when working with corporate law on this level. They will outline the possibilities and costs involved with your acquisition strategies.
As the coronavirus continues to reshape the economic landscape, small business owners need to keep searching for ways to protect their interests. If you find that your companies need asset protection, then starting a holding company might be the smart thing to do.