Do you own multiple high-value businesses or considering diversification? Having a holding company is perhaps the best way for effective risk management, asset protection, and centralized control. There are numerous benefits that your business can leverage from a holding company; however, there are also certain considerations and caveats that you must take into account before having a holding company as your structuring option.
In this post, you will learn everything about a holding company, its purpose, benefits, and factors to consider when structuring.
What is a Holding Company?
A holding company is defined as an entity that owns a “controlling interest” in investments or subsidiaries. Typically, it can own shares of stock in another corporation, real estate, intangible assets like copyrights and patents, securities, or anything of value. It owns and manages equity interest in subsidiary companies but does not involve in producing goods or providing services itself.
A holding company may serve as a “parent” company or an “umbrella” company that only manages one or more subsidiaries/assets/investments under it.
Purpose of a Holding Company
The key purpose of a holding company is to empower organizations having multiple businesses with an effective means to streamline management, maintain ownership and limit liability. It serves as a centralized control for all businesses, while the ownership and management lies with the operating company only.
A holding company is also suitable for businesses who want to diversify their risks, distribute their income and protect their assets from creditors and litigators.
Advantages of a Holding Company for Your Organisation
There are three primary reasons why you should consider a holding company for your organization –
- Limited liability
- Centralized control
- Limiting investment
Limited liability is one of the top reasons why businesses choose to have a holding company. Under this form of structuring, the equity, assets, and securities of the subsidiary are owned by the holding company and then leased to the former.
In any scenario, if the subsidiary becomes insolvent or faces litigations from a creditor, their assets will remain in safe hands with the holding company. Creditors and litigators cannot claim their ownership on such assets because they are on lease under the holding company.
It is an effective way of safeguarding the assets even if the subsidiary company closes and/or declared bankrupt.
Another advantage is achieving centralized control for all businesses. This is especially beneficial for companies having multiple businesses under their portfolio or planning to diversify.
The holding company does not involve in the operations of the subsidiaries but holds ownership of the businesses under them. An executive management team, appointed by the holding company, is responsible for managing each company.
Centralized control aids in seamless operations, greater productivity and reduced costs as the subsidiary can focus on their core business while the holding company takes care of effective management.
Having a strong portfolio of subsidiary companies, assets, and securities, a holding company provides an opportunity for equity investors to pick their preferred company for investments. They can invest and gain equity interest in their business of choice.
For instance, reputable holding companies such as SUISSE HOLDING provide the advantage of limiting investment, allowing investors to raise capital and build valuable partnerships.
In addition to the above, effective debt-structuring and financial flexibility are other benefits that a company can leverage from a holding structure. By operating multiple activities or businesses under a holding, having a group structure ensures improved flexibility when allocating or reinvesting capital across diverse investments or businesses.
The subsidiary companies also tend to enjoy lucrative financing terms than any stand-alone entity and may also get the advantages of the reduced cost of capital.
Another key advantage is that if any subsidiary fails due to insolvency, it will not affect other companies within the holding structure, provided no unscrupulous asset transfer occurred to showcase the former as undercapitalized.
Holding structures such as SUISSE HOLDING also aid in intra-group financial strategies. This further aids in effective tax planning and better protection of profits.
Factors to Consider for a Holding Structure
So if you are considering a holding structure for your business or group of businesses, here are some vital things you should evaluate first. Let’s check out:
1. Do I need a holding company for my business?
This is an important factor to consider before you take the leap. If you run small-scale businesses with limited assets, a holding structure is not suitable for you.
However, if you have a diversified business with a huge asset base, structuring it in the holding form is the best way to mitigate risks from creditors, protect your assets, ensure better control and reduce costs.
2. Legal structure
The legal structure and requirements may vary depending on the purpose of having a holding company. If the objective of the holding company is to segregate your business units and assets, aiding in tax planning, providing financing or fundraising – the legal structure will be in the form of a corporation. It provides stricter management and governance, is limited by shares, and can help subsidiaries leverage significant tax benefits.
If the purpose of the holding company is limiting liability on particular assets or extending an additional layer of protection, an LLC structure is the most suitable.
The advantage is LLCs are more flexible and simple with minimal operational requirements or procedural formalities. Based on the above factors, you have to determine which holding structure is suitable for your business – corporation or LLC.
3. Economic activities and underlying holdings
The nature and type of your underlying assets also play an important role in determining the most suitable holding structure and the right jurisdiction.
Consider how the holding company will manage your lease assets, financing needs, equity holdings, and active businesses. Assessing the management structure, liabilities and governance are also important to take into consideration.
As discussed in this post, having a holding company may offer significant advantages and flexibility regarding how to manage and finance your organization. Achieve a high level of asset protection, minimize your financial risks and effectively operate your business with top-notch holding companies such as SUISSE HOLDING.