What is a Holding Company?

A holding company is a business entity or corporation that holds controlling stock in another company. The holding company, which is typically a Limited Liability Corporation (LLC), has enough voting share in a separate company to contribute in managing its operations. In most cases, holding companies do not manufacture, sell, or produce any products or services. Instead, the company exists solely for the purpose of owning and controlling other companies. The companies that the holding company controls are referred to as subsidiaries. 

Key Takeaways

• A holding company is a corporation or other business entity that holds controlling stock in another company or companies.
• The companies that a holding company owns are called subsidiaries.
• Holding companies can be either publicly traded or private.

Understanding Holding Companies

While they may also own other assets such as real estate, patents and trademarks, the primary focus of a holding company is the ownership and management of their subsidiaries. This complex yet valuable mechanism serves to limit the financial and legal liability of the holding company and its subsidiaries. Moreover, it may reduce a corporation’s overall tax liability by establishing holding companies in certain jurisdictions with lower tax rates. 

Since the holding company owns the controlling portion of shares in a subsidiary company, it has the freedom to elect the board directors in the subsidiary, control the company’s operation and conduct strategic planning. The holding company may also contribute to the company by providing streamlined access to certain investments or capital. In turn, the holding company typically receives dividends on the company’s profits. 

Some businesses are completely owned by a holding company. These companies are often referred to as “wholly-owned subsidiaries.” In these cases, the holding company has the complete authority to control the managers and directors of the companies it owns.

Advantages of Holding Companies

As a business owner, it is crucial to take steps to safeguard your company's assets and ensure the long-term success of your business. This is why it is important to carefully consider the potential advantages of setting up a holding company. It can provide a range of essential benefits, including:

• Tax benefits: holding company structures may offer certain tax benefits. For example, if a business operates in a jurisdiction with especially high business taxes, the holding company may move to a different jurisdiction to reduce taxes.
• Protection from losses: holding companies hold the ability to safeguard their subsidiaries from certain losses. In other words, the creditor of a subsidiary cannot claim the assets of the holding company or another subsidiary.
• Organization: since holding companies are able to consolidate a number of businesses under a single entity, they can make business management more efficient and organized.
• Diversification: holding companies have the freedom to gain access to new markets through a variety of subsidiaries. This can expand the overall diversity and reach of a company.

Bottom Line

In conclusion, it is essential to keep in mind that holding companies do not exist to do any independent trading or sales. Instead, they exist to own shares in other companies. One of the largest holding companies in the United States is Johnson & Johnson, which has over 250 operating subsidiaries worldwide.

If you are interested in opening your own holding company and you aren’t sure where to start, speak to one of our experienced business attorneys today.