Holding Company Benefits: Advantages & Disadvantages

Although not a common idea when first starting your business, a holding company is something that can provide a lot of benefits in the long run. Holding companies are businesses that do not sell products or services. Instead, they act as a business that owns other companies. This might include real estate, patents, or other units of ownership.

Holding companies exist to own other companies. Holding companies are considered the parent company, over the subsidiary, which it owns. Holding companies are usually corporations or LLCs and they do not conduct business other than owning stock in other companies.

Holding companies exist to operate with larger control and overall power, which would not exist as separate corporations. This can seem extremely helpful but does have a few disadvantages as well. You should be aware of these before pursuing this type of business.

What are the Advantages of a Holding Company?

Creating a holding company is a great way to capitalize on the financial benefits and reduce risk of a parent company. Here are 3 key advantages of creating a holding company.

Reduces Risk

One main holding company advantage is the fact that they reduce risk by providing asset protection. When holding companies go bankrupt, its assets can be pursued by creditors. This can be very dangerous when it comes to smaller corporations and businesses.

By setting up a holding company, it can reduce risk by keeping assets completely separate. Especially when it comes to real estate, you can protect the equity that has been invested into various assets by placing them in their own individually held companies.

Potential Tax Benefits

There are many types of tax benefits that come along with creating a holding company. Holding companies can allow the owners to defer and save on taxes, or even earnings on dividends from corporations. This is because they can flow between companies tax-free.

Another instance is that typically any earnings paid to shareholders are considered dividends. These will have taxes paid on them, as well as personal income taxes. When dividends are paid to a holding company they are not taxed in the same manner.

More Control With Less Money

Forming a holding company is possible with owning 51% or more of the stock in another company. This allows the holding company to spend less to purchase the stock but provides them with the same amount of control as if they own the company completely. This is also helpful for small businesses that have less capital but want to expand their business with less risk.

What are the Disadvantages of a Holding Company?

Although there are many advantages of starting a holding company, there are a few downsides. If you are going to start a holding company, make sure to know the disadvantages of holding companies as well as the advantages.

  • High start-up cost: One holding company disadvantage is that, as compared to other business structures, holding companies carry a lot of costs.
  • Less transparency for consumers: Because a holding company is not directly correlated with that of its subsidiaries it can be confusing for the consumer and leave less information for the consumer to understand.
  • It is not easy for holding companies to sell shares: Holding companies sometimes need to jump through hoops in order to sell their shares in a company. Even placing a lot of their shares on the stock market does not mean that they will be sold.
  • Reliant on the market: 60% of the income of a holding company must be from dividends, interest, or other areas that are not direct products or services. This means that it can make the company too reliant on the market.

Forming a Holding Company: How to Start a Holding Company

After you have decided to start a holding company you need to decide how you want it to be formed. You may want to consider using a corporation, an LLC, or another entity type. Corporations and LLCs are the most commonly used because they provide limited liability and tax advantages. These tax advantages typically depend on how the holding company will be taxed. Whether it is a separate taxable entity or, another option, a pass-through entity.

The next step in forming a holding company is to figure out where you want to form the entity. This will depend on the state that you wish to form in. You will also need to have a designated agent that has a presence in the state that you wish to form in. Finally, you can choose a name. This will need to be specifically based on the type of entity you form and needs to be completely unique.

Should You Start a Holding Company?

There are various advantages and disadvantages of forming a holding company. Whether or not you start a holding company will depend on the markets, and if you have a chance of being profitable. In some cases, it may not benefit you to begin a holding company, but in other cases, it can provide tax benefits, limited liability protection, and the ability to be more competitive in the marketplace.

If you are considering starting a holding company, speaking with a financial expert can help. We specialize in forming holding companies, LLCs, and corporations. Get in touch with one of our experts today to schedule a free consultation.

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