How to Set Up a Holding Company

Holding companies do not exist to create products or provide services. Instead, holding companies own other companies or primary stock in other companies. Holding companies can also own real estate or property such as stocks and trademarks. All of these aspects come together to form a corporate group with subsidiaries as its assets.

In many cases holding companies also have the responsibility of investing money into other companies, and for other companies. These funds are made by selling equity, and then investing either within its own company or into its subsidiary companies. In return, revenue can be accessed via interest, payments from subsidiaries, or even rent.

What is the Purpose of a Holding Company?

Holding companies specifically exist to control other companies. They often own property, patents, even stocks of other assets. The one specific thing that all holding companies have in common is that they typically do not sell products or services. They act specifically in the interest of controlling other companies.

What are the Different Types of Holding Companies?

There are different types of holding companies. If you are creating a holding company you will need to choose which type of holding company you will be. There are 4 different types of holding companies:

  1. Pure
  2. Mixed
  3. Immediate
  4. Intermediate

Pure

When a holding company is “Pure,” it means that it only holds stock in other companies. It is a classic type of holding company and will not do any other type of business other than that of controlling other companies.

Mixed

When a holding company owns stock and control of other firms, but also sells products, or services, it is called a mixed holding company. This can also be named a holding-operating company. If a holding company is mixed and works in an unrelated field, it will be referred to as a conglomerate.

Immediate

Immediate holding companies control stock in other companies, while also being a subsidiary of another.

Intermediate

Intermediate holding companies are the holding company of one entity, while also are owned by another company. In some cases, an intermediate holding firm will not need to publish its financial records of the subsidiary.

Advantages of Starting a Holding Company

Holding companies are a great way to reduce risk while maintaining ownership. If you are wondering why people prefer to start holding companies, here are 3 key reasons to start a holding company.

Liability Protection

Holding companies are able to limit their liability by using subsidiaries as a liability shield. When a subsidiary encounters debts, they will belong to each individual company, not that of the parent company. The parent company’s assets will be safe from that of creditors.

Control Assets for Less Money

When it comes to controlling a subsidiary company, a parent company is required to hold at least 51% of that subsidiary. This makes it a lot cheaper than purchasing 100% of a company. Instead, it allows business owners to purchase and control multiple entities for less of an investment.

Lower Debt Financing Costs

Although debt financing can be expensive for small or new businesses, using a holding company can help to reduce this. This is because larger or more seasoned companies typically have the ability to obtain loans with low-interest rates. In these cases, a holding company can provide capital at a low rate for its subsidiaries.

Disadvantages of Starting a Holding Company

Holding companies have a lot of advantages but they can be difficult to create and continue to manage. Here are a few of the most common challenges and disadvantages of starting a holding company.

Complexity

Starting a holding company can be complex. This is one of the largest disadvantages of starting a holding company. As compared to a standard business structure, it can be a lot to keep track of.

In some cases having a good management system can prove to reduce the complexity of a multi-faceted holding company situation. In any case, having good records regarding all aspects of the business can help to reduce the negative impact of complexity.

Compliance Costs

When a holding company is formed, each subsidiary will be required to pay formation fees. This may include annual reports, franchise fees, as well as LLC or corporation fees that are required in the state of formation. By using one single company you can avoid these and the extra costs.

How to Set Up a Holding Company

Starting a holding company from scratch can be an overwhelming process but when you break it down it’s actually pretty simple. To create a holding company you must register the holding company in the state that you live in, as well as providing your business’s name.

You will also need to file all the appropriate paperwork, as well as articles of incorporation, and operating systems. Finally decide on a registered agent, who can be a part of your holding company or a third-party provider.

If you need help setting up a holding company, we can help. We specialize in forming holding companies, LLCs, and corporations and can help you!

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