Should You Form A Holding Company?

If you are a small business owner with several companies, you may have considered having all of them managed together. A holding company is an entity that can allow you to arrange this set-up while still keeping the liabilities of each business separate from each other. A holding company is also known as a parent company or an “umbrella” company. A holding company does not actively participate in a company’s day-to-day operations. Businesses of all sizes and in all sectors use holding companies. Many of the most well-known publicly traded firms are simply holding companies. Many investors are unaware that they are buying shares in a holding company rather than the operating company.

Business owners can use a variety of strategies through a holding company to help limit liability risks, minimize taxes, and protect assets. This includes asset protection from creditors because a holding company can withdraw excess earnings/monies from the operating company (typically in the form of tax-free dividends) to protect against creditors.

In addition, if the operating entity wants a loan to buy assets, it can borrow funds from the holding company. This agreement gives the holding company first preference over potential creditors when it comes to interest on cash.

Splitting income and deferring taxes are two other advantages. With holding companies, you can also split income amongst adult family member shareholders and provide flexibility in the timing of that income payment.

A holding firm will also help you transfer your company’s properties to potential owners. Various techniques can be used as part of a corporate succession strategy but bear in mind that they are not appropriate for all business owners. Do a thorough research if this is a benefit you are looking for.

You can manage various assets for less with holding companies. A holding company must have power over its subsidiaries, but it does not have to own all of its shares or membership interests. This enables the holding company to control another company and its assets at a lower price than if it had purchased the subsidiary’s entire ownership stake.

For forward-thinking entrepreneurs, a holding company helps to foster innovation.

Since operating companies are independent legal entities, investing in startups or other high-risk projects is less risky. Google’s Alphabet company is an example of this because it can innovate further with innovative projects while protecting its core businesses.

Having a holding company is not without its challenges. You will need to consider Formation and ongoing compliance costs. Management challenges especially where conflicts may arise when the interests of the minority owners are different from those of the holding company. Please also note that holding companies and subsidiaries adds an element of complexity not found in the single-entity structure.

Consult an attorney and a CPA familiar with the laws and accounting for a holding company before forming one. Examine your current situation and plans to ensure that anything you do complies with all applicable federal and state laws and regulations.