What is a holding company?

A holding company is a corporation that owns shares in another company. It’s typically positioned between the operating company and the individual shareholder, and it owns the operating company’s voting stock and assets, and controls its management and policies. Holding companies don’t usually produce goods or services themselves, but rather do so through their operating subsidiaries.

1) Creating a Holding Company:

Assess your needs:
Holding companies can function effectively at many different scales of business, but this doesn’t necessarily mean every operating company needs to be held under a holding company.

Larger holding companies benefit from different aspects of the holding company structure than smaller holding companies. A large holding company makes use of a highly diversified investment portfolio and large amounts of capital to assist companies in which it has a significant stake. This often manifests as loans and investments, which can be done in a more consistent way than an individual company because of the protection offered by the diversity of the holding company’s assets.

A smaller holding company mainly gleans the benefits of this structure by getting better tax rates through being located in a more favorable tax state than the operating company and through the asset protection it offers to shareholders.

Although a holding company may not be necessary for a small business with low risk due the complications in management a holding company can create, it is very often a good idea to set up some type of holding company in order to better protect both the company’s and your own assets. Even a small business owner can benefit from the protection of a holding company.

2) Choosing your business structure:

There’s two main types of holding company structures: limited liability companies (LLCs) and corporations.

Generally LLCs are preferable for small business owners as they tend to provide a higher level of asset protection than the corporation structure, but it’s still recommended to speak to a professional if you’re having a difficult time choosing.

3) File a business application:

Inform the state in which you decide to register your business of the business name, business agent, and articles of incorporation for your holding company.

4) Fund the holding company:

Move money and assets into the name of the holding company from your operating company. Then, when your operating company needs any assets, they can be loaned from the holding company to the operating company.

This allows your operating company to continue using all of the resources it needs while protecting those resources from an ill-intentioned lawsuit or financial problem.

5) Keep records:

The only thing separating your operating company from your holding company are the financial records of the transactions between the two companies. Without detailed records of all transactions, it becomes much easier for a creditor to pierce through the operating company and access the assets with the holding company.

For this reason, it is extremely important that careful and precise records are kept.

Conclusion

Although setting up a holding company for your business can seem like a monumental task, it’s achievable by anyone through hard work and careful planning, and the benefits are significant. It’s advisable for many business owners, large and small, to protect the assets of their business through a holding company and ensure their risk is kept to a minimum.