Having a holding structure is an effective asset protection strategy that can help limit liability risks in your organizational structure. With this structure, business owners can eliminate – or significantly limit – liability for business debts and ensure asset protection.
It helps minimize the risk of losing the assets if a business faces substantial financial difficulties. At the same time, it aids in strategic tax deferral benefits and estate planning.
In this post, we will discuss 7 vital aspects of a holding company that every business should know. So let’s get started.
#1: What is a Holding Company?
A holding company is a legally-recognized and registered entity to own the “controlling interest” in other companies. Typically, it does not engage in core business operations of the company but holds enough assets, equity or stock to gain control.
The holding company does not directly manufacture goods or provide services but owns a group of companies to efficiently manage legal liabilities and leverage the advantages of consolidating tax responsibilities.
#2: Different Types of Holding Companies
Let’s understand the different types of holding companies that exist today. This will help you determine the most appropriate kind of holding a structure that you want for your business.
- Pure: A pure holding company is one that has the sole purpose of owning a controlling interest in other companies in the form of stock, equity, and assets. A fine example is SUISSE HOLDING, licensed in Ras Al Khaimah. Their core objective is to hold shares and real estate properties in other companies and does not involve in any other business operations.
- Intermediate: An intermediate is one that owns control and stocks of another country but is itself a subsidiary of another company, i.e. the holding company is controlled by another entity. This means it functions as both a holding company of another firm and a subsidiary of a bigger corporation.
- Mixed: Also known as a holding-operating company, it holds control of another company and also performs its core business operations.
#3: Difference between a Holding Company and a Parent Company
While there are no substantial legal differences between a holding company and a parent company, they may vary in terms of their status.
Typically, the key objective of a holding company is to own equity interest and gain control of other companies. In most cases, they are not involved in any type of business function such as product manufacturing or offering services.
On the other hand, a parent company also holds shares and assets of its subsidiary company but unlike a holding company, it has its business functions. Such an entity generally purchases subsidiaries to facilitate their business operations or for investment purposes.
They acquire subsidiaries through mergers or acquisitions to expand their operations, gain significant tax benefits, alleviate competition, and improve their overall operating income.
Understanding the difference between the two will help you determine what type of business structure is suitable for your company.
#4: Holding Company and Taxes
Holding companies that hold over 80% of shares in subsidiaries can reap significant tax benefits in the form of consolidated tax returns.
This means that the financial records of all subsidiary companies are combined with that of the holding company. In that case, if a subsidiary faces loss, it will get offset by the profit earnings of other acquired companies. It will result in reduced tax liability for all the companies under the umbrella of that holding structure.
The holding company and its shareholders are also eligible for lower tax liabilities on dividends earned because of the consolidated profits and losses gained from all the subsidiaries.
Additionally, dividends earned within a holding group are often tax-free in many countries because these are paid to the holding company directly and not shareholders.
This also gives the opportunity to defer paying income tax until the dividends are withdrawn. Shareholders also have the flexibility to determine when the earnings can be withdrawn to save tax.
Premier holding companies such as SUISSE HOLDING often use the entire dividend amount for reinvestments in profitable assets, ensure the growth of the entire corporate group and how to pay taxes as independent contractor.
#5: Holding Company – A Powerful Way to Limit Your Liability
Limiting liability is one of the primary reasons why most profitable businesses (and even smaller companies) choose to have a holding structure. Herein, the holding company owns the assets, shares, and stocks of the subsidiary company and then leases it to the latter.
Now, if the latter becomes insolvent or gets sued due to the inability to fulfil financial obligations, the assets and shares will still be in safe hands because these are owned by the holding company.
Legally, the subsidiary has no authority over the assets held by the holding company and therefore, cannot be seized by creditors or litigators.
This way, businesses can limit their liabilities and protect their assets even if they are declared bankrupt and closes down.
#6: Add Value to Business
Most businesses overlook this aspect of having a holding structure. Harnessing the know-how and skills that the holding company possesses can help increase the value of your company. Additionally, being in a corporate group helps the subsidiaries obtain favorable financing terms than what they would get standalone.
Acquired companies from the same industries can combine their purchasing power and get better prices and lucrative credit terms.
#7: Gain Centralized Control
For organizations running multiple businesses, a holding structure helps gain centralized control. They appoint an executive management team whose role is to manage operations of each company acquired within the group. This helps in streamlining operations, minimizing costs and improving productivity.
Additionally, the subsidiary can operate its core business in a focused manner as the holding company ensures effective management.
Conclusion
Having a holding structure is an excellent way for businesses to diversify their risks and operations in a profitable manner. Consolidating the efficiency of a holding company and its subsidiaries can help improve financing terms, purchasing power and the opportunity to invest in high-scale, profitable projects.