Holding companies are designed to acquire equity in other companies. However, this is not the same as buying stock in another company. Equity ownership refers to ownership in a company even if that company does not issue stock. For example, joining two other partners in the ownership of a company makes you an equity owner, regardless of whether or not stock is issued.
Stock owners are a type of equity owner. While holding companies can own assets that include stock, there are other types of equity, such as hedge funds, real estate and song rights. Holding companies deal with the ownership of almost anything of value in a business.
Why Create a Holding Company?
The main reasons that business owners consider creating a holding company are to protect assets, reap tax benefits and have control or influence over other companies.
Businesses owned entirely by holding companies can all be filed under the same tax return, saving time and money. The value of the holding company itself rises if the value of the stocks it owns in various businesses goes up. By having certain levels of equity in a business, the holding company can help dictate its direction and operations.
A holding company maintains equity in an operating company, but if the holding company does not co-sign onto the operating company’s debt, it is not responsible for that debt. This can shield assets from creditors. Assets are held by the holding company, which also helps shield those assets from lawsuits and debt liabilities. The holding company is only at risk of declines in worth and capital.
Evaluate Your Needs
Because the value of a holding company lies in protecting assets and influencing other businesses, there are only specific instances in which it is worth it to create a holding company. If you want to do so, begin by evaluating your current business needs.
If you are concerned about asset protection, for example, a holding company may be of value. However, holding companies are often created for potential tax benefits. You can create an operating company and a holding company, both of which are different legal bodies, and shield the holding company from the debt of the operating company.
Register Your Company
To create your holding company, you register it in a state and provide your business name, articles of incorporation and the name of the business agent managing the operating and holding company. If you so choose, you can be the agent for both the operating and holding company.
Your articles of incorporation outline the purpose of your company, list its officers and specify the method by which business-related decisions will be made. You also need to create a bank account that is unique and specific to your holding company. The operating and holding companies must use separate bank accounts and keep track of their bank records separately.
Deposit Your Assets
The wealth that your company generates is deposited with the holding company, rather than the operating company. This money can then be lent to the operating company as needed. If your operating company is already in existence at the time that you started your holding company, you can sell your operating company’s assets to the holding company to protect them.
To grow and diversify the portfolio of your holding company, you may end up choosing to invest in or acquire tangible or intangible equity in other businesses as opportunities arise.
