A non-profit holding company is a business designed to act as a structure for maintaining multiple non-profit companies beneath its protection, much as a regular holding company works for for-profit businesses.3 min read updated on February 01, 2023
Updated November 18, 2020:
Non-Profit Holding Company Overview
A non-profit holding company is a business designed to act as a structure for maintaining multiple non-profit companies beneath its protection, much as a regular holding company works for for-profit businesses. Such a company works to assist smaller non-profits to succeed by acquiring them to protect them from the burden of maintaining a sustainable earned income model or access to greater government funding. This allows non-profits to focus more on their original social missions.
Joining a Non-Profit Holding Company
To join with another company to form anon-profit holding company relationship, the following model may be an effective one to follow:
- Find an anchor partner. Ideally, this should be a credible organization with a solid operating platform and a clear vision for why it wants to add new organizations to its structure.
- Begin with a partnership. Before attempting to join with the anchor partner, it makes sense to first partner in a non-binding way on non-profit work to see how effective working with the potential holding company can be. If one or several projects work out well, then it may be possible to move on to the next step.
- Move to a joint decision-making and leadership model. If partnering has proven effective in a certain country or location, combining leadership for a project will show you how well budgeting, planning, and decision-making can go. This can be done with joint funding and clear milestones for advancing the partnership to the holding company stage.
- Form a holding company relationship. If the partnership proves successful, you can then merge further. Back-office operations can be consolidated, redundant legal entities can be wound down, and fundraising efforts can be combined, although program brands should remain distinct. Leadership teams that worked on joint-projects should become part of the holding company management team to better facilitate joint operations.
Non-Profit Holding Company Benefits
Benefits of non-profit holding companies include:
- Allowing funders to more efficiently allocate capital toward a more sustainable and robust non-profit sector.
- Less risk in investing in non-profits.
- The ability for non-profits to maintain their leadership, brand, and governance while receiving support from a more experienced enterprise.
Non-Profit Holding Company Risks
The main risk of establishing or working under a non-profit holding company is the legal liability that one company may hold for all the other companies. For instance, if one company is held liable for a transgression and it cannot pay the penalties levied against it, then all the other companies under the holding company, and the holding company itself, may ultimately be liable. In the worst-case scenario, assets of the related companies may be liquidated to pay court costs and settlements. Thus, some lawyers advise against taking on the possible risk inherent in a holding company.
One way to alleviate this risk, however, would be to establish a 501(c)(2) holding company. A 501(c)(2) is similar to the typical holding company except its sole purpose is to hold the property for other tax-exempt organizations. It is controlled by a larger tax-exempt organization, and in theory, if the larger organization is sued, the 501(c)(2) will be protected from liability related to any lawsuit. Other benefits of the 501(c)(2) may include:
- A greater ability to borrow money.
- Accounting simplification.
- Clarity of the title.
However, it should be remembered that 501(c)(2)s cannot operate a business themselves or conduct in trade, even if business and trade is conducted on the premises of a property the 501(c)(2) owns. Also, benefits and other protections the 501(c)(2) might enjoy will depend on the correct legal structuring of the businesses and the correct observance of corporate formalities. Thus, professional legal counsel should be consulted before this route is pursued.
As a further alternative, one might consider establishing a 501(c)(3) company to hold property as a means of risk management. This may be a better choice for religious-affiliated non-profits, as these organizations, if properly structured, can qualify for exemption from filing Form 990 with the IRS, which is not the case for 501(c)(2) organizations run or affiliated by religious institutions.
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FAQs
To sum it up, a holding company is a parent company that owns and controls other companies and in many cases does not produce any goods or services or conduct business operations of its own. The holding company structure is used by businesses of all sizes and in all industries and can be found in use in many states.
What is a holding company answers? ›
A holding company is a company that has a specific function of controlling subsidiary companies. It won't usually provide services or products like a normal business. Instead, its only purpose is to control and manage other companies of which it holds the majority shares.
What is the best way to structure a holding company? ›
The holding company and its subsidiaries could be formed as benefit corporations, benefit LLCs, public benefit corporations, or public benefit LLCs. Each subsidiary could be formed to provide a different specific benefit.
What are the disadvantages of a holding company? ›
Disadvantages of holding company
It's Hard to Market Stocks: Parent businesses may find it difficult to sell subsidiary assets at times. Even though the firm usually doesn't want to, it compels them to keep the assets. The firm finally loses profits as a result of it.
Does a holding company pay taxes? ›
Corporate income tax: Holding companies are typically subject to corporate income tax on their income, which may include dividends, interest, rental income, and capital gains from the sale of assets.
How does the owner of a holding company make money? ›
The most straightforward way to make money is through equity in their subsidiaries: Holding companies can benefit from dividends in the subsidiary's share price, as well as by selling equity in companies that gain value. In addition, holding companies can also profit from synergies between their subsidiaries.
Does a holding company need an EIN? ›
All corporations must have a federal tax ID number to do business, and there are only rare situations (a holding company that does not pay tax of any kind) where an LLC wouldn't need an EIN. Your tax ID number will be required to fill out payroll reports, pay taxes, open a business checking account, etc.
Why would someone start a holding company? ›
Privacy: A holding company gives you the ability to maintain ownership of multiple companies without being personally listed as an owner. A holding company would use its own tax identification number, which would limit the exposure of the owner's social security number on record with the entities it owns.
Why would a company want a holding company? ›
Holding companies can offer advantages, like letting you own multiple companies through one entity, protecting your personal assets from business debts, and keeping business liabilities separate.
Should a holding company be an LLC? ›
A holding company can be an LLC. The only difference between a traditional LLC and a holding company is that the holding company does not conduct any business of its own. Holding companies don't create products or manufacture goods—they exist purely to hold ownership of the assets of their subsidiaries.
Tax Advantages
The main tax advantage of a holding company is that it does not have to file different tax returns for each subsidiary company. Generally, subsidiaries can pay dividends to the holding company without creating a tax liability.
How do I start a holding company from scratch? ›
How to Form a Holding Company: 3 Steps
- Form At Least Two Business Entities (LLCs) To set up the holding company structure, you will need to form at least two business entities. ...
- Set Up Ownership. Ownership in an LLC is established in the company's private Operating Agreement. ...
- Open Separate Business Bank Accounts.
Revenue Generation in a Holding Company
A holding company generates revenue through various channels, including dividends from its subsidiaries, income from its assets, and royalties from patents or copyrights it holds. This diverse income stream contributes to its financial stability and growth.
How do holding companies avoid taxes? ›
The benefit here is that the dividends paid to the holding company do not create a tax liability (as the dividends would if they were simply paid to an individual). Those dividends could then be paid to shareholders of the holding company in a more tax-efficient manner (or re-invested in another subsidiary).
Should a holding company have employees? ›
Although a holding company doesn't always have its own business operations, the holding company itself can – but doesn't have to – have employees. These could be as few employees as necessary to manage the subsidiaries, or enough to run an entire business unit. This creates another source of income.
What is the primary purpose of a holding company? ›
A holding company's main objective is to exercise control over other companies. This is achieved by acquiring a significant portion of their voting shares. Other benefits include risk management, streamlined control, potential tax benefits, and protection of assets.
Is it worth having a holding company? ›
Lessen liability
Entrepreneurs typically form a holding company to limit liability risks when owning multiple businesses. Each subsidiary is protected from the legal claims against and debts of the other subsidiaries.
Should a holding company be an LLC or a corporation? ›
A holding company can be an LLC. The only difference between a traditional LLC and a holding company is that the holding company does not conduct any business of its own. Holding companies don't create products or manufacture goods—they exist purely to hold ownership of the assets of their subsidiaries.
