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WHAT IS A HOLDING COMPANY?

Most of you have heard about holding companies, however, most are unfamiliar about how they are created or operated. In fact, you may be surprised to learn that some of the biggest companies today are structured as holding companies. Some of the most widely known holding companies include: World Disney Company; Comcast Corporation’ Bank of America’ Johnson & Johnson; JP Morgan Chase’; American Express Company; Macy’s; and XXVI Holdings Inc.

Holding Company Definition

What is a holding company? A holding company is a company that owns most, if not all, of the stock or membership interest in one or more subsidiaries, each which operates an active business.

The holding company in addition to owning stock or interest in a subsidiary, may also own high valuable assets of the businesses. A holding company structure may be created through a C Corporation structure or through a Limited Liability Company (“LLC”) structure.

Holding Company Structure

The typical holding company structure involves creating a Parent company on the top to hold the assets of the subsidiaries. The most widely used entities for holding companies usually are Limited Liability Companies (LLC’s) and Corporations. 

Whether to use an LLC or a Corporation it depends on many factors. Your attorney must weight the pro and cons specially as it relates to complexity, asset protection, and tax.

Creating a holding company structure does not make sense for everyone. It is particularly useful when you have assets and businesses that have relative amount of liability.

You should always weight in the advantage of insurance against the benefits of having a holding company structure.

Benefits of Holding Companies

By operating as a holding company, it allows you to operate various businesses or parts of a single business in separate subsidiaries, which will provide the following benefits:

Asset Protection

The assets of the subsidiaries are separate and distinct. The reason to do this is to insulate the assets from the creditors, liabilities, and risks of the other subsidiaries. This is important because if any one of the subsidiaries is attacked by a lawsuit or needs to file from bankruptcy, it will not affect the other subsidiaries or the holding company. If a judgement again one subsidiary is awarded, the risk of loss is limited by what is held in that company and the other subsidiary will be judgement proof (assuming there is no “piercing of the corporate veil”).

In a bankruptcy proceeding, the only company effected will be the lone subsidiary, and not the holding company or its subsidiaries. In fact, some of the biggest companies in the world structure not only other companies in this type of structure, but also separate the name, logos, equipment, management, and almost every aspect of a particular business into smaller companies to prevent any one person from attacking and bankrupting any one company.

Accounting

The assets and liabilities of each subsidiary can be accounted separately, permitting loans to the different subsidiaries and insurance to be based on each subsidiary’s own business. In addition, each subsidiary can maintain a separate financial statement that will reflect the profits and losses of each particular business in a more transparent way. This allows the business owner to make decisions as to whether a particular subsidiary is performing to expectations.

Tax Planning

A holding company can file a consolidated return[1] for all its affiliated companies, as long as the holding company (parent company) meets the 80 percent rule.[2] The holding company must hold at least 80 percent of the total value of the outstanding stock and possess at least 80 percent of the total voting power of the stock.[3] This may sound like a headache, but it will allow for the holding company to file one consolidated return and allow for the offsetting of the gains and loss of multiple subsidiaries.[4]

Financial Flexibility

Depending on the companies in which you invest, you will be able to stretch the initial investment to control a variety of different assets. For example, with some of the funds the company can purchase controlling interest in existing small companies with cash and debt instruments that will allow control over multiple business ventures, generating more streams of income without spending all of the investors money into one company.

Control

In many cases, a holding company will be the majority interest shareholder or member of each subsidiary. This allows the holding company, rather than a large number of individual shareholders, to make business decisions that may need shareholder approval.

Estate Planning

For estate planning purposes, having a holding company will simplify the transfers. A trust can be created to own the interest in the holding company, which in turn will own the interest in all of the subsidiaries. The benefit of this structure is that only one assignment of interest need to be created and the trust will have control over all the subsidiaries. Furthermore, if a trust is not created, then only the holding company’s interest will need to be probated, which should reduce cost and time.

Should I Form A Holding Company?

Forming a holding company does not make sense in every situation. Specially if the cost of upkeeping the holding company will far outweigh its benefits. Each of the holding company and the subsidiaries will have to maintain proper business records and abide by state law when it comes to all the company formalities.

A holding company makes sense when you have multiple business or you want to separate the existing business into different parts. One, if not the main feature of the holding company is the asset protection aspect. As a business owner, you may want to insulate part of the business which have more liability to protect the assets of the company.

[1] 26 U.S.C § 1501.

[2] 26 U.S.C § 1504.

[3] 26 U.S.C § 1504(a)(2).

[4] 26 U.S.C § 1501.

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