Businesses need to figure out the best ways to structure their company and invest in the smartest aspects. Let’s see one-way companies can help mitigate risk and protect their assets!
Table of Contents
What is a holding company and why should you use it? See more here!
First, we need to know what a holding company is before you can decide it will be beneficial for your company. A holding company is a business entity, that is typically a corporation, that does not manufacture or sell any products or services. Without having products or services, a holding company does not have any daily business operations, but instead solely holds ownership or membership in other companies.
Some of the subsidiary companies that the holding company owns part of will produce goods and services, but the main job of the holding company is to own the subsidiary, stock, or membership interests. Having some control of a subsidiary company allows the holding company to help with daily businesses. See more here about how to use a holding company!
How is a holding company financed? The holding company can help subsidiary companies by investing its money and obtaining the funds to make investments by selling interests. After the holding company has been financed, the holding company will be able to be used by enterprises. Enterprises and large corporations will use a holding company so they can have several subsidiaries to hold interest and trademarks.
Unlike other aspects of business, holding companies are not solely just for large businesses. Instead, holding companies are versatile so they can be used for much smaller businesses and new startup companies. Two business entities can be formed using an LLC or a holding company that would own the LLC.
Benefits of a holding company
Now that you know what a holding company is, you must know the benefits of a holding company operating structure. A holding company provides liability protection for businesses to help shield assets and subsidiaries.
The second benefit of using a holding company is to control assets for less money. The holding company doesn’t have to own shares or membership interests, allowing for the holding company to control and work with other companies at a lower price.
The third benefit of using a holding company is to lower any debt financing costs. A holding company can have a lower interest rate than others, especially if a business is a startup company or an entrepreneurial adventure that could be a credit risk.
The fourth benefit of using a holding company is the ability to foster and create innovative products and services. Since operating companies are separate from the holding company, there is less chance of any risk involved with startups or other risky business ventures.
The final benefit of using a holding company for your business is to lessen the daily management necessary to control your company. It doesn’t matter if the holding company does the daily operations, since the subsidiary businesses can manage their own workers and daily measures.
How to form a holding company? See more here!
If you find that you want to form a holding company for your business, you need to determine how to form a holding company and manage smaller companies. If you are a business owner or entrepreneur, you might find it beneficial to form a holding company to protect company assets.
Create your holding companies and your operating companies
The first step of how to form a holding company is creating and forming your operating and holding companies. When you are creating your holding company, you need to assess your business needs. Figure out what you need to have done in your company, when, and why.
Make sure that you use a holding company for tax reduction and asset protection. A holding company will help you achieve the benefits for your business once you identify your business needs.
The second step of creating your holding company is to formulate the structure of your business. There are two main forms for how you can create a holding company, which is either a corporation or an LLC. Try and figure out which type of business is most suitable for your company in terms of taxes and your financial state. Many entrepreneurs need to figure out what form of business structure is best for their asset protection and your business needs. If you want to have safety when it comes to your taxes, you need to consider forming a holding company separately from the company that is operating the services and products.
The third step of creating your holding company and the operating company is to file the business application. You will form your holding company based on the business type that you want to create. For example, if you form an LLC or corporation, you need to file the registration according to the type of business that you are forming. Your incorporation needs to state the type of company you are creating, the purpose of your business, and the objective of the business.
The fourth step of creating your holding company and operating company is to create a bank account that is directly related to the holding company to maintain independence from the operating companies. You should use a business account that is only for your holding company with a specific tax ID.
The fifth step of creating a holding company and operating company for your business is to find out how you want to fund the holding company. To start using the company, you need to fund the company by investing, loaning money to the operating company, and selling valuable assets of the company.
The sixth step of forming a holding company is to keep accounting records for your transactions. As you continue operating your holding companies, you need to maintain accurate records so there is a legal line between the two entities.
Operating your holding company and subsequent operating companies
The second phase of creating a holding company is to operate your holding company and operating companies. The first step in this phase is to perform all operating activities through a specific company. The business activities are either investing activities, financing activities, or operating activities. The operating activities refer to the sale of products or services, so you need to ensure that the holding company is never the entity involved with these daily operations and activities.
The second step of operating your holding company and operating companies is to put money into the holding company. Every month, money will be paid back to your holding company so cash can continue flowing between the entities. During this step, you will have to ensure the majority of the money between the two entities is held within the holding company to accrue interest. In addition, own stocks and shares in various companies so you can have a low-interest rate from your diverse portfolio.
The third step within operating your holding company and operating companies is to file taxes and pay the franchise fees. You will have to file two tax returns annually and pay the required state franchise fees for your companies.
Popular Holding Company Examples
To get a better understanding of a holding company and how it works in society, we need to know the example of a holding company in modern times. One of the best well-0nkwn examples of a holding company is Berkshire Hathaway. This company owns various assets in other large companies, helping them broaden their portfolio and minimize risk. Berkshire Hathaway owns assets in over one hundred private and public companies alike, including the names of Fruit of the Loom, Marmon Group, Duracell, and Dairy Queen. Furthermore, Berkshire also has holdings in huge corporations, such as IBM, Coca-Cola, American Express, Delta Airlines, and Apple.
A second example of a holding company is Alphabet Inc. To understand this, we need to know the background of Google. In 2015, Google restructured its business and was organized under Alphabet Inc., a new holding company that was in charge of Google and other subsidiaries.
Alphabet Inc. was formed so it could focus on core businesses and create a more seamless integration of management for Google. Other subsidiaries owned by Alphabet Inc., include Verily, Loon, DeepMind Technologies, Google Ventures, Google Fiber, and much more! Alphabet Inc. could continue to earn money and profit by generating revenue via advertising and cash flows from the subsidiaries. By owning a substantial amount of property through subsidiaries, Alphabet Inc. maintained a huge profit margin.
Conclusion
Businesses can use a holding company to protect their assets, lessen daily management, foster innovation, lower debt financing costs, and control assets for less money. A holding company is beneficial for businesses of all sizes and ages, since it is versatile enough to be used for any type of entrepreneur or startup owner.
Make sure you follow the steps of how to open and run a holding company and operating company so you can properly utilize this for your business.
