Key Takeaways:

  • A business holding company is a corporate entity that owns shares in other companies to control their administration and management.
  • Holding companies provide legal and financial benefits, including risk reduction, asset protection, and tax efficiency.
  • There are different types of holding companies, such as LLC holding companies, bank holding companies, and public utility holding companies, each governed by specific regulations.
  • A holding company can be structured in various ways, including pure (only holding investments) and mixed (engaged in its own operations).
  • Entrepreneurs use LLC holding companies to protect assets and separate liabilities between subsidiaries.
  • Holding companies also play a role in wealth management, business expansion, and estate planning.
  • If structured improperly, holding companies can raise antitrust concerns and face regulatory scrutiny.
  • UpCounsel connects business owners with top legal professionals to navigate holding company law.

Holding company law governs a corporation or other business entity formed only to hold stock shares in other businesses. Often, these shares are used to control administration and management of the associated companies by creating a majority interest. Most holding companies do not produce or sell their own goods or services.

The largest holding company in the U.S., Berkshire Hathaway, is owned by Warren Buffett. It owns stock in diverse industries including insurance, retail, manufacturing, and real estate. Holding company law comprises federal antitrust regulations to ensure that a corporation of this kind does not reduce competition and create a monopoly.

Benefits of Holding Companies

  • Holding companies reduce risk for the companies whose stock they hold by stabilizing the investment, making it more valuable. This attracts more buyers.
  • The holding company can own and control several companies, thus spreading its risk across markets and industries.
  • Risk management is enhanced by dividing assets across two or more companies. This allows liability to be limited to a single subsidiary if, for example, it gets sued.
  • Wholly owned subsidiaries of a holding company can be treated as pass-through tax entities, eliminating the need to file a corporate tax return while maintaining limited liability.
  • A product line can be sold or transferred easily and confidentially, without revealing trade secrets.
  • Intellectual property (IP) can be licensed to several subsidiaries for various purposes.

Types of Holding Companies

There are several types of business holding companies, each serving different purposes:

  1. Pure Holding Company – Exists solely to own shares in other companies without direct business operations.
  2. Mixed Holding Company – Owns shares in other companies while also engaging in its own operations.
  3. Immediate Holding Company – A subsidiary that owns shares in another company but is itself controlled by a parent entity.
  4. Intermediate Holding Company – Functions between the main holding company and operating subsidiaries, often for tax or structural reasons.

Additionally, LLC holding companies provide asset protection by shielding personal assets from business liabilities, making them popular among entrepreneurs and investors.

Structure of a Holding Company

A simple holding company owns all the stock shares of at least one subsidiary. The shares of the holding company are owned by trusts or individuals. The holding company and subsidiaries each act as independent entities, with separate finances and bank accounts. They must enter into agreements with one another for assets and real estate. Often, one subsidiary serves to manage the holding company's operations.

The Internal Revenue Code defines a personal holding company under two classification systems, which must be fulfilled to constitute this entity. These include:

  • Personal Holding Company Income Test: The entity must possess at 60 percent or more of the adjusted ordinary gross income of the corporation in question for the associated tax year.
  • Stock Ownership Requirement: At least 50 percent of the outstanding stock of the corporation must be owned by fewer than six individuals at any point during the second half of the associated tax year.

A public utility holding company owns companies that distribute gas or electricity to home and business owners. The law governing this type of holding company is the Public Utility Holding Company Act (PUHCA) of 1935, which requires utility companies to operate only in a single state or in a limited geographic region.

Bank holding companies are governed by the Federal Deposit Insurance Corporation (FDIC). These laws indicate that a bank holding company must:

  • Control, own, or possess voting power over at least 25 percent of a financial institution
  • Control the election of a majority of directors on the company's board
  • Possess a controlling influence over the organization's policies

How to Set Up a Business Holding Company

Setting up a business holding company requires strategic planning to ensure compliance with financial and tax regulations. The steps include:

  1. Choose a Legal Structure – Typically, a corporation or LLC serves as the holding entity.
  2. Register the Business – File incorporation documents with the state.
  3. Obtain an EIN – The IRS requires an Employer Identification Number for tax purposes.
  4. Open Separate Bank Accounts – Maintaining separate finances is crucial for legal liability protection.
  5. Acquire Subsidiaries – The holding company purchases or forms subsidiary businesses.
  6. Ensure Proper Governance – Draft operating agreements and bylaws to define management roles.
  7. Comply with Tax Regulations – Work with tax professionals to optimize benefits and avoid legal risks.

Many businesses set up holding companies in tax-friendly states like Delaware, Nevada, and Wyoming due to favorable corporate laws.

Public Utility Holding Company Act

This law prevents companies that hold public utilities from using their profits to pay for unregulated business activities. Side endeavors must be separated from the holding company. Although some utility companies argue that PUHCA restricts competition and no longer applies, repealing this law would result in the creation of several large utility companies and eliminate industry competition. Many believe that reform of this law should only take place as part of a thorough restructuring.

This law was originally passed to counteract the unfair business practices of large utility holding companies in the 1920s and 1930s. These businesses created complex pyramid structures holding shares in numerous subsidiaries. For example, at one point, three holding companies controlled most of the industry through more than 130 subsidiaries. This resulted in inflated rates, hidden charges and fees, and a lack of accountability.

Regulatory Considerations for Holding Companies

Holding companies must comply with several regulatory frameworks, depending on their industry:

  • Bank Holding Companies – Governed by the Federal Reserve under the Bank Holding Company Act (1956) to ensure financial stability.
  • Public Utility Holding Companies – Subject to restrictions under the Public Utility Holding Company Act (PUHCA) to prevent monopolization.
  • Antitrust Laws – The Federal Trade Commission (FTC) monitors acquisitions to prevent unfair market dominance.
  • Securities Regulations – Publicly traded holding companies must comply with SEC regulations to ensure transparency.

Failure to comply with these regulations can result in government intervention, fines, or dissolution of the company.

Criticism of Holding Companies

Holding companies are often criticized because of their potential ability to monopolize a market sector. As a result, the federal government can block acquisitions and business models that deter competition, as well as majority acquisitions and mergers. For example, a repeal of PUHCA could result in massive corporations beyond the reach of federal and state regulation.

Common Legal Risks of Holding Companies

While a business holding company offers financial and structural benefits, there are legal risks to consider:

  • Piercing the Corporate Veil – If the holding company and its subsidiaries do not maintain separate legal identities, courts may hold owners personally liable.
  • Tax Complications – Improper structuring can lead to double taxation or scrutiny from the IRS.
  • Liability Risks – While holding companies shield assets, lawsuits against subsidiaries can still impact the overall business.
  • Regulatory Investigations – Large holding companies may be scrutinized for monopolistic practices or tax avoidance strategies.

Proper legal structuring and compliance can mitigate these risks, ensuring the long-term success of the entity.

Frequently Asked Questions

  1. What is the primary purpose of a business holding company?
    A business holding company exists to own and control subsidiary companies, allowing for asset protection, tax advantages, and business expansion.
  2. What is the difference between an LLC holding company and a corporation?
    An LLC holding company provides pass-through taxation and flexibility, while a corporate holding company may face double taxation but offers additional investor protections.
  3. How do holding companies reduce business liability?
    By structuring assets and operations across separate subsidiaries, liabilities remain isolated, preventing one business's debts or lawsuits from affecting the entire company.
  4. What tax benefits do holding companies provide?
    Holding companies can minimize tax obligations through pass-through taxation, foreign tax incentives, and strategic asset allocation.
  5. Where can I get legal help for setting up a holding company?
    You can find experienced attorneys on UpCounsel, where business owners connect with top legal professionals for guidance on structuring and managing a business holding company.
     

If you need help with holding company law, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.