Tax Advantages of a Holding Company
Tax advantages of a holding company include not having to file different tax returns for each holding company.3 min read
Tax advantages of a holding company include not having to file different tax returns for each holding company. A holding company comprises a limited liability company, parent corporation, or limited partnership that owns sufficient voting stock in another business to control management and policies. Holding companies exist for the sole purpose of controlling another business, which may be any legal entity, rather than for the reason of producing its own services or goods. The primary function of a holding company is to own property and assets; and this could include intangible property, such as copyrights and other intellectual property.
Such assets could come in the following forms:
- Limited liability companies
- Private equity funds
- Limited partnerships
- Hedge funds
- Traded stocks
- Song rights
Holding companies can retain anything that’s of value, whether tangible or intangible. To use an example, the following companies are placed under three categories:
- Medical devices
- Consumer health care
Holding Company Examples
Companies stand alone in nearly every nation, which are staffed by local owners and have their own facilities. When it comes to big companies like Johnson & Johnson, the stockholders choose a board of directors to safeguard interests. For instance, Johnson & Johnson holds ownership interests in roughly 265 individual businesses the same way you may own shares of different companies via a brokerage account. The board, among other duties such as assessing dividend policy, hires a CEO. The CEO then hires direct subordinates. The group of individuals, in unison, has the power to pick CEOs and other important executives at the companies.
Johnson & Johnson utilizes this function, allowing other personnel to take charge of the many companies under the holding company. If a company is 100 percent owned by holding companies, it is known as a wholly-owned subsidiary. In terms of operation, the subsidiaries and holding companies function as individual companies.
The parent holding companies boost the subsidiaries through the decrease of costs of capital and overall health of the company. Using downstream guarantees, parent companies make loan pledges on behalf of subsidiaries. Therefore, it can issue bonds at bottom rates, and issue money to its own subsidiaries at rates that a subsidiary could not get on its own.
This is because when backed by a holding company, the subsidiary’s risk of defaulting is less. One of the most successful and largest holding companies, Berkshire Hathaway, is owned by investor Warren Buffett. According to the IRS, you must meet two qualifications to be a holding company:
- Five or fewer people, whether directly or indirectly during six months of the taxable year, must own over 50 percent of the outstanding company stock.
- At least 60 percent of adjusted gross income may come from rents, dividends, royalties, and interest.
Holding Company Advantages
Such a structure can offer the business vital advantages over operating under a single business entity:
- Risk Management: Assets that are categorized into distinct businesses. When properly administered, product liability claims may be limited to the assets of a sole subsidiary. Riskier operations may be separated. Therefore, a major business may commence a structure as a holding business with a single subsidiary to own its trademarks, brand name, and another to own real estate, and another to own equipment. This means that each holding company and subsidiary holds limited liability
- Transfer Ease: Holding companies allow for a simple sale of a service or product line. A single line may be sold through the selling of the subsidiary. Without a holding company, sales may mandate additional due diligence for a buy or could show trade secrets that are not related to a service or product line.
- Patent Licensing: IP and other patents may be boiled down by territory or industry. In such an instance, the property may be licensed for multiple reasons to various entities.
- Tax Advantage: 100 percent owned subsidiaries may be treated as disregarded entities for tax reasons. This means that no different tax returns must be filed, yet limited liability and corporate safeguards can be maintained for business reasons.
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