Updated November 27, 2020:

What is a Holding Company?

What is a holding company? A holding company is defined as an LLC, parent corporation, or limited partnership that has enough voting share in a separate company to manage its operations. Holding companies are in place for the sole aim of operating a separate company. The company being controlled could be a corporation, LLC, etc. The aim of a holding company is not to produce services or goods, but to hold and bring value to an investment. Holding companies can exist for such endeavors as owning:

  • Real Estate
  • Patents
  • Trademarks
  • Stocks
  • Miscellaneous assets
  • Copyrights

A business that is fully owned by a holding company is called a wholly-owned subsidiary. In essence, the company holds the assets and nothing more.

Benefit of a Holdings Company

A core benefit of holdings is that the holding is safeguarded from losses. For example, if a company enters bankruptcy, other companies under the umbrella of the main holding company are protected from creditor claims. The holding arrangement is commonly found in large corporations that are invested in the business of multiple industries.

A corporation may base itself as a holding company, with a subsidiary owning the trademark and name, while a separate entity has domain over real estate or equipment. Dividing up various sections of the business safeguards the business as a whole. Further, a company structure can also cut tax liabilities to a large degree. Moreover, holding companies allow members of an organization to protect their personal assets because the holding company itself owners the assets instead of the individual.

The primary goal of any holding company is to manage how the company is operating. Owners can fire managers as needed if the business is not running at top efficiency. In essence, the managers are the ones who are responsible for the operation end, but not the holding company. While owners do not operate the business itself, they should be aware of the basic operations and how that company is performing.

Modern Examples

Entities such as Bank of America and General Electric operate as holding companies because each large firm has domain over a variety of small companies. For instance, Bank of America owns stock of various companies in the areas of insurance, securities, asset management, etc. In essence, purchasing Bank of America stock does not amount to investing in any activity because Bank of America is a holding company comprising of various small businesses and assets.

Another example is Berkshire Hathaway, a holding company that has 100% ownership of Geico, an insurance company. Moreover, Berkshire owners around 90% of stock in Nebraska Furniture Mart, a large furniture retailer. Further, Berkshire has 8% of holdings in Coca-Cola via its insurance holding. Also, Berkshire is comprised of nothing more than a few employees and a vault of stock certificates. Revenue is then paid in the form of divides paid through its subsidiaries. Berkshire does not operate businesses.

Aim of a Holding Company

You should think of getting a holding company if the following applies to you:

Silo Investment: Silo assets place holdings in a particular subsidiary that does not affect the rest of the assets under a holding company. An example would be Dunkin’ Donuts placing intellectual property into a separate LLC.

Family Affairs: Holding companies can be used to siphon money to family members or friends.

Multiple Businesses: If you have a variety of businesses, real estate, or other assets.

Retain Control: Allows you to create deals in order to control more money than would otherwise be unable to manage. For instance, you used $10 million to purchase an insurance group amounting to $20 million that had $70 million in value, you would control $70 million because of your holding company. Overall, holding companies provide the necessary capital when you need it.

Holding companies serve two purposes: a primary investment vehicle and lowering risk for larger corporations.

Investors: Holding entities allow investors to reach multiple industries covering valuable assets.

Moreover, the holding methods give investors the advantage of setting up a single office and using that office to find good places to invest money. Investors can pour capital in a wide range of industries such as:

  • Restaurants
  • Films
  • Tech start-ups
  • Mineral Rights
  • Mining

Holding companies primarily benefit larger investors and not necessarily small-time investors dabbling in limited industries. Never own a holding company for the prestige of having one.

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