One top priority among business owners is to protect their company by strategically minimising risk. An example of such a strategy is setting up a holding company. This article outlines all you need to know about holding company structure PLUS a free company incorporation hack at the end. But first, what is a holding company, and how can it benefit your business?
What is a Holding Company structure?
A holding company, alias, umbrella or parent company is simply a company created with the primary purpose of holding controlling interest ( at least 51% – 100%) in other companies called subsidiaries. It doesn’t typically carry out any business operations of its own but instead focuses on managing the stocks and decision-making of the companies it holds. This allows for a separation of liabilities so that if one subsidiary incurs debt, it doesn’t affect the assets of the parent company or other subsidiaries. The operating company also has its own management board that oversees its day-to-day management and conducts its business.
Types of Holding Companies
Holding companies are categorized differently based on the nature of their business. There are four main types of holding companies.
- Pure Holding Companies
Pure holding companies are holding companies that operate only as holders of different firms. They do not branch into other business ventures but are solely created for the purpose of holding shares in other companies.
- Mixed Holding Company
A mixed holding company is a holding company that holds other companies alongside running various business operations. They are also called a holding-operating company.
- Immediate Holding Companies
Immediate holding companies run other companies but are themselves owned by another holding company.
- Intermediate Holding Companies
Intermediate holding companies are similar to immediate holding companies because they are a section of a larger holding company.
Advantages of a Holding Company structure
Holding companies have certain advantages and disadvantages that characterise them. Some of these advantages are:
Protection against liability
Separating operating companies and their activities from the holding company creates a shield against liability. In this arrangement, each subsidiary is responsible for its own debts, such that the assets of the parent company or another subsidiary are inaccessible to a subsidiary’s creditor.
For instance, if Operating Company A has incurred a debt, the creditor can only seek repayment against the assets of Operating Company A, however inadequate those assets may be. The creditor of the company, even though aware of the relationship between Operating Company A and its sister subsidiaries, cannot seek to enforce against the assets of those related entities.
The absence of the need for day-to-day management
This structure allows the owners of a holding company to engage in several unrelated businesses in a variety of industries. The management of each of these diverse businesses is then placed within the control of persons who are better equipped to manage and direct the affairs of the business.
When an established company seeks to explore a riskier undertaking, they create a subsidiary company, separate from the holding company, to protect the interest and assets of the existing company. This guarantees that in the event of a failure of the undertaking, the liabilities to be incurred are limited to the assets of the subsidiary company.
A good example of this is found in the restructuring of Google and the creation of Alphabet to function as a holding company. This allowed the subsidiary companies to freely take on ventures such as robotics, medical research, etc, without the fear of excessive exposure for the owners.
Disadvantages of a Holding Company Structure
Cost of Incorporation
To form the holding company and the subsidiaries, the company must incur the incorporation costs for each of those companies. Each of these companies also has to comply with filing requirements, tax obligations, and other required compliance obligations. This is where a quick online incorporation process is necessary as it reduces the slow, manual procedure.
The holding company structure can result in increased complexity for the owners as their attention and considerations are now split across different entities as opposed to the same entity with different units.
This issue can arise whether the holding company owns 100% of the interests in the subsidiary company or merely a controlling interest. Issues surrounding management may arise concerning the board appointed to run the business or the relationship with the minority shareholders. The issue of whether or not to set up a holding company structure is one that should be determined by the purpose the holding company is intended to serve. Where it is decided to establish one, such a holding company is to be incorporated in the same manner any other company is incorporated.
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