Holding companies are formed to hold assets or outstanding stock of other companies. Most often a holding company will not produce goods or services on its own. Instead, the purpose of a holding company is to own assets or the shares of other companies. The holding company is responsible for deciding where to invest the holding companies assets and funds.
These companies will then come together to form a corporate group.
What is the Purpose of a Holding Company?
Most holding companies typically exist for the sole purpose of controlling other companies. Holding companies may also own property, such as real estate, patents, trademarks, stocks, and other assets.
Different Types of Holding Companies
What makes holding companies unique is how many different types of holding companies there are. Here is a list of the 4 different types of holding companies, so you can learn which type of holding company is best for.
When a holding company is pure it means that it was formed for the sole purpose of owning the stock of other companies. Essentially, the company does not practice any other form of business other than controlling another.
Mixed holding companies operate by controlling other firms and engaging in their own operations as well. They are known as a holding-operating company. Holding companies can take part in completely unrelated lines of business from their subsidiaries. In this case, these holding companies are referred to as conglomerates.
Immediate holding companies continue to hold stock or control of another company even though they are already controlled by another entity. These are a type of holding company that is already a subsidiary of another.
Intermediate holding means that the company is both a holding company of another entity and a subsidiary of a larger corporation. Oftentimes intermediate holding companies are not required to publish financial records as a holding company of the smaller group.
Advantages of a Holding Company
There are many advantages of creating a holding company in Florida.
When operating as a holding company, the assets in separate entities are placed under a liability shield. The debts of each subsidiary belong to that subsidiary but not the parent company. If there is a creditor of a subsidiary, they cannot access the assets of the holding company or another subsidiary.
Control Assets for Less Money
Forming a holding company gives said company more of a controlling interest in another company without having to purchase 100% of the company. This is because when the parent company purchases 51% or more of the subsidiary, it automatically gains control of the acquired firm. By not purchasing 100% of each subsidiary, a small business owner gains control of multiple entities for a much smaller investment.
Lower Debt Financing Costs
Because typically a holding company is larger than its subsidiary, it means that the parent company has access to capital. This also means that the holding company can obtain funding at a lower interest rate, and pass that funding on to the subsidiary.
Daily Management Not Required
Whenever a parent company acquires a smaller company, it most often keeps the original management. This is important because otherwise the subsidiary would need to either fire or demote some of their employees. Holding firms do not need to be involved in the activities of the subsidiary. Oftentimes they are only involved when it comes to strategic decisions and monitoring performance. This also benefits the holding company because they do not need to put in any effort when it comes to day-to-day management, but still benefit.
Disadvantages of Holding Companies
Before creating a holding company, it is important to learn the disadvantages and challenges before you get in over your head.
The use of holding companies and subsidiaries creates an added element that is not found in a typical business structure. Especially when a publicly-traded corporation uses a holding company structure, there might be many subsidiaries to keep track of. In this case, a good management system is essential.
Although all corporations and LLCs are required to pay fees to the state and federal governments, holding companies and each subsidiary must also pay formation fees. This might include annual reports, franchise tax obligations, and also compliance with Florida standards. Rather than one obligation to one entity, it must be done for each, and in turn, the associated costs must be paid as well.
How to Set Up a Holding Company
Starting a holding company can be a bit complicated. It can either be done through a merger, or it can be done similar to the formation of any other business. You will need to decide first what type of entity will be formed. This means you will decide whether to use a corporation, LLC, or another entity type.
The next step entails deciding how the entities should be taxed for federal income tax purposes. Finally, a name needs to be chosen for each, fees must be paid and should decide who the registered agent will be. If you already have one for one of the entities, this can be used for the new formations as well.
If you want to form a holding company in Florida, we can help. As trusted business lawyers, we specialize in forming holding companies, LLCs, and corporations. Speak a with a professional today to find out if a holding company is best for you.