You may have heard of the idea of having a holding company while considering several structuring options for your venture. Therefore, the business owner needs to understand the Holding company and its benefits to your experience. A holding company offers some significant advantages depending on the size and structure you have.
What is a Holding Company?
A holding company is formed to own and buy other agencies’ shares, which are known as subsidiaries of the holding companies. Venture owners consider setting up a holding company and one or more subsidiaries to refine the structure of their business as it flourishes. This is due to the fact that holding company provides a better safeguard against the high risk operations of a venture that is still diversifying and flourishing.
Benefits of a Holding Company
- Protects your assets: a holding company holds the valuable assets of a venture, which might include:
- Intellectual property
The subsidiaries then perform the daily tasks of the venture and its trading duties. The holding companies’ valuable long suit is protected from other liabilities and creditors that the operating agencies may incur.
- Reduce risk: the risk of losing the holding company’s assets is minimized along with the entities if the operating company becomes insolvent or shows poor performance. For instance, in case of any insolvency, the holding agency can lose the money too. Anyhow, they cannot be held accountable legally for the responsibilities of the operating agency. In some situations, however, the holding agency can still be held responsible for the directors’ actions, in case they were aware of the worse situation.
- Minimize tax: a holding agency can be made to lessen the tax payments that the group is liable to pay. For instance, a holding agency can be created to receive lower tax rates. The other factor can be establishing a holding company in another state with a lower corporate tax ratio. However, the new laws were introduced in 2016 to regulate profit shifting or tax to international jurisdiction, which has limited the tax advantages generated out of it.
- Central control: the holding agencies’ directors generally control the subsidiary companies’ management and the holding agencies. This provides a centralized and cohesive management structure that lets the holding agency extend its growth and performance. For instance, the holding agency director might initiate a debt-structuring process, which will benefit all the operating agencies. The holding agency might also help the solo operating agencies get more advantageous financing terms (if those agencies are working independently without any external help).
- Concentrate property assets: the holding agency, as the primary holder of the property assets, can deal with taking advantage of the group as a team. In due course, the trading agencies may not need to take the time and the risk to deal with the assets for taking any advantage.
- Flexibility for development and growth: if the holding agency has valuable assets, then it allows the group to:
- Diversify in a better way
- Make investments in new businesses.
- Exit business if required.
The operating agencies can take the steps mentioned earlier without putting the holding agency at any risk by the group’s assets. A holding agency serves with wiser power to the subsidiaries and the group to invest in more significant projects.
- Immense capital: the subsidiary and the holding agencies’ financial resources can be pooled together and undertake a more significant scale project(s) to increase the profit.
- Eliminate competitions: if the subsidiary and holding companies are in the same business line, then the battle between the subsidiary and holding agencies can be avoided.
- Economics of large-scale operations: the selling and buying of the subsidiary and the holding company can be centralized. It can enjoy the benefits of better credit terms and quantity discounts because of the bulk purchases. It can also enhance the buyers in case of sales.
- Risks avoided: the loss does not affect the holding company if the subsidiaries undertake the risky failure in the business.
Frequently Asked Questions
How does a holding company protect venture belongings?
The holding agency can have assets like equipment and property, which means that if the subsidiary incurs some debts, it cannot be paid by the assets owned by the holding company protected from the creditors.
How does a holding company centralize control?
The directors of the holding agency control the staff of the subsidiary agencies and the holding agencies. This serves as a centralized and cohesive management structure.
How can succession planning be done in a holding company?
With a centralized board of directors, the holding company can ensure continuity of the venture when the key people from the operating agencies quit.
How can one form a holding company?
The holding company is pretty easy to form, so the promoters can get the shares within an open market. Here the consent of the subsidiary company and shareholders is not required.
Does the holding company take part in daily operations?
The holding company generally does not take part in the business’s daily operations or produce services or goods. Instead, it owns the assets which the subsidiary agency is using.
Setting up a holding company makes your venture grow by minimizing some of the risks which can come in between its growth and prosperity. Henceforth, you can get an advantage in:
- The operation of your agency
- Minimizing taxes
- Financial benefits
Using the buying force by separating a bigger group’s property assets can help a venture grow in a better, creative, and flexible way.
Setting up a holding company is beneficial for small-scale ventures in an excellent way to diversify their operations without taking irrelevant risks. By combining the subsidiary and holding companies, a synergy is created in purchasing power, investing in more significant projects, and financing terms.