A holding company, usually a corporation or limited liability company, is a type of financial organization that does not run day-to-day operations. Rather, holding companies hold stock in other companies, known as subsidiaries. The sole purpose of holding companies is to control other companies.
What is a Holding Company?
A holding company, sometimes called an “umbrella” or parent company, holds stock in other companies. It is a type of organization that owns controlling interests in outside companies, which are called subsidiaries. These companies do not conduct any operations of their own or sell any products or services. While these companies do not own the assets of these other companies, it maintains stringent oversight capabilities without actively participating in a business’s day-to-day operations of these subsidiaries.
How do Holding Companies Work?
A holding company will own the controlling portion of shares in a subsidiary company with the ability to elect the board of directors in that subsidiary. Because holding companies have direct control of the subsidiary company’s operations and planning, they can receive dividends. By doing so, they provide subsidiaries with access to capital and other investments.
What are Real Estate Holding Companies?
Real estate holding companies allow you to own real estate while reducing your exposure to the risk and liability that come with it. When purchasing real estate assets, the holding company’s name is listed on the deed and contract, thus keeping your name private. For example, let’s say you, Jane Doe, wish to buy three condominium units, one in Orlando, one in Coconut Grove, and one in Cape Coral. You fear being held liable for any issues arising from buying and later renting these properties. You can create ABC LLC to purchase these properties and make yourself the sole manager of the LLC. Therefore, although the properties will be under the company’s name, you will still manage them.
What are Some of the Different Types of Holding Companies?
- Pure Holding Companies: only exist as a vehicle for ownership of other firms. These companies do not participate in any other type of business.
- Mixed Holding Companies: also known as holding-operating companies, have their own business operations and manage their subsidiaries.
- Immediate Holding Companies: companies that other holding companies own.
- Intermediate Holding Companies: companies that are both a holding company of another entity and a subsidiary of a larger corporation.
What are some Advantages of Holding Companies?
Holding companies enjoy many benefits, including protection from losses accrued by subsidiaries. For example, let’s say that a big corporation has many subsidiaries and therefore structures itself as a holding company, owning the smaller subsidiaries. If one of its subsidiary companies goes bankrupt, the holding company may experience a capital loss and a decline in value. However, creditors cannot legally pursue the holding company for payment. Besides creditor protection, holding companies can allow a parent company to own its brand name and trademarks while allowing subsidiaries to own real estate.
To put it into the perspective of real estate holding companies, if ABC LLC rents out its condominium in Cape Coral to John Diggle and John Diggle gets constructively evicted, instead of John Diggle suing Jane Doe, the practical owner of the property, it will have to sue ABC LLC, the actual owner of the property. What makes this even more critical is that owners of the holding companies are protected by the corporate veil, which would have to be pierced by a creditor for the owner’s assets to be attached directly. This is especially important for corporate tax purposes, allowing a holding company to relocate to a more business-friendly environment while continuing operations in the original location.
What are some Disadvantages of Holding Companies?
It is imperative to remember that holding companies can come with reduced transparency, which makes it harder for investors and creditors to assess the health of the enterprise and makes it more likely that unethical directors may hide losses. Parent companies may abuse their subsidiaries by forcing them to trade with others at non-market prices; also, parent companies can force their subsidiaries to appoint certain directors or change their policies in a way that might not benefit the holding company.
