So what is a holding company you may ask?
A holding company is a company that owns most, if not all, of the stock or membership interest in one or more subsidiaries, each which operates an active business.
ASSETS PROTECTION
ACCOUNTING
TAX PLANNING
CONTROL
Benefits of a Holding Company
Asset Protection
The assets of the subsidiaries are separate and distinct. The reason to do this is to insulate the assets from the creditors, liabilities, and risks of the other subsidiaries. This is important because if any one of the subsidiaries is attacked by a lawsuit or needs to file from bankruptcy, it will not affect the other subsidiaries or the holding company. If a judgement again one subsidiary is awarded, the risk of loss is limited by what is held in that company and the other subsidiary will be judgement proof (assuming there is no “piercing of the corporate veil”).
Accounting
The assets and liabilities of each subsidiary can be accounted separately, permitting loans to the different subsidiaries and insurance to be based on each subsidiary’s own business. In addition, each subsidiary can maintain a separate financial statement that will reflect the profits and losses of each particular business in a more transparent way. This allows the business owner to make decisions as to whether a particular subsidiary is performing to expectations.
Tax Planning
A holding company can file a consolidated return for all its affiliated companies, as long as the holding company (parent company) meets the 80 percent rule. The holding company must hold at least 80 percent of the total value of the outstanding stock and possess at least 80 percent of the total voting power of the stock. This may sound like a headache, but it will allow for the holding company to file one consolidated return and allow for the offsetting of the gains and loss of multiple subsidiaries.
Control
In many cases, a holding company will be the majority interest shareholder or member of each subsidiary. This allows the holding company, rather than a large number of individual shareholders, to make business decisions that may need shareholder approval.