This post will be useful to those who are looking for a suitable legal form to set up their company or want to know more about a holding company. This is the most convenient company type in some cases if you own different assets and various businesses in countries across the globe and you need a central management hub that brings them all together. There are jurisdictions that are the best choice for entrepreneurs who wish to set up a holding company as they offer the most favorable conditions for them. If the task of choosing a legal form seems difficult to you or you have some questions, we highly recommend visiting International Wealth where you can find a lot of articles on different companies.
Holding Company in Brief
A holding company usually owns the controlling stakes of other legal entities. This is a parent company that manages other units, and each of these units can conduct various activities. As you see, the overall structure may be quite complicated.
A holding company may be formed as a corporation, a partnership, or an LLC – the particular choice depends on the purpose of its establishment and the jurisdiction where it is registered. You will need to carefully consider the existing legal limitations and incentives to make the holding company an effective business tool.
Holding companies are usually set up to reduce the tax burden, diversify operations, and considerably reduce business risks. Competent holding company management may result in receiving more income and taking advantage of better asset protection with much lower investments than you expected.
If you want to expand the scope of your business activities or efficiently manage several entities, a holding company is the only logical choice.
Control and Management
The holding (or parent) company owns the shares or assets of other companies. It can have wholly-owned subsidiaries where it has 100% of the shares, or partially-owned ones if they own fewer shares.
Each structural unit is managed by directors who take care of all routine daily operations, and the holding company’s top executives do not interfere with them. The holding company managers are responsible for important decisions, such as mergers and dissolutions, and they can also appoint or dismiss the directors of subordinated units. One more responsibility of theirs is the profit distribution and investment decisions.
Holding Company: Main Functions
The holding company’s functions depend on its structure, but they usually include owning a controlling stake in subordinated units. As a result, the holding company has a decisive vote in the organization of the subsidiaries’ daily operations.
The main purpose of a holding company is to provide reliable protection for your business and assets, including intellectual property and real estate.
What is the mechanics of the process?
You may have a large production facility that deals with the whole cycle, including the delivery of raw materials, processing, production, and transportation of finished products to retailers.
Let’s imagine that you failed to deliver the ready-made products on time and a lawsuit is filed against you. If this is one enterprise, the lawsuit will affect the whole company, and the debts you may have to pay could be huge.
Now let’s imagine that you divided all processes and you have a separate transportation company, a separate processing company, and a separate production company – and all of these are managed by a holding company. In this case, the scope of the lawsuit will be limited by the assets possessed by the transportation company, and the other two will remain intact. You will definitely lose less in this case.
Holding Company Types
Pure Holding Company
This is a company that is not engaged in the production of goods or provision of services. It is an owner of controlling interests in its units and valuable assets. The only activity it actually conducts is control.
Mixed-Activity Holding Company
In contrast to a pure holding company, a mixed-activity holding company not only owns shares in its units but can also carry out its activities, including the production of different goods and provision of various services. This is the most widespread type as it gives really broad possibilities.
If a parent company is the owner of subsidiaries working in different industries, it is called a conglomerate.
Direct Holding Company
This company holds shares in another company that is owned by a third party. It owns voting interests in another company even considering the fact that the latter is owned by a third party.
Intermediate Holding Company
This is an organization that serves as an intermediary between a major holding company and the structural units subordinated to it.
Subsidiary
Can a holding company be a subsidiary? Yes, it is possible! This option is usually selected to manage a new line of business. In this case, the principal holding company sets up a secondary company and transfers all essential assets to it to be used in its new activity.
You can choose a partnership, a corporation, or an LLC for any holding company type described above. Think of the main goals for holding company formation and study the corporate and tax laws in the country of incorporation to make the right choice. If that sounds too complicated, you can follow the above link and book a free session with an expert to discuss your situation.
Holding Company: Tax Optimization
Let’s look at the two ways of tax optimization that are practically used by holding companies:
- If the company owns more than 79% of shares in its structural units, it can file consolidated tax returns for the whole company. The accounting records kept by all of its subsidiaries will be combined in this way. If one subsidiary makes losses rather than profits, it can be used to compensate for the taxable income of subsidiaries that brought income, which will considerably lower the overall fiscal burden.
- If you pay the dividends to the holding company rather than the shareholders, you can minimize the dividends tax or even reduce it to zero. Later on, the shareholders can withdraw them from the company and save on income tax.
Interested in holding companies? Click on the above link and use the search function to find more practical articles written by experts on the portal – or simply get in touch with them to take advantage of a customized solution.
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