A holding company is a business that owns the stock of other companies in a way that allows it to control the decisions and policies of these companies. In other words, a holding company is the top tier in a hierarchy of companies.
A holding company can take one of a number of legal forms, and may be a corporation, a limited liability company or a limited partnership, depending on the jurisdiction and the aims of the company. A holding company is not obliged to own 100% of the subsidiary's stock — the actual percentage required is determined on a case-by-case basis, but the minimum is most often set at 50% + 1 share, i.e. the majority of shares. In some jurisdictions, the percentage of the stock owned by a holding company can influence tax procedures. In the USA, for example, a holding company must own 80% of its subsidiary's stock to be eligible for tax-free dividends and other tax benefits.
A holding company presents a certain benefit in that it is protected from losses. So, if one of the companies in which the holding company owns shares goes bankrupt, this loss does not affect the holding company. Holding companies also allow you to protect your confidentiality, as authority and decision making are centralised.
Functions of a holding company
The main function of a holding company is to minimise risk by dividing assets between various subsidiaries. That is, it is not established with the aim of producing and/or distributing goods and services (as is usually the case), but to structure a group of companies in a way that minimises risk.
This is achieved by limiting the scope of liability for the holding company itself and for each of its subsidiaries. For example, one subsidiary might own real estate on behalf of the holding company, another might handle intellectual property and a third might manage branding, etc. Thus, the different assets of the holding company are divided, and if one of subsidiaries fails and goes bankrupt this will not endanger the holding company or its other structural components, as they are not legally liable for the losses of subsidiaries. The primary function of a holding company is, therefore, to manage the actions of its subsidiaries.
Benefits of establishing a holding company
As we have discussed, the main reasons for establishing a holding company are:
Centralised management and control over several subsidiary companies
Protection of assets (real estate, vessels, yachts, IP property, etc.)
Privacy of beneficial owners: Those who prefer to avoid nominee directors and shareholders’ institutes may choose to place a shareholding company in the jurisdiction in which shareholders' registers are disclosed.
Tax optimisation: Distributing dividends to a well-chosen holding jurisdiction can reduce or even entirely eliminate withholding tax. Click here to read more about taxation for holding companies.
