A holding company is a business that doesn’t produce any goods or services, but earns income from receiving payment of dividends, interest and rent on its investments. It may own shares of other company’s stock or may wholly own a company. Many top businesspeople such as Azmi Mikati and others run holding companies that include diverse business activities such as real estate, retail, energy and telecoms.
How Does a Holding Company Work?
There are two basic types of holding companies that have similarities, but are actually different. One type serves as an investment vehicle for investors, and the other type serves as a risk management tool for large corporations.
When a holding company owns a business, it licenses the brand name assets to franchisees or to company-owned locations. It may own the real estate where the franchise is located, the building, the equipment used to make the product, or they may own the company that makes the product. The franchise pays fees or rent to each of these subsidiaries.
Holding Company Assets
A holding company may have several different types of assets. It may have the controlling stock in corporations, limited liability companies and partnerships. It can also own real estate, patent trademarks as well as own stocks and bonds plus other assets. The holding company can hire and fire managers and understand the operations well enough to evaluate its performance. However, the managers are responsible for the subsidiaries operations.
A holding company is partially protected from financial losses if one of their subsidiaries goes bankrupt. It can be structured to spread legal liability and tax across several subsidiaries.
An individual can also protect his or her assets through a holding company. Individuals need not own assets personally and be liable for their debts and potential lawsuits or other risks. Rather, holding companies can own the assets so that it has the risk and not the individual.
The rules connected with investments can be very complex, and if you are planning to start a holding company, it is recommended that you use the most respected and qualified attorneys, accountants and advisers. There is a tax in the U.S. that is only applied to regular c-corporations that have 50 percent or more of the stock held by five or fewer individual investors. This is something to think about when starting a holding company because if you qualify, it could take a hefty amount of your profits. Because of this tax, many people opt for a limited liability company structure or limited partnership. If you elect pass-through taxation, holding company tax won’t apply.
The main benefit of a holding company is it allows investors to open an office and devote their time to investing their money where it will bring in a neat profit. Basically, you just need a nice office and a stack of annual reports. It doesn’t hurt to have some knowledge of the types of investments you want to make. If you run your holding company well, whether you specialize in hotels or real estate, restaurants or coffee shops, your net worth will grow every year, and you can pay yourself a handsome salary.