what the point of a holding company is

Question

If I owned two companies, why would I make a third company to own them both, instead of just putting them both in my own name?

In: 4

Answer 1

If you, personally, own two companies then the only reason to put them into a holding company *may* be because your jurisdiction allows for less paperwork that way (ie, you can just file annual statements for the holding company, rather than filing statements for both companies individually).

For large companies, the benefits are in administration and risk management.

Say that I’m a big multinational company that owns two factories – one that makes pillows and one that makes dynamite.

Chances are that pillows and dynamite are different enough businesses that I want different people running them. One way to accomplish that is to just formally structure them as two different companies, each with its own independent management and possibly its own board of directors.

There’s also the issue of risk. The pillow factory is at little risk of blowing up, while the dynamite factory is at great risk of doing so. If the pillow factory and dynamite factory are part of the same company, then anyone hurt by the explosion of the dynamite factory can go after the pillow factory to recover for their injuries. If, however, the two factories are each owned by independent companies then people injured by the dynamite factory can’t go after the pillow factory and vice versa.

This extends beyond liability for the factory blowing up as well – it covers liability for everything. So if one factory is heavily indebted and goes bankrupt, its creditors can’t go after the other factory, they’re limited to going after the assets of the one company they loaned the money to.

When people create holding companies its often due to a combination of those two factors – the businesses are different enough that they need independent management, and since you’re already paying for two management teams you might as well divide them up into two different companies to mitigate against any risk posed by something negative happening in one of the companies.

And just because its the internet – you can’t isolate risk by just making up new shell companies to stick assets in. Shell companies don’t protect one part of a business from liability created by another part of that same business. To be protected from liability, the different parts of the business need to be legitimately independent companies who just happen to have a shared owner.