what the point of a holding company is


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

The holding company is in a country that pays little to no corporate income tax and it owns all the IP that the company that makes the product. e.g. I make phones and I have copyrighted software and a patent on a fingerprint sensor that’s under the screen. After paying for labor and materials I have $1,000,000 left over, but since a holding company actually owns the IP, they charge me a $900,000 licensing fee to use it. I only have to pay corporate income tax on $100,000 now, not $1,000,000.

First, taxes. This varies greatly by country though so I can’t give a simple explanation for all countries.

Second, stocks. Publicly traded companies usually have a board of people running the company. This people are made up of both elected employees and large share holders. For example, if someone owns 30% of a company, they’ll be on the board even without being voted. The chief of marketing of the company will be voted on the board even if they don’t own many stocks.

A holding company allows a board of just share holders. Literally the company is just people that just hold a lot of stocks. If a company is worried that some third company is trying to buy up a majority of stocks in order to have a hostile take over, then this concerns the board of the holding company, but not the producing company.

Basically, if you want to call a meeting of each person who owns at least 10% of a company, you’d call a meeting for the holding company’s directors. If you want to call a meeting of each person who is in charge of producing something at the company, you call a meeting of the producing director’s.

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.

If you owned 2 companies, there is no real advantage to a holding company.

The purpose of a holding company is to own other companies. However, you only need a company to do the owning, if tge ownership is shared among a number of people.

Lets say, you run a domestic residence landlord business.

You buy each house with its own separate company. This means, if one company loses money and goes bankrupt, it only affects that one company, not the others.

Your set up a holding company for your investors. This way they only have to deal with the admin of owning a share of one company. The holding company deals with the admin of owning 50 separate companies.