An extremely effective way to divide a business into multiple entities is to create a holding company. Holding companies are companies holding assets or outstanding stock of other companies. Holding companies do not produce goods or services on their own. Instead, a holding company has the purpose of owning either assets or the shares of other companies to form a corporate group.
What is the Purpose of a Holding Company?
The purpose of a holding company is to exist for the sole purpose of controlling other companies. This means that holding companies can own property, real estate, patents, trademarks, stocks, and other assets.
How Does a Holding Company Work?
There are two ways in which a corporation can become a holding company. The first is to acquire enough voting stock or shares to control its activities. The second method is to create a new corporation and then hold most of the shares from it.
Owning more than 50% of the stock in another firm guarantees greater control, but a parent company can still control the decision-making process with at least 10% of its stock.
Different Types of Holding Companies
Pure
When a holding company is described as pure, it means that it was formed with the sole purpose of owning stock in another company. This company will not participate in any other business activities other than controlling other entities.
Mixed
Mixed holding companies control other firms, but also engage in other operations. Mixed holding companies can participate in completely different lines of business. When this occurs they are referred to as conglomerates.
Immediate
Companies that hold voting stock or control of another company while still controlled by another company, is considered an immediate holding company. Essentially, these holding companies are subsidiaries of another holding company.
Intermediate
An intermediate holding is a firm that is a holding company but is also held as a subsidiary of a larger corporation. Oftentimes an intermediate holding firm will be exempt from publishing any financial records because they are a holding company of the smaller group.
Advantages of a Delaware Holding Company
Liability Protection
When a holding company has control over several companies, each one of these companies is its own legal entity. This means that the liability of the owners is not connected to each business. If one of the subsidiaries were to face a lawsuit, the assets of the owners will be protected and the parent company will not be held liable.
Control Assets for Less Money
Holding companies gives the parent company more control without having to invest 100%. For example, if the parent company purchases at least 51% if the subsidiary, they will gain full control. This means that they will gain 100% control simply by spending 51%.
Reduced Tax Liability
Holding companies that own 80% or more of a subsidiary can obtain great tax benefits. This is because a consolidated tax return is one that combines the financial records of all the acquired firms together. In this case, if one of the subsidiaries encounters a loss, it will be offset by the profits of the other companies. This reduces tax liability.
Management Continuity
When parent companies acquire smaller companies, typically the smaller companies will retain their own management. This is often important when it comes to smaller companies choosing acquisition. The holding firm may decide not to be involved in any activities at all, and allow the subsidiary to choose all activities other than strategic decisions and monitoring performance.
Lower Debt Financing Costs
Holding companies are able to obtain loans for a lower interest rate than the operating company could ever do on its own. This is specifically helpful when a business in need of capital as a startup, or if it is considered a credit risk overall. Once the holding company obtains the loan, it can then distribute the funds to the subsidiary.
Disadvantages of Delaware Holding Companies
Complexity
Holding companies and subsidiaries add complexity. In the case of multiple subsidiaries, a good entity management system is essential to keep track of information, records, and due dates for all of the companies.
Compliance Costs
There are different formation fees required to form a holding company. Not only does this include an annual report, but it will also typically require franchise tax obligations.
How to Set Up a Holding Company in Delaware
Starting a holding company is not an incredibly long process, but there are a few specific steps to follow in order to do so.
- Identify the business structure. You will need to decide how you want your business to be structured but also the type of assets you plan to hold.
- Go to your secretary of state department. You will need to research the interview process and fill out any initial forms.
- Collect all relevant paperwork. This will include articles of incorporation for your businesses, as well as any planned subsidiaries and umbrella companies.
- Create a separate bank account for your holding company, and another for your operating company.
Requirements to Form a Holding Company
- Control or have voting power for more than 25 percent of a company.
- Control the majority of directors on the company's board.
- Control influence over the organization's policies.
Looking to Set Up a Holding Company?
Contact us for help in setting up your holding company, and ensure you are legally compliant in all aspects of Delaware law. We have been forming holding companies in Delaware for several years. Our team has the experience and expertise to get the job done right!
Written By
Jonathan is admitted to practice law in Colorado and Wyoming. In this position, he helps business owners at nearly every level and in nearly every industry with asset protection, estate planning, and business formation. Beyond business owners, Jonathan also helps activists of all political persuasions to legally protect themselves.
