With holding companies, you are able to receive advantages that would not be possible with just a corporation or LLC. The process of forming holding companies is similar to creating another type of business. The main difference is a holding company will not be part of operations. Instead, it owns and controls assets, including intellectual property, real estate, or other companies.
A holding company relies on subsidiaries or sister companies for its operations. This arrangement leads to excellent asset protection and can also provide anonymity and reduced taxes.
BENEFITS OF HOLDING COMPANIES
Holding companies are popular due to the extensive list of benefits associated with them. One of the most important is asset protection. Holding companies minimize the risk of a lawsuit (whether or not it is legitimate) leading to excessive losses. A holding company keeps your valuable assets separate from risk since it just holds the assets, renting or leasing them when required. For example, a real estate holding company can be separate from its related entity that hires employees, signs contracts, and engages in other risky activities associated with real estate ownership.
Another significant benefit is privacy. This is because many states legally require managers or owners of companies to list their relevant information online. If the manager or owner is an anonymous holding company, their information gets listed online. This advantage of holding companies can even deliver anonymity in those states known for fighting that anonymity, like Florida.
Finally, holding companies can reduce taxes and simplify the fillings. The parent company files tax returns, thereby saving time as the subsidiaries do not need to. Additionally, it is possible that sole-proprietorships would pay more taxes than LLCs thanks to the updated tax laws from 2018. Additionally, using holding companies lets you to strategically shift income to areas with no or minimal taxes.
EXAMPLE SITUATIONS FOR HOLDING COMPANIES
There are numerous scenarios where a holding company structure is useful. This is true in industries with a high level of risk or that entail high revenue or high-value assets. The following are all examples of situations when you may want to consider forming a holding company.
If you hold real estate, consider using a holding company to reduce your risk. The holding company will separate the physical property from the aspect of property management. The result is a lower risk of loss in case of a lawsuit, a common concern for real estate holdings.
Families can even use a holding company as a way to consolidate their tax returns. This takes advantage of the fact that just parent companies need to file returns. Thanks to that, year-end tax filings become much simpler. At the same time, families find it easier to manage interests in companies and assets, such as in the case of investment portfolios with intellectual property, physical property, and equities.
E-commerce companies can choose to open a subsidiary for every product line to isolate risk. This is particularly helpful for those who sell riskier products, so it will not negatively affect the company’s brands or revenue streams.
Intellectual property can also make use of a holding company to keep it separate from the operational risks. You could then lease the intellectual property. This lets you easily move on from failures with minimal negative results.
You will need to put in some additional work to implement your holding company, but the benefits make up for these efforts.