What Is a Holding Company and Does Your Business Need One?

Holding company definition and purpose

A holding company consists of an overarching business entity, known as a parent company, and subsidiary companies. The parent company either owns or oversees the subsidiary companies due to a merger, because they have purchased stocks or controlling interests, or they founded additional companies underneath the holding company name.

Most holding companies do not produce goods or services and instead focus on managing the subsidiary businesses through voting stock. Most don’t manage the day-to-day operations of subsidiary companies, but they can. A holding company can own up to 100% of a subsidiary company. 

Holding companies are common in finance, real estate, manufacturing, and technology. A subsidiary company that produces a good or service is known as an operating company. Other subsidiary companies might hold real estate, intellectual property rights, or physical assets that are used by the operating company. Your holding company can be an LLC or corporation. 

Holding companies are a popular tool for gaining a competitive advantage by increasing scale and efficiency through ownership of multiple companies and not just a single entity.

How do holding companies work?

Most holding companies are formed when one business entity purchases 50% or more of shares in another company. This gives the parent company the ability to sway decision-making without controlling daily operations.

There are multiple important aspects to understand about holding companies:

• Ownership and control. To gain control, the parent company purchases 50% of stocks or controlling shares in a subsidiary company. They then can appoint board members, set strategic goals, and oversee financial decisions for the subsidiary.
• Liability protection. A benefit of holding companies is that they are typically protected from financial and legal losses by subsidiaries. If a subsidiary files for bankruptcy, the creditors usually cannot pursue the holding company for remuneration.
• Financial management. When a holding company wholly owns a subsidiary or owns enough stock to be a majority, it can control the finances, investments, and resource allocation within subsidiaries.

Types of holding companies (with examples)

There are multiple types of holding companies, each with slightly different purposes. 

• Pure holding company. A pure holding company solely owns shares of other companies and does not engage in any other business activities. An example of a pure holding company is Berkshire Hathaway, which is a holding company that owns stakes in subsidiaries but doesn’t produce a product of its own.
• Mixed holding company. A mixed holding company has a combination of its own business operations and subsidiary companies with their own business operations. For example, Microsoft is a holding company which produces software while also owning subsidiaries such as LinkedIn, GitHub, Microsoft365, and Skype.
• Immediate holding company. An immediate holding company is a term used to describe how two companies are related. An immediate holding company is a holding company that directly owns another holding company. For example, Meta is a holding company and parent company to Instagram, which makes Meta an immediate holding company over Instagram. 
• Intermediate holding company. An intermediate holding company is one that serves as a middle-tier entity within two other holding companies. Company A owns Company B which owns Company C, and all are holding companies. This structure is often used by large organizations to save on taxes and manage local regional operations. An example of an intermediate holding company is JP Morgan Chase Bank, which owns many local financial institutions while being owned by parent company JP Morgan Chase & Co.

It’s important to remember that a business of any size can use this business structure—even a single-member LLC can become a holding company, and a company of any size can own multiple subsidiary businesses at the same time. 

For example, you may want to start a company for real estate investment. The parent company can hold an apartment building as an asset and form a subsidiary company to manage the renters and rental property. As another example, you could create an artisan crafts LLC holding company that has two subsidiary companies, one that sells hand-bound books and another that flips furniture. 

Pros and cons of a holding company

Whether or not a holding company structure is right for your business will depend upon your needs and goals. There are many benefits and disadvantages to owning and operating a holding company.

Pros

When it comes to owning a holding company, you can expect these potential benefits:

• Risk management and liability protection. Because each subsidiary has a separate legal status, if one faces a legal challenge or financial difficulty, the other subsidiaries and parent company are protected from risk.
• Tax benefits. A holding company has major tax advantages compared to owning several separate companies. If one subsidiary loses money while another makes money, they balance each other out within the holding company. This means the holding company pays less overall in taxes by using one business’ losses to lessen the profits of the profitable company. Profits from successful subsidiaries can also be redirected to fund growth opportunities for newer subsidiaries. This is less costly than obtaining outside investment.
• Control with less investment. With the ability to redirect funds from one subsidiary to another, a holding company can limit the amount of outside investment they need to seek. By limiting outside investors, the holding company retains control over business decisions. If a holding company does need to seek outside investment, they are more likely to get a better deal on loans and investments.
• Resource sharing. Because a holding company owns multiple subsidiaries, those subsidiaries can share resources. This might mean owning one piece of equipment that’s loaned out and used by multiple subsidiaries. It can also mean getting a better deal with suppliers. Instead of one company negotiating the purchase of a small amount of supplies, the parent company can negotiate a better deal for a larger order of supplies that all subsidiaries can then use.
• No day-to-day management required. A holding company is not required to participate in the day-to-day production and management of the subsidiary companies. This also allows the holding company to own a variety of companies and not need to understand the ins and outs of each industry.

Cons

If you’re considering starting a holding company, it’s important to consider these drawbacks ahead of time.

• Complex structure. The complex structure of a holding company can be a drawback for owners who don’t know what they’re doing. Even for savvy business owners, it can be difficult to manage all of the details of multiple businesses at the same time—it’s easy for something to get missed. In addition, for the subsidiaries that aren’t owned 100%, a holding company will have to deal with minority owners while managing the businesses.
• Regulatory scrutiny. A holding company might own multiple subsidiaries in a variety of different regulated industries. This would require scrutiny from different regulatory agencies and adds to the complexity of operating multiple businesses at the same time.
• Financial disclosures. Some holding companies must share consolidated financial information and report to the Federal Reserve. This financial scrutiny can make some business owners uncomfortable.
• Risk of mismanagement. Whether intentional or not, financial mismanagement can happen. For example, say your holding company owns two subsidiaries, a profitable decade-old subsidiary and a new startup. The startup needs funds to get off the ground, so you funnel a significant amount of the holding company’s cash to that subsidiary. If the older subsidiary then has the opportunity to make a large order at a discount, it wouldn’t be able to, because the funds are tied up in the startup subsidiary. This would harm one subsidiary unintentionally through cashflow mismanagement. Another potential risk is that the holding company owners are not knowledgeable about the various subsidiary companies and aren’t skilled in running those specific types of businesses.
• Lower valuation. A holding company is generally valued at less than if all the businesses were evaluated separately, lessening the valuation of your businesses. This is known as the conglomerate discount.

How to start a holding company

Starting a holding company is very similar to starting any other business venture, but you’ll need multiple businesses, not just one.

You’ll need to choose a business structure and name, register the business with the state, and pay any associated fees.

If you believe your company could benefit from becoming a holding company, LegalZoom can support you through the business formation process and even help you register your business if you want to try the process yourself, these six steps can help you get started:

Step 1: Choose a business structure

Your first step in founding a holding company is to choose your business structure. The majority of holding companies are either a limited liability company or a corporation, but can also be a partnership. A holding company cannot be a sole proprietorship. Partnerships, LLCs, and corporations provide you with liability protection and tax benefits. 

When considering business structure, it’s important to keep in mind that you will have multiple businesses at once. Because each business is a separate legal entity, each can have a different entity structure. For example, the holding company could be a corporation with multiple subsidiary LLCs. 

Step 2: Register the business

The next step is to register your business with the state. This process varies slightly depending on the entity structure and the state. In most states, you’ll need to file incorporation documents and pay a fee to the Secretary of State.

LegalZoom can help you to register your business in your specific state, taking a lot of the legwork off your plate. 

You’ll also want to obtain an employer identification number or EIN from the IRS. This acts as your business' Social Security number for tax purposes. 

Step 3: Define business objectives

Next, you’ll want to get to know your business. Your business objectives include deciding what your holding company will invest in. There are a number of pathways you can follow, including purchasing stock in other companies, investing in real estate, or purchasing other businesses in order to take over operations. 

Founding your holding company is just the very beginning. Your business objectives will act as your guiding light throughout the life of your business.

Step 4: Fund the holding company

Before your holding company can do the work you want to do, you’ll need capital. You can secure funds through personal investments, loans, or outside investors. Without financial assets, you likely won’t be able to found or purchase subsidiary companies.

Step 5: Acquire subsidiaries

Once you’ve got funding, it’s time to acquire subsidiary businesses. You have options here—you can purchase a majority stake in existing businesses or establish new businesses. These businesses will operate underneath the parent company which is your holding company. The parent company has voting rights for the subsidiary businesses but doesn’t necessarily have to be involved in day-to-day operations.

Step 6: Set up financial and legal frameworks

The final step in setting up your holding company is to make sure that all of your financial and legal frameworks are in place. A holding company is a complicated business structure, so it’s important to get support from legal and tax professionals. An example of your financial framework will include a separate business bank account for the parent company and each subsidiary you have to maintain completely separate financial records.

At LegalZoom, you can find support from experienced business attorneys to ensure that you’re setting everything up correctly and won’t have any unpleasant surprises later on. 

Does my business need a holding company?

There are many benefits to operating a holding company, but it’s important to recognize that it’s a complex business structure that comes with some unique challenges. Whether or not your business will benefit from becoming a holding company will depend upon your goals and risk management strategy.

Before deciding to become a holding company, you should consider:

• Whether or not you want to own multiple companies or assets
• If you need additional liability protection by changing your business entity type
• What tax benefits you might receive from changing to a holding company
• If you plan to raise investment or sell shares of your business
• The benefits you could gain from the protection of real estate or intellectual property

A holding company can reduce risk if you already own multiple businesses and combine them. Your holding company might also be able to lessen the taxes that you pay for your multiple businesses. Many profitable and successful businesses operate as holding companies, but it’s important to be prepared for the additional structural requirements of operating a multi-tiered business.

FAQs

How does a holding company make money?

There are many different ways that a holding company can make money from its subsidiaries. These include:

• Income from assets
• Royalties
• Leasing out assets
• Revenue from payments, such as dividends, distributions, interest payments, and rent

What is the difference between a holding company and a parent company?

A holding company refers to the entire corporate structure of a parent company and its subsidiaries. The parent company owns the assets of the one or more subsidiary companies. The subsidiary companies can maintain their own operations with oversight by the parent company.

What are the tax benefits of a holding company?

There are multiple ways that a holding company can lower the taxes of a business. The holding company can defer taxes when one subsidiary is profitable and another is not. The holding company also helps to avoid double taxation, which is when a business is taxed at the corporate level and personal level.