A holding company is a business entity designed primarily to own and manage other companies. A holding company can also be called a mother company.
Structure and operations of a holding company
A holding company differs from an operating company, which directly produces goods or services. The purpose of an holding company is to own shares and interest in other companies. The revenue in a holding company comes from the shares they own.
A holding company owns a controlling interest in one or more subsidiary companies, holding their assets and overseeing operations. The subsidiaries, being separate legal entities, maintain their own assets, liabilities, and legal obligations.
Many holding companies are investment companies. However, the structure of a holding company can take various forms, such as private companies, public companies, or trusts, tailored to meet the goals of the holding company and the preferences of its owners.
The advantages of holding companies:
- Asset protection: Holding companies serve as a shield for the companies they own making it easier to protect their assets. They are separating the assets of each subsidiary into separate legal entities. This limits the liability of the holding company, safeguarding its assets from potential seizure to settle the debts of subsidiaries.
- Tax planning: Holding companies has a a strategic approach to managing tax liabilities. By merging tax losses and capitalising on tax concessions, such as small business CGT concessions, they can can optimise tax structures and also minimise the tax burden on subsidiary sales.
- Simplified management: Holding companies make operations more efficient because they can share resources and simplify administration.
- Access to capital: It is often easier for holding companies to access capital compared to individual companies. A holding company can raise funds by issuing shares, acquisitions or other investmenets. This is providing financial flexibility for both holding and operating companies.
The difference between holding and operating companies
In a dual-company structure, operating companies handle day-to-day business management, while holding companies own assets without participating in operational decisions.
A holding company gives a layer of protection for the operating companies. This is especially important in scenarios like bankruptcy, as creditors cannot pursue assets held by the holding company.