Holding Company

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Holding Company


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Holding companies own assets or stock of other companies. Typically holding companies do not produce their own products, or provide their own services. Instead, holding companies are formed to own assets of other companies to form a corporate group.

There are two main ways in which a corporation can become a holding company. The first is to purchase enough stock or shares in a company, and the second is to create a new corporation, but then keep most of the shares.

The relationship between the holding company and the subsidiary is called the parent-subsidiary relationship. In this case, the mother company is the parent company, and the organization that is being acquired is called the subsidiary. This makes the parent-subsidiary holding relationship.

What is the Purpose of a Holding Company?


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Typically set up as a corporation and LLC, holding companies allow you to divide a business into multiple entities, while still allowing them to be owned by the primary holding company. Holding companies control membership interests in other companies, but some of the subsidiary companies will manufacture, sell, or conduct other business.

The only purpose of a holding company is to control other companies. Although holding companies can also own property, such as real estate, patents, trademarks, stocks, and other assets, the primary purpose is to own all or a portion of another company.

Different Types of Holding Companies


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Pure

Referred to as “Pure” are holding companies that are formed for the purpose of owning stock in other companies. This company will not participate in other business that is outside of controlling other firms. It does not offer any other services or offer products.

Mixed

Mixed holding companies control other firms, but also engage in their own operations. Sometimes also referred to as a holding-operating company. If a holding company takes part in lines of business that are unrelated to their subsidiaries, they are referred to as conglomerates.

Immediate

If a holding company continues to retain voting stock or control of a subsidiary although it is already controlled by another holding company, it is considered immediate. These are holding companies that are already a subsidiary of another.

Intermediate

Intermediate holding occurs when a holding company is a subsidiary of another holding company, while also holding a smaller entity. An intermediate holding firm might be exempted from publishing financial records as a holding company of the smaller group. This provides a layer of privacy.

Advantages of Holding Companies


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Liability Protection

If a holding company exercises control over several companies, each of the subsidiaries is considered an independent legal entity. This means that you will be afforded liability protection, keeping each entity separate. Even if one of the companies is sued, the assets of the other companies are protected.

Control Assets for Less Money

Holding companies are able to control interest in another company by only purchasing 51% of the company. This means that instead of purchasing the entire company, you will only need to purchase half, giving you the ability to control more assets with a lower investment. This essentially can allow a business owner to gain control of multiple entities using a very small investment.

Lower Debt Financing Costs

Because holding companies are typically larger, they are often able to secure more funding at a lower cost. This allows the holding companies to pass down these loans or funding with lower financing costs on to the subsidiaries, and it is one of the main advantages of a holding company.

Tax Benefits

Holding companies that own 80% or more of every subsidiary can reap tax benefits by filing consolidated tax returns. This allows you to combine the different financial records of various firms with the parent company. Should any subsidiary encounter a loss, it will offset the profits of the other subsidiaries. The net effect of filing a consolidated return is a reduced tax liability.

Disadvantages of Holding Companies


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The main disadvantage of creating a holding company in New Mexico is that there are compliance costs that otherwise would not exist. These need to be paid annually and on time. Additionally, there is an added layer of complexity that comes with running a holding company. You must ensure that everything is well organized and kept track of.

How to Set Up a Holding Company


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To set up a holding company you must own at least 50% of the voting stock of another firm. When this occurs, it guarantees greater control, but despite this, a parent company can control the decision-making process even if it owns only 10% of its stock. Starting a holding company can be done by forming a new entity as well, or through a merger.

Once the transaction is completed, the stockholders of the subsidiary will then hold shares in the holding company, while the holding company will own stock of the operating company. The process is not incredibly difficult. In New Mexico especially, forming a holding company is inexpensive, and provides privacy from public records should you use a registered agent.

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