[VIDEO] Start-Ups 201 - Holding Companies - Why You Might Want One

Major Business Decision – Choosing a Legal Entity for Your Startup

Choosing a business entity is one of the important decisions a business owner makes. Most business owners are familiar with the common legal entities for business, including corporations, partnerships, sole proprietorships, and limited liability companies (LLCs).

Is There Another Option to Consider?

You may want to consider a holding company as an alternative way to structure your business. Before choosing this form of business structure, it is wise to understand more about holding companies, including the pros and cons of a holding company.

What is a Holding Company?

A holding company is the parent company for one or more other companies known as subsidiaries. The parent company owns the shares and assets of the subsidiaries, but the parent company doesn’t participate in the day-to-day operations of each company. It just maintains oversight over the other companies.

Why Should I Consider a Holding Company for My Startup?

Five reasons for using a holding company:

1.  Reduce Risk Of Liability

·      If a subsidiary loses money or goes bankrupt, creditors cannot look to the holding company or other subsidiaries for payment.

·      This advantage can be very useful for a startup that might have one or more projects in high-risk industries.

2.  Greater Protection Of Assets

·      Subsidiaries may be created to own various assets used by a parent company.

·      The parent company becomes a holding company for the subsidiaries.

·      One subsidiary may own intellectual property while another subsidiary owns the equipment. A third subsidiary may be established to own real estate.

·      When set up correctly, the liabilities of one subsidiary does not impact other subsidiaries.

3.  Reduction Of Tax Liability

·      Another strategy of using a holding company is to reduce overall tax liability.

·      The holding company can base certain subsidiaries in jurisdictions with more favorable tax rates.

·      When one subsidiary experiences a loss, that loss may offset net profits from the other subsidiaries.

·      Purchasing and selling assets as a holding company can also reduce or exempt capital gains taxes. Holding assets for multiple subsidiaries can result in offsetting capital losses from one subsidiary against capital gains from another subsidiary.

4.  Reduce The Cost Of Capital

·      A holding company uses its resources to provide working capital for its subsidiaries at a much lower cost.

·      The holding company and its subsidiaries pool their resources to obtain low-cost loans. Loans secured by the holding company’s shares of several subsidiaries can lower the interest rate for the loan.

·      The holding company may also issue bonds and loan money to its subsidiaries at a lower interest rate.

5.  Easy Formation

·      Holding companies can be formed by incorporating a business.

·      The business then purchases the shares and assets of other businesses.

·      A holding company doesn’t need to purchase all shares of a company. It only needs to purchase a controlling interest in the business to become a subsidiary of the holding company.

Proceed With Caution

Holding companies are not always the best option for a startup. As with any business formation, there are many questions to answer and issues to discuss before choosing the best structure for the startup. A business formation lawyer can provide information and guidance for startups as they decide which legal structure is right for their business.