Why Use A Holding Company For Structuring Its Business
The holding company word comes with different reasons to an entrepreneur as there are vast reasons for formation of a holding company. Different people have their own sets of reasons to form a holding company and the reason mainly comes to protect the parent company’s finance and assets. Before jumping into the analysis of advantages of a holding company, let us first understand that what a holding company is.
What does a holding company mean?
A holding company is basically a parent company (an LLC or a corporation) which holds its share in different companies to manage its own day to day trading and also services. These child companies where the parent companies play a role as a shareholder are called subsidiary companies and also these are the main operating companies who does day to day operations for those subsidiary companies’ trading or services activities. For example: A holding company wants to have trading in banking services and also in life insurance ,health insurance and stock exchange. Hence the parent company can hold three subsidiaries having banking services, insurance services and stock exchange services separately.
The holding or parent company can hold 100% (depending on the rules and regulations of the country) of the subsidiary or just a share to control the managerial decision of the subsidiary companys. The management will be separate for each subsidiary company as they will be having their own sector of business and interest which is controlled by the same parent company management. The management of the child companies could also be same, based on the business required.
Also a holding company can create a subsidiary company just to protect its assets and properties. Example a person wants to start an LLC with an owned building for renting purpose. The Parent company can be an LLC which will have a subsidiary company and that subsidiary company will own that property.
Financing a holding company
The holding company earns its revenue from the subsidiary companies’ in the form of rents, interest payments, dividends, distributions etc.
Advantages
- Control over assets in a lesser budget-The parent or holding company doesn’t require to own all the assets of the subsidiary companies and hence can own the subsidiary companies and their assets at a lower budget
- Liability distribution- All the subsidiaries holds their own assets which comes to their account only and hence any financial loss or any liability cannot come to acquire any assets from the parent or holding company. This makes the foundation stronger
- Lower Financial Debt-The holding company can take loan at a lesser rate than any of its subsidiary companies and can give it to its subsidiary company for their expansion which will save the cost
- Distribution of Managerial Power-As the managements are different for each subsidiary company hence the day-to-day management is not required for the holding company
- Increment in risk taking appetite- As the risk of a subsidiary company remains limited to the subsidiary company mainly hence the parent company may take decision for new innovative startups as new challenges
Disadvantages
The subsidiary companies can be formed in different states and the tax benefits will depend on the particular country’s rules and regulations and then it can be decided whether each entity is taxable or not. The name and the activities for the subsidiary companies can be different. But all the time creation of subsidiary company is not the answers for all the business though in country like UAE many people form company and holding companies to own their assets and to protect their rights. The structuring of the holding company and it’s different assets depends upon the aim and business plan/goals.
This blog is written by Ms. Ananya, Business Advisor at Flyingcolour Business Setup, VAT and Accounting Services, Dubai. We at Flyingcolour can help in advising of the right structure for your business, with years of experience in doing the same. If you have any question please contact us at +971 4 4542366 or email us at info[at]flyingcolour[dot]com.
