A holding company is a type of financial company that possesses a controlling interest in other companies which are called subsidiaries. Holding companies enjoy the privilege of protection from losses.
Holding companies exist solely for the purpose of controlling other companies. Generally, holding companies serve as a shield for small businesses (subsidiaries) while maximizing profits for both the holding company and the subsidiaries.
What is a Holding Company?
Holding companies are companies that specialize in owning shares of other companies to form a corporate group. They can also conduct trade and other business activities. Holding companies are also called “umbrella” or parent companies.
They are created to hold assets such as intellectual property or trade secrets. Holding companies can recruit and dismiss managers of companies they own. However, those managers are responsible for their own operations.
How Do Holding Companies Work in Commercial Real Estate?
A real estate holding company is a legal entity designed to protect business owners from the risks involved with owning investment properties.
Real estate holding companies can be organized in different ways, one of the most common being the LLC (limited liability company).
LLCs shield their owners from personal liability. They provide asset protection for their owners by protection from suing. However, if the managing shareholders of an LLC commit fraudulent crimes, complainants can directly file a lawsuit against those shareholders.
Regardless of the type of holding company, it is necessary to have a fixed agreement in a real estate holding company. The agreement takes many factors into consideration, some of which include:
- Percentage of ownership interests.
- Rights and interests of members.
- Voting rights and power.
- Sharing of authority and responsibilities among members.
Benefits of Holding Companies
Holding companies reduce risk for shareholders and can permit the ownership and control of a variety of companies. There are varieties of benefits enjoyed by holding companies, some of which include:
- Better Asset Management: As an asset protection strategy, a parent company may structure itself as a holding company, creating various subsidiaries for each of its business lines. If it is structured well, the debt of one subsidiary would not affect other subsidiaries. This helps to ensure better asset management as the main ownership of assets and rights stays with the non-trading company.
- Protection from Losses: If a subsidiary of a holding company undergoes bankruptcy, it does not affect the holding company or its subsidiary companies. The holding company may, however, experience a loss in capital as well as a downturn in the company’s net worth.
- Allocation of Resources: Holding companies support other subsidiaries by allocating resources to lower the cost of capital. This in turn helps to reduce the risk of debts and bankruptcy.
Example of a Holding Company
A prominent holding company is Berkshire Hathaway, founded by Oliver Chace and owned by Warren Buffett, which contributes a variety of commodities and services to the market.
Berkshire Hathaway owns a large number of subsidiaries which include: Duracell, Louis Motor, Oriental Trading Company, Clayton Homes and many more. It is a worldwide conglomerate having total assets of $707.8 billion as of 2018.
Holding On to Your Investments
Business owners usually consider setting up a holding company as well as subsidiaries to help construct the business as it blooms. This is because the holding company can provide greater protection against risks and effective asset management for a business that is still extending.