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Alphabet Inc. owns Google, YouTube, Android, and Waymo. Does that mean they’re all the same company? Yes and no. Alphabet is a type of parent company known as a holding company. It oversees a collection of different businesses, the largest and most well-known of which is Google LLC. Rather than create its own products and services, Alphabet’s role is to manage the capital allocation and strategic direction for all its independent businesses.
Holding companies operate in a wide array of industries, from finance to automobiles. If you’re considering managing multiple businesses using a single corporate entity, you may benefit from forming your own holding company. Learn what holding companies do, how they differ from other business structures, the advantages and disadvantages they offer, and the exact steps to start one.
A holding company is a businessentity—usually a corporation or limited liability company (LLC)—that exists primarily to own a controlling interest in other companies, which are called subsidiaries. This controlling interest can take the form of voting stock, shares, or membership interests.
Even though a holding company owns one or more subsidiary businesses, it rarely takes an active role in the day-to-day operations of those businesses. Many holding companies exist to manage and control subsidiaries; hold assets such as real estate, intellectual property, or cash; provide resources; and create a corporate structure that offers advantages like liability protection and potential tax benefits.
Most holding companies fall into one of the following three categories, each with its own distinct structure and purpose. Understanding which type fits your business goals will help you structure your holding company correctly from the start—saving legal fees and administrative headaches later.
A pure holding company exists solely to own shares in other companies. It does not engage in any other business activity or provide services directly. For example, Berkshire Hathaway, long controlled by the iconic investor Warren Buffett, serves primarily as a pure holding company for brands like GEICO, Duracell, and many other subsidiaries.
A mixed holding company, also called an operating company, both owns subsidiary companies and conducts its own business operations. One such example is the Walt Disney Co., which creates its own Disney-branded content but also controls other businesses, like ESPN and ABC News, that produce content of their own.
Mixed holding companies’ subsidiaries can be engaged in completely unrelated lines of business or industries. For example, Chemed Corp. owns hospice care company VITAS Healthcare and the Roto-Rooter plumbing service. These types of holding companies are sometimes called conglomerates.
A financial holding company primarily manages financial assets such as banking or investment subsidiaries. In the US, these are often formed under the terms of the Bank Holding Company Act of 1956. The act requires such holding companies to register with the Federal Reserve and obtain approval for acquisitions. It also limits them to activities closely related to banking. One such example is JPMorgan Chase & Co., which owns JPMorgan Chase Bank NA, which in turn owns and oversees various smaller, specialized bank and financial services subsidiaries.
The holding company structure can afford groups of businesses several key benefits.
Starting a holding company makes sense for large businesses that want to engage in a broad array of activities simultaneously. It’s probably not the right fit for smaller entrepreneurial efforts that are more focused. Here are some downsides to running one:
Setting up a holding company follows similar steps to starting any LLC or corporation, with one key difference: its purpose. Here’s a step-by-step guide for starting a holding company:
Determine the primary goal of your holding company, whether that’s asset protection, tax optimization, centralized control over multiple businesses, or future acquisitions. Due to the complexity of legal and tax implications, it is crucial to consult with a business attorney and a tax professional (like a CPA) early in the process.
Choose whether your holding company will operate as a limited liability company (LLC) or a corporation. Forming multiple businesses under one LLC ensures that the holding company can provide funding, handle major financial decisions, and collect profits from subsidiary LLCs while maintaining a protective legal barrier between different ventures.
Choose a unique name and check its availability in your chosen jurisdiction. Holding company names often include terms like “Holdings,” “Management,” or “Group.” Register the holding company with your state secretary of state (or equivalent government agency in your region) by filing either articles of organization for an LLC or articles of incorporation for a corporation.
Before opening a dedicated bank account for your holding company, obtain an employer identification number (EIN) for tax filings, bank accounts, and payroll. Getting an EIN is free from the IRS. This step is critical for maintaining the legal separation between the holding company and its future subsidiaries.
Draft an operating agreement (for an LLC) or bylaws and resolutions (for a corporation). These rules explain who manages the company, detailing the ownership structure and control of its subsidiaries. They vary from one company to the next, but they typically also define practices for appointing and removing board members and other officers, and include rules for issuing stock, voting, and scheduling annual meetings.
A holding company structure requires that it hold at least one subsidiary or operating division. If you create a holding company first, you can create a subsidiary by forming a separate legal entity, such as an LLC or corporation, to act as an operating unit. The holding company will be named as the owner (the sole member or majority shareholder) in the subsidiary’s formation documents and internal agreements.
If you already have an existing business—or if you’re planning to buy another business—the holding company will purchase a controlling interest (usually 50% or more of the voting shares or membership interests) to acquire it as a subsidiary.
For effective limited liability protection that shields owners and investors from the company’s obligations, the holding company and its subsidiaries must operate as completely separate legal entities. This requires separate bank accounts, accounting records, and financial statements for each entity, including the holding company. Each should file its own annual reports and pay its own taxes. All transactions between the holding company and its subsidiaries, such as loans or lease payments, must be formally documented as if the transaction were between unrelated, independent companies.
A holding company is financed through a combination of owner or investor capital, loans, and dividends or revenue received from its subsidiaries or investments.
The purpose of a holding company is to own and manage controlling interests in other companies. The purpose is to centralize control, reduce risk, and streamline investment and management decisions.
A holding company exists to own and control other businesses, while an LLC is a legal structure that can either operate a business directly or form a holding company itself. Typically, holding companies are structured either as LLCs or as corporations.
The owner of a holding company makes money through dividends, interest, and profits earned from the subsidiaries or investments the company owns and controls.
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