What is a holding company?

Learn everything you need to know about forming a holding company and whether your business should consider this avenue.

Whether you’re wondering if your business should set up a holding company or you’re completely new to the term, you’ve almost certainly come across one at some stage in your life.

The definition of a holding company is a business that owns part/or all of another business’ stock. A holding company doesn’t usually produce or offer services itself, instead, it owns a majority share of another company and therefore controls it.

The holding company can consist of many forms, including a partnership or a limited liability company, with the idea that they can control or overlook the other company’s management and policies.

While some holding companies are formed to own property, others see it as a means to gain a profit from the other company without being involved in the production of the goods or services offered.

To put this in real terms, The Walt Disney Company acts as a holding company because it owns assets/and profits from big TV networks like ABC and entertainment providers Marvel Entertainment.

What are the benefits of forming a holding company?

For many businesses, there are a lot of benefits to forming a holding company. For instance, by doing this, a company can protect itself from any losses. So if Marvel Entertainment or ABC went bankrupt, the holding company (The Walt Disney Company) will experience a capital loss and a decline in net worth. However, Marvel Entertainment and ABC’s debt collectors and creditors won’t be able to ask the holding company to pay.

Another key benefit of forming a holding company is via structuring. This means that a big corporation can split itself into multiple subsidiaries like real estate, brand name, franchise etc. to further limit the financial and legal liability.

From a personal viewpoint, there is a lot of flexibility in the law as well. Instead of personally owning an asset and being subject to the debt, they can make the holding company own it, meaning the company is liable. This is a great way to protect your own assets via your company.

Becoming a holding company also allows it to oversee the companies it owns. This includes making executive decisions, firing managers and so on. However, the holding company isn’t involved in the manufacturing/service side of things, meaning they get to make big decisions and profit from it without having to do the day-to-day part. This makes the incorporation and maintenance of the company it owns extremely cost-effective, because they don’t need to worry about employing staff to complete the work.

Other elements to consider

Tax benefits can also act as another benefit in favour of setting up a holding company. For example, in many countries, they would receive a low rate of corporate tax and personal income tax for employees having to relocate to the holding company’s jurisdiction. Although the latter is only really relevant if the business is significantly altering the location of major headquarter operations.

Location is another vital point to consider before choosing possible places to locate your holding company. Luxembourg, Ireland, Cyprus, the Netherlands, Malta, Estonia and Switzerland are perfect as none of these has any noteworthy substantial controlled foreign company provisions, with no tax on dividends and capital gains for the holding company.

Want to learn more?

Get in touch with our team here at the European Business Advisory and we’ll talk you through the process of setting up a holding company. As experts in business formation and financial advising in Europe, we can help you decide whether it’s the right decision in the current economic climate.