Benefits of a Holding Company
The holding company-subsidiary company corporate structure is extremely popular all across the world. All large companies serve as holding companies. For instance, Apple Inc. is a holding company which is registered in the United States. Apple has several subsidiaries all across the world. Companies like Apple China and Apple Russia are registered in their respective countries.
This structure is used by all multinational companies in the world. They have subsidiary companies which conduct business in different parts of the globe and then send their profits back to the holding corporation. This structure has become popular because there are several tax and operational benefits that accrue as a result of this structure.
In this article, we will have a closer look at some of the main benefits that are associated with having a holding company.
What is a Holding Company?
A holding corporation is a parent corporation. This means that the holding corporation owns majority shares in other companies. As a result, the holding company can appoint the board of directors of the subsidiary company. This means that the holding corporation is in complete control of the policies and workings of the subsidiary company.
Also, since the holding company owns majority stock in the operations of the subsidiary company, it can receive the profits from transfer it to the parent company. Based on the needs of the shareholders, the profits can either be retained in the subsidiary company or they can be transferred using the holding company. Thus, the holding company structure provides flexibility to the shareholders.
Advantages of a Holding Company
- Liability Protection: The liability of the subsidiary company is limited to the extent of money that they have invested in the business. This means that is the profits of a company have been moved to the holding company, they are out of reach for the creditors. Even if the creditors suit the subsidiary company, they can no longer recover the amount from the holding company because the two companies are separate legal entities. Also, it needs to be noted that in many jurisdictions, the profit transferred between the two companies may be tax free. This is because this amount is transferred in the form of dividends and dividends are tax free in most parts of the world.
- Tax Benefits: There are many states in the United States which provide favorable tax regimes to business. Delaware and Wisconsin are considered to be prime examples of such states. Hence, companies tend to register their holding companies in such jurisdictions where the tax rate is relatively low. In some cases, multinational companies prefer to register their holding companies in offshore tax havens like the Bahamas or the British Virgin Islands.
The holding company structure allows the parent company to lend back the same money that was received as profits. The money can be lent out in the form of a secured loan. In some cases, the subsidiary companies enter into agreements with the holding company. These companies give the holding company, the priority right to seize the assets of the subsidiary company in the event of a default. This structure allows the company to protect the interest of its shareholders over the interest of creditors. It is for this reason, that this structure has been considered to be controversial and many lawsuits have been filed citing the misuse of this structure.
This strategy is used to transfer the maximum amount of earnings to the holding company. Since the holding company pays very low taxes, the structure becomes extremely tax efficient. Companies like Amazon are known for using the holding company structure to build a competitive advantage in the form of sustained low income tax payments which translate into lower costs.
Disadvantages of a Holding Company
- High Cost of Regulation: Usually the holding company structure is used by multinational companies or other companies which have a huge asset base. As a result, the regulations and compliance norms related to holding companies tend to be fairly detailed. If a small company creates a holding company structure to reap some of the benefits, they may find this structure to be needlessly expensive. This is because the cost of compliance will nullify some of the benefits that accrue as a result of this structure
- Difficult To Raise Funds: Banks and other creditors have become aware about how the holding company structure is used to avoid pay creditors their due. As a result, they tend to be very careful while loaning out money to subsidiary companies. The funds provided are often provided at a high rate of interest to compensate for the probable loss that may arise because of lending out to companies who have already mortgaged their assets to a holding company.
- Anti-Trust Laws: Holding companies have been used to create invisible monopolies in the past. As a result, regulators regularly keep a check on these companies to ensure that they are not creating a monopoly. In some cases, this leads to harassment as the company is not allowed to expand their operations easily.
To sum it up, the holding company structure has several benefits. However, a lot of these benefits only accrue to companies that have a significant turnover. Hence, this strategy may not be applicable to smaller companies.
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