This article gives you a brief introduction to the definition of a holding company as well as the benefits and drawbacks of establishing one.
What is a holding company?
A holding company is a limited company that owns stocks and shares in other business entities, or subsidiaries. They are at times called parent- or umbrella companies.
These subsidiaries could e.g. be private limited companies (Ltd.), public limited companies (PLC), limited liability companies (LLC), corporations (Corp., Inc.), and even other holding companies.
It is not possible to establish holding companies as individual enterprises. That’s because it’s not active and does not produce goods. Therefore, it can also not be registered for VAT.
A holding company is thus not a specific type of enterprise but rather a company which owns one or more operating companies. When establishing this type of company, its purpose must be stated in the memorandum of association.
Why people use holding companies
It may be a fiscal or corporate advantage to be organized within a holding company.
Risks associated with operation may be minimized by separating means and risk factors. Isolating distributable reserves as payable profit to a holding company safeguards against the risks of losing these funds in the case of unforeseen expenses or bankruptcy within the operating company.
At the same time, the parent company can be used to accumulate savings from its subsidiaries, thereby establishing a sort of money reservoir. Since financial transfers are tax-free as long as the parent company owns more than 10% of the operating company, financial transactions can be performed, which are exempt from taxes. The funds can also be reinvested without personal taxation.
A holding structure may also be advantageous in the cases of strategic cooperation or planned corporate acquisition or fusion. There are also tax benefits related to the selling of a company or inheritance of control. For example, it may be a benefit if you are considering investing your profits at a later time.
One of the drawbacks is that an annual report must be compiled, reviewed and published.
How to start a holding company
The simplest way to establish a holding company is to do it concurrently with the establishment of the operating company.
You will, however, almost always have to pay for filing costs and/or permits in the country, you’re establishing your company in. You also need to ensure that your company can live up to the minimum capital requirements of said country. However, some countries allow for so-called “rolling capital”.
For example, in Denmark you can establish a private limited company with e.g. 50,000 DKK and letting this capital roll over into another company, thereby making the holding company liable for shares in the operating company and utilizing the same capital twice.
There are, however, some additional non-recurring establishment costs associated with this model. An annual report for both companies must also be compiled, which also carries some costs. When establishing a holding company, you can choose to purchase an already registered but inactive shell corporation.