Holding company purchase the equity in other company and it manages and organizes smaller companies. Equity is completely different from the stock and share, it’s the percentage of ownership in the company even the company doesn’t offer stock. The establishment of a holding company has a great attraction for investors and business owners. Today, we’ll discuss how to start a holding company and how you can make it operational in detail.
How to start a Holding Company
Some of the main steps in learning how to start a holding company are as follows;
Analyze Business Needs
A holding company falls under the category of an incorporation business deals with making an investment in other companies, the receiving party is the operating company. Some of the main activities of the holding company are making investment decisions, lending, and borrowing. It offers loans and leases assets of the operating company that performs traditional business activities.
A holding company has two main benefits; asset protection and tax reduction. It offers low taxes by incorporating its business in a state that has a favorable tax structure. It also protects the asset of a company before it would lose them to the creditors. Therefore, you should consider the benefits and needs of your business before launching the holding company.
- A holding company is suitable for small business owners because it could protect the valuable assets of the operating company. In other words, it allows a person to protect its valuable assets from the creditors of the operating company by making an alliance between the holding and operating company.
- Berkshire Hathaway is a US holding company and it invests and lends in other operating companies. It has equity in various companies, and that’s why it lends money at a lower interest rate. However, the company makes a great profit because it invests in those companies that have a high stock value.
The holding company has got two main types; LLC (limited liability company) and the corporation. You should follow the structure that meets your needs and requirements. However, whatever structure type you would follow would impact your liabilities and taxes.
Many small business owners usually select the LLC holding because the corporations don’t offer the same level of asset protection. Here you have to keep in mind two things; what form of company you already have, and what type of operation and holding company would suit your needs.
You can establish two LLCs (holding and operating company) if you want maximum asset protection. Each company should be a separate entity, and you could be its agent of both companies. As long as they remain separate entities, the holding company won’t be responsible for the debt and obligations of the operating company.
If you want a tax advantage, then you should establish the holding company in a different state than the operating company. Before launching it in any state, you should consult with your business attorney.
When you’re launching the holding company, then you should do it according to the state laws. There are different laws for different types of companies. Whether it’s a corporation or LLC, you should register it by providing the business name, agent name, and incorporation articles. It’s the same procedure both for the holding and operating company as long as the operating company is not incorporated.
- The article of incorporation of your company should clearly mention the objective and purpose of your business, business decision-making process, and name of the company’s officers. When you make any changes, then you should update the article of incorporation.
Holding Company Bank Account
The holding company and the operating company should have separate accounting systems and bank accounts in order to maintain independence. However, you should provide your company’s new tax ID when you’re creating a business account relevant to your holding company. Whatever funds you’re using, deposit all of them.
When you’re starting a holding company, then you would require a lot of funding in order to make investments in the operating companies. The holding company would store all the wealth and capital of your company. It would allow you to offer loans to finance the operations of the operating companies.
If the operating company is running its business long before the formation of the holding, then it should sell all of its valuable assets (IPR, equipment, land, building, etc) to the holding company under the classification of transfer of assets.
Maintaining Accounting Record
When you’re running holding and operating companies, then you should maintain a transparent accounting record of all the transactions between both companies. Therefore, it’s important to have a legal distinction and maintaining a separate accounting record between two businesses.
The holding company should disclose the income that it earns from leasing, lending, and loaning, and it should be higher than the company’s expenses of owning the assets. It’s important to maintain a record of all the transactions between the holding and operating company that takes place throughout the year.
How to Operate Holding Company
The next stage in learning how to start a holding company is that you have launched the holding company by now. It’s time to discuss how to operate the holding company;
Performing Operational Activities
You should categorize all the business activities like investment, finances, and operations. The goal is that you should perform these operational activities through the operating company, and not through the holding company. These operational activities are the main sources of generating a profit by selling products and services. If you don’t want the holding company to be liable for the creditors, then you should get it involved in the operations.
- The employees who are performing operational activities should be the employees of the operating company, and they should receive salaries from the operating company.
- “Piercing the corporate veil” means that the holding company is responsible for the debt of the operating company. It only happens where holding and operating companies are not separated.
Invest & Finance
The holding company owns the assets and lends the money to the operating company. The operating company pays the lease expense and a cash flow to the holding company every month. It’s the rent and interest money that the operating company has to pay to the holding company.
- It’s important to maintain separate accounting books for both companies so that it becomes easier for you to track and maintain them.
- The holding company usually owns the equities of many smaller companies and earns through their growth.
- The holding company stores the cash of many businesses and earns interest from them by making loans to the operating companies.
Taxes & Franchising Fee
The holding and operating companies both have to file for separates taxes and pay separate franchising fees. If you don’t find it difficult, then you should consult an accountant to do it for you. It’s mandatory that you should file reports to the state business registries. If you don’t know that how taxes and franchising fees would apply to your business, then you should consult the business attorney.
Conclusion: How to start a holding company
After an in-depth study of how to start a holding company, we have concluded that launching a holding company is indeed a very profitable business. However, it requires a lot of attention to maintain various accounting books both for the holding and operating company.
Ahsan Ali Shaw is an accomplished Business Writer, Analyst, and Public Speaker. Other than that, he’s a fun loving person.