What is a holding company and what are they formed for? According to the popular online business dictionary, Investopedia, a holding company is “a parent corporation, limited liability company or limited partnership that owns enough voting stock in another company to control its policies and management.”
These companies (usually) exist for one purpose and one purpose only, which is to control the actions of another company instead of providing their own services or producing their own products. The company they seek to control could be a limited partnership, a limited liability company or a corporation, with a company that’s 100% owned by the holding company known as a ‘wholly owned subsidiary’.
There are a number of major holding companies of note, including the largest holding company in the US and arguably the most famous, Berkshire Hathaway, which is owned by Warren Buffett.
What Benefits to Holding Companies Provide?
That’s the big question here, why form a holding company and what benefits are provided by doing so? There are many excellent benefits to forming a Swiss holding company, such as:
The structure of a holding company is notable because it reduces the risks to the owner of the company while providing the ability to own and control a number of different companies simultaneously.
This means that the holding company is protected from losses experienced by the companies that it owns entirely or a part share of. For example, if one of the companies owned by the holding company suffers a major loss or files for bankruptcy, the holding company experiences nothing more than a capital loss and a decline in its net worth. What’s more, any debtors or creditors of the bankrupt company can’t pursue the owners of the holding company.
A holding company has limited financial and legal liability, which is one of the most notable benefits to establishing a holding company with which to purchase multiple businesses. Subsidiaries can be set up to further reduce financial and legal liability, which is what many multinational corporations do.
Holding companies are able to obtain tax-free dividends as returns on investment (these returns are based on the percentage of ownership in the company), as well as value in the company and voting rights. Furthermore, the structure of holding companies can be used to further limit tax liabilities by establishing subsidiaries in countries with lower tax rates.
As you can see, there are some excellent benefits to establishing a holding company, especially if you choose to establish it in a country with favourable taxation laws such as Switzerland. While there are several minor drawbacks to establishing a holding company (not all these affect all company owners), a notable disadvantage is the use of antitrust laws by governments to force holding companies to close.
However, unless the company structures put in place are structured properly, don’t seek to control interests any particular industry and are in line with the requirements in that jurisdiction, you’re unlikely to experience any problems.