In general, a holding firm is a firm that focuses on investment, assets and management. It doesn’t directly purchase or sell items and services to make profits. In essence, a holding organisation doesn’t have any trading operations or any other activities.
A holding organisation is usually responsible for overseeing and managing other companies in place of having shares in their portfolio and getting dividends from their shares. Apart from this, the holding company does not engage in any other business activity.
Did you know?
JPMorgan Chase & Co is currently the biggest holding company in India, and Mitsubishi UFJ Trust and Banking Corporation is the second one on the list.
Also Read: Choosing the Right Type of Business
What Is Meant By a Holding Company?
A holding corporation is one that does not run its own operations, ventures, or other active responsibilities. It exists for the sole aim of acquiring assets. In other words, the corporation does not acquire or sell any goods or services. Instead, it was established in order to seize control of one or more businesses.
Why Do People Want to Use Holding Companies?
As an overview, let’s know what the holding company meaning is. It could be a financial or corporate benefit organised within a holding corporation.
The risks associated with operating can be reduced by segregating elements and risk factors. Separating distributable reserves to pay profits to a holding company protects you from the risk of losing the funds in case of unexpected costs or bankruptcy in the company operating.
Additionally, the parent company may be used to build up savings from its subsidiaries, creating money storage. Financial transactions are tax-free when the parent company holds at least a 10% stake in the operating company. So, it’s possible to carry out financial transactions tax-free, and it’s also possible to reinvest them without taxation.
A holding structure can be beneficial in the case of strategic cooperation or planned mergers or acquisitions of a company. Additionally, there are tax advantages with the sale of a business or the transfer of control, and this could be beneficial if you consider investing your profits shortly.
One of the disadvantages is that an annual report needs to be reviewed, compiled and then released. In the next section, you will learn about the important assets of a holding company.
Which Assets Are Necessary for a Holding Company?
As a holding company‘s primary objective is to manage assets, not purchase or sell items and services, they usually manage a range of entities. In all cases, everything that has value could be held by a holding company and used as an asset. For instance:
- Limited Liability Companies(LLC)
- Stocks of other companies
- Limited partnerships
- Hedge funds
- Private equity funds
- Public stocks
- Real estate
- Bonds
- Song rights
- Patents
- Trademarks
- Brand names
- Copyrights etc.
The Advantages of a Holding Company
Since many share disposals and dividends qualify for tax exemptions, one of the major benefits of holding companies is the possibility of tax savings. Also, a holding organisation can get rid of their shares with tax consequences when they contain a huge shareholding of approximately 10% or more of ordinary shares of the subsidiary for 12 months in two years before the disposal. The condition is that the subsidiary and parent company are active businesses during the 12 months before and after the removal.
- Dividends are paid out from shares.
- Acquires shares from subsidiary companies.
- Transfers shareholdings to subsidiaries.
- It secures itself and its affiliates from acquisitions from outside.
The above are not considered taxable supplies from HMRC and thus exempt from VAT. In addition, these types of holding companies cannot register for VAT.
What Are The Holding Company’s Advantages You Can Avail?
After knowing what a holding company is, let’s know the best benefits. The operations of a single subsidiary do not impact the operations of any other subsidiary of the parent company. In addition, when the holding company hasn’t actively taken part in the subsidiary’s operation that it controls, the holding company won’t be accountable for the subsidiary’s activities.
Each subsidiary of the umbrella company has a separate entity, too. If you determine to establish LLCs for each of your subsidiaries, you must register with the state and file distinct Articles of Organisation.
You should have separate handling agreements, payroll, bank accounts and tax-filing documents. As the proprietor of the company holding it, this also means that you will be able to raise funds in separate ways, draw investors and establish partnership agreements for every subsidiary. This could be more effective than attracting investors to larger corporations with multiple divisions.
If the holding organisation is one of an LLC or C Corp and owns them, it doesn’t matter except in the case of tax filing. When the LLC holding organisation has an entity or a C Corporation, its LLC holding company has to select the tax status of the C Corp.
The Considerations Before You Set up a Holding Company in India
Forming a holding company in India will require the same procedures as any other entity type. However, due to its intricate arrangement, many aspects are worth considering. For instance, the company could be established in the form of a limited-liability business. Still, other structures are also possible according to the company’s activities.
In some cases, the holding company will only be able to control the subsidiaries. So, it will not be able to participate in the management or trading activities. The benefit of a company is that it is exempt from any obligation for the subsidiary. That is one of the main reasons for setting up such a structure in India.
The holding company could control the direction of its subsidiaries or may have ownership rights via the shares that it holds in its subsidiary companies. It is worth noting that holding companies are conglomerates responsible for managing a number or more subsidiaries.
Also Read: Difference Between Company vs Partnership Firm vs LLP
The Types of Holding Companies
There are two major types of holding companies that are operational and holding firms for financials, and they are further subdivided into pure/mixed, immediate/intermediate-level holdings. The primary differences between firms that are holders in India are as follows:
- The mixed corporation will own the shares of at least one subsidiary. However, it will also be responsible for running its operations.
- The primary holding company is an entity that owns voting rights/stock in a subsidiary company of its own.
- A pure company operates with the sole purpose of holding the stock of its subsidiaries.
- The intermediate company can be an affiliate of the corporation and holding company.
In many cases, intermediate holdings companies are involved in the publishing industry in India.
These kinds of entities are also found in India and elsewhere, where they can have different types of assets based on the reason they were created to serve.
The Process of Setting Up a Holding Company
To take advantage of the liability protection offered by the holding company, it is recommended to create the holding company in the form of a corporation or an LLC.
Corporations can provide personal liability insurance for shareholders and owners as the corporation is a distinct legal entity. The actions of the corporation are attributed exclusively to the company. Corporations can also sell shares of stock. If you decide to take your business public, your business needs to be organised in a C Corporation. Since the corporation is an independent entity, the corporation retains the company’s losses and profits. If shareholders or owners are paid dividends, they will be taxed on their shares.
People’s main complaint about becoming a C Corp is the number of documents, filing fees and deadlines. C Corps must adopt bylaws that require annual shareholder and director meetings and record the minutes of meetings with corporate documents.
However, many businesses create C Corps because liability protections are beneficial. In addition, C Corp liability protections are advantageous. Also, be sure to improve your communication skills as it will matter a lot.
Conclusion
A holding company is a company that will have assets to manage and will not be able to purchase or sell items. If you’re a business with a new product idea and are looking to sell and expand your business, you’ll need to establish an LLC, a partnership or a private company.
Suppose you own a holding company or are looking to acquire various assets and you’re forming the company as a holding instead of the traditional business model. In that case, it is important to be aware of the tax consequences. If you want a robust solution to manage all the transaction calculations of your business, you can go with Legaltree.
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