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Why You Should Consider Using a Holding Company

by | Apr 5, 2023 | Business Law

If you own multiple businesses or your business owns different types of valuable assets, like real estate, equipment, or vehicles, you may want to consider creating a holding company. A holding company is a business entity that owns and controls assets or other companies. The holding company can be a parent to multiple other companies which are its subsidiaries. A holding company can also be a sister company to your operating company. Holding companies do not sell or manufacture goods, offer services, or conduct any other business operations. An operating company, on the other hand, will conduct business operations. Holding companies can be useful in limiting liability and maintaining centralized control.

An operating company can limit its lability by having a separate holding company own the assets needed for its operations. This is especially helpful when the operating company’s business operations require it to own a variety of assets. For example, if your business operations require a piece of equipment, the holding company would own it and then lease it to the operating company. Because the holding company is the owner of the asset, it is shielded from any of the operating company’s creditors and court judgments against it. In other words, creditors of the operating company cannot take the assets of the holding company, if appropriate steps are taken. Additionally, the assets would be protected in the event that the operating company goes bankrupt. A business lawyer can help identify if you are prepared for this scenario.

Utilizing a holding parent company is also helpful in maintaining central control over multiple subsidiaries and their assets and operations. Although each subsidiary could have its own management to operate its daily business, the holding company may be able to enter multi-entity contracts that create economies of scale. The holding company can make decisions on who will manage the subsidiaries, how they are managed, and even whether to dissolve or merge them.

It is important to keep in mind that each subsidiary will have to be managed as an individual entity. This means that your holding company and subsidiaries will have separate bank accounts and financial statements. Making sure all the financial records are separate can sometimes make using a holding company more complex. Additionally, each corporation will have to keep separate minutes. These requirements can sound overwhelming, but as long as the management of both the holding company and the subsidiaries understand their responsibilities, utilizing a holding company can greatly benefit your business. To learn more and ensure that your holding company and subsidiaries are properly structured, consult with an experienced business lawyer.

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