Business owners structure their holdings in numerous ways to reduce risks, realize tax benefits, or diversify their portfolios. One example is a holding company, sometimes referred to as an umbrella or parent company.
Holding companies typically operate with a distinct board of directors, which is responsible for making critical decisions, overseeing subsidiary operations, and crafting overarching business strategies. Learn more about the types of holding companies and benefits of forming one.
What Is a Holding Company?
A holding company is a legal entity that exists to manage other businesses, which are its subsidiaries. Its business structure is typically a corporation or limited liability company (LLC).
Holding companies operate by possessing a controlling amount of stock in other companies, and often manage a portfolio of subsidiaries that provide its source of revenue and define profitability.
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Types of Holding Companies
Not every holding company holds the same level of ownership in its subsidiaries or manages business operations in the same way. The 4 main types of holding companies include:
- Pure holding companies: Pure holding businesses are built only to own and govern other businesses. These companies are not diversified in their business model, and therefore do not conduct any type of business other than acting as the owner of its subsidiaries.
- Mixed holding companies: Mixed holding companies have their own business model operating in addition to owning other businesses. For example, a large clothing brand that buys other brands and becomes their parent company would be a mixed holding company — both holding subsidiaries and running their core business.
- Immediate holding company: An immediate company is a holding company that is also owned by a holding company.
- Intermediate holding company: Similar to an immediate holding company, an intermediate holding company serves as a layer between subsidiaries and a parent company.
Advantages of Holding Companies
Holding companies offer significant benefits to their subsidiaries while enjoying financial safety from business failures. Advantages include:
- If a subsidiary goes under, the bankrupt company’s creditors legally can’t hold the parent company accountable.
- A holding company can base itself in the most financially beneficial location to take advantage of better regional taxation laws.
- A larger parent company helps subsidiaries obtain loans more easily and at a lower interest rate by providing downstream guarantees.
- Together, subsidiaries can negotiate optimal supply chain sourcing and combine the cost and management of business services like IT and HR.
- The parent company provides expert board direction to all subsidiaries.
How to Form a Holding Company
A pure holding company typically begins by filing the articles of incorporation to form an official business. From there, operating as a holding company relies on the acquisition of assets. The steps to forming a holding company include:
1. Assess Business Goals and Objectives
The first step is to assess your goals as a holding company. Establish objectives that will drive the company as well as parameters for how you’ll measure success. This crucial phase aids in shaping the identity and purpose of the holding company.
Create a comprehensive business plan that outlines the types of businesses you aim to invest in and lays out core management principles for effectively overseeing the acquired businesses.
2. Select a Business Structure
Next, determine which business structure is right for you. Most holding companies register either as a corporation or an LLC. Corporations are more rigid and regulated, while an LLC is more flexible in structure and management. However, it’s easier to transfer shares and ownership of a corporation.
Because the relationship between a holding company and its subsidiary can be complex, seek legal guidance to ensure both companies’ tax responsibilities and other business details are aligned.
3. Submit a Business Application
The final step is to write the documents of incorporation and submit a business application. You can form your business in any state, which provides the flexibility to file a business application in a state where tax laws are favorable for your holding company operations.
Examples of Holding Companies
Check out a couple of well-known examples of holding companies in action.
Alphabet and Google
Google is one of the biggest tech giants in the world, and often acquires brands with adjacent or interesting business models. In 2015, Google restructured itself as a subsidiary of Alphabet.
Under the Alphabet umbrella, Google operates alongside other subsidiaries, granting each entity greater autonomy while allowing Alphabet to oversee and coordinate its varied ventures across multiple industries.
JP Morgan Chase
JP Morgan Chase is one of the largest holding companies in the financial sector. They own a wide range of investment and banking brands, most notably both the JP Morgan and Chase banking franchises.
OnBoard Supports the World's Leading Boards
The most important aspect of a holding company is the board of directors. The governing board of a holding company influences decisions, policies, and board membership for all the company’s subsidiaries.
Managing cascading executive boards is complex, but also offers great potential advantages. The best way to manage a holding company is with a suite of tools that can streamline the board meeting process.
OnBoard supports some of the world’s leading boards, providing useful tools and cloud-based management for every aspect of board management, from agenda building and meeting analytics to secure messaging and task management. Meeting software like OnBoard includes powerful features to help both parent companies and subsidiaries work smarter and achieve their goals.
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About The Author
- Josh Palmer serves as OnBoard's Head of Content. An experienced content creator, his previous roles have spanned numerous industries including B2C and B2B home improvement, healthcare, and software-as-a-service (SaaS). An Indianapolis native and graduate of Indiana University, Palmer currently resides in Fishers, Ind.
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