A holding company is a parent business entity and usually that doesn’t have any commercial activity or any business operations. Its purpose, as the name implies, is to hold the controlling stock or membership interests in other operating companies called as Subsidiary. It’s typically positioned between the operating company and the shareholders, and it owns the operating company’s voting shares and assets, and controls its management and policies. A holding company is also sometimes called an ‘umbrella’ or parent company.
Holding companies are created to hold assets, such as intellectual property or trade secrets that are protected from the operation of the company which will create a smaller risk when it comes to litigation. Holding companies can also be used to reduce tax as well as provide important non-tax related benefits. Business owners are always looking for ways to protect their business’ assets and over the years a number of strategies have been developed to help them do so. One of the most effective is to divide the business into several business entities all owned and controlled by a single holding company.
The holding company’s management is responsible for deciding where to invest its money. The holding company can obtain the funds to make its investments by selling equity interests in itself or its subsidiaries or by borrowing. It can also earn revenue from payments it receives from its subsidiaries in the form of dividends, interest payments, rents, and payments for back-office functions it may provide.
Advantages of Holding Company
One of the most important benefit of creating holding company is to protect your business assets. In today’s world, every business operates in an uncertain environment. There is no surety about the success of business particularly in start-ups. So, it is beneficial if company create a holding company and carve out assets of the group in such holding company so that in case of bankruptcy like situation, creditors can’t claim on the assets of your holding company. Placing operating companies and the assets they use in separate entities provides a liability shield. The debts of each subsidiary belong to that subsidiary. A creditor of the subsidiary cannot reach the assets of the holding company or another subsidiary.
Low Tax Rate
Creating holding companies in off-shore jurisdiction having low rate of tax than operation company can save your lot of tax money that can be used to expand your business in initial years. For e.g: In Mauritius, Singapore, US corporate tax rates are far lower than in India.
Lower debt financing costs
A holding company that has financial strength can often obtain loans for a lower interest rate than its operating companies could themselves, particularly where the business in need of capital or business is a start-up or having more credit risk. The holding company can obtain the loan and distribute the funds to the subsidiary.
Flexibility in Management
A holding company can own businesses in a variety of unrelated industries. It doesn’t matter if the owners and managers of the holding company don’t know about those businesses because each subsidiary has its own management to run the day-to-day operations.
If you are having only one operating company for your 2-3 business verticals, it is difficult to get the funding from venture capitalist. Suppose, some investors has to invest only in one of the business vertical of your company then at that time it is beneficial if the company has one parent company and 2-3 separate subsidiaries so that each subsidiary attract investors. That is the reason why Google has formed Alphabet Inc., as its parent company and formed other subsidiaries for other business verticals.
How to set up parent/holding company overseas from India?
Since last 5 years, many business houses including start-ups went abroad and formed a parent company to lower their tax rates, to get funding from investors, to attract best talent of the industry, to attract international customers/clients etc. However, it is not always tax saving while forming parent company abroad but there are numerous other benefits also like the one listed above.
Indian regulatory environment allows Indian individual and companies to invest in an overseas corporations subject to the foreign exchange rules, ODI regulations, RBI approvals etc. Once you decide to set up a holding company, you must consider the following things:
To sum it up, a holding company is a business entity that does not produce any goods or services or conduct business operations. Instead, it owns and controls other companies. Holding companies and operating companies are used by businesses of all sizes and in all industries. Doing so has several advantages, including helping businesses mitigate the risk of losing assets to creditors.