Holding companies: the jargon explained

Holding companies are a big reason why many businesses have grown to the heights they have, as asset protection is key as you get bigger ...  photo by CC user M.O. Stevens on wikimedia

Many of the largest and most successful companies in the world are actually holding companies; however, most people are unaware of their structure, functioning and purpose.

A holding company can simply be defined as a company that does not have any business, activities or operations of its own. Instead, it owns assets in the form of shares or stocks in other corporations, limited partnerships or limited liability companies. A holding company has to own enough voting stock in these other subsidiary companies in order to control their policies and management.

Holding companies exist for the purpose of controlling other companies rather than producing their own goods or services. They do not have their own line of businesses, and most comprise different subsidiary companies operating in various industries. Additionally, holding companies also exist for the purpose of owning assets such as patents, trademarks, bonds, stocks, brand names, copyrights, real estate or virtually anything else that has value.

Once a holding company purchases the majority of the stocks in a certain company, that company becomes a subsidiary of the parent corporation. Wholly owned subsidiaries are those that are 100% owned by a holding company.

Why do business owners use holding companies?

A major corporation can structure itself as a holding company with several subsidiaries to protect its business interests. For instance, one subsidiary can own its real estate business; another can own its brand name and trademarks, while others operate independently in other fields as different franchises. By doing this, the parent corporation as well as each of the subsidiaries has limited legal and financial liabilities. If one of the subsidiaries goes bankrupt, the holding company itself will be protected from any losses. It would only lose the money it had invested in the unfortunate subsidiary and would experience a decline in net worth as a result. However, it would be safe from creditors or debtors seeking remuneration.

Another advantage of using a holding company is that the owners can limit their tax liability. They can do this by strategically basing some of the subsidiaries in jurisdictions or countries that have lower tax rates.

It is important to note that a holding company does not have a role in the day-to-day operations of any of its subsidiaries. Although the owners can hire and fire managers of individual subsidiaries at their discretion, their operations mainly consist of overseeing the companies they own. They passively invest, put their cash to work, evaluate their businesses’ performance, and look out for future prospects.

One of the largest holding companies in the world is the M1 Group, which has diversified investment interests across different sectors such as fashion, telecommunications, travel, and energy. Najib Mikati, VC – M1 Group, and his brother, Taha Mikati, founded the business almost four decades ago. Under their stewardship, the M1 Group has grown into a global holding company with assets worth billions today.

Many other businesses can emulate the example set by the M1 Group. Holding companies are quite profitable and are sound business investments. Those who have the requisite capital, patience and skills to set them up are sure to reap good returns in the long run.