Some of the most financially successful enterprises on Earth are holding companies. This reality seems counterintuitive, as one would assume that the nature of a holding company is to serve simply as a legal and financial tool for a larger corporation. A business-related tool should, by its very purpose, not be successful in its own right. But such assumptions are incorrect. Far from merely serving as helpful extensions of larger corporations, holding companies often serve as powerful and consequential forces in and of themselves.
What Is a Holding Company?
Traditionally, companies have served as business enterprises focused on providing goods and/or services to either the general public, other businesses or another specialized client/customer base. By contrast, a holding company does not conduct any active business in these traditional ways. Instead, it serves as a parent company designed primarily to own equity and/or other assets in one or more other companies. In general, holding companies own enough equity in other companies that they retain the voting power to either control or significantly influence policies and management in these other enterprises.
The Purpose and Potential Benefits of a Holding Company
Because a holding company does not produce goods or services, it derives its power, purpose and profits from its controlling interests in other companies. There are also alternative holding company structures which exist to own various forms of intellectual property, real estate, non-controlling equity and other assets. In essence, the purpose of a holding company is to own shares of other companies, the legal rights to ideas, real estate or other assets that may appreciate in such a way that they ultimately turn a profit for that holding enterprise.
It is worth noting that many large corporations opt to use a holding company structure in order to insulate their businesses from losses and judgments. For example, if a company is compelled to file for bankruptcy but the controlling ownership interest in that company is protected by a holding enterprise, that holding company will experience financial challenges, but will remain insulated from creditors and collections by the courts in a way that the larger corporation’s interests would ordinarily not be safeguarded. As an entity distinct from the larger corporation, it is not tied to that larger corporation’s losses, debts and legal judgments.
Investment and Business Assistance Is Available
Understanding how a holding company works is critical in keeping your larger corporation’s interests in mind. If you have questions about forming a business or meeting the financial and legal needs of an established enterprise, please consider reaching out to us. Our legal team has extensive experience and will be happy to assist you once we learn about your unique financial and/or business-related needs.