Starting a Holding Company

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How to Start a Holding Company

A holding company is a parent company which may not produce and advertise goods and services of its own but has a sole purpose of owning authorized financial assets of other private companies to form a single entity.

The parent company operates by holding enough voting assets or stock to predominate subsidiary companies by influencing the management of the companies. Subsidiary companies can be corporations, Limited Liability Companies, Partnerships or sometimes government or state owned enterprises.

A holding company performs only investing, financing and managing activities other business activities such as purchasing of goods and services are carried out by the operating company.

Starting a Holding Company

Starting up a holding business is an easier task if you do it right, the steps and actions involved in starting a holding company are listed below;

Analyze your Business Needs

Reduction of taxes and assets security are the two most common benefits of a holding company. A holding company can provide assets security of highly valuable assets of subsidiary companies, you should consider the benefits you want to gain from in starting up a holding company. The holding company also loans assets to subsidiary companies to perform their operating functions.

Decide your Business Structure

Holding companies are mostly of two structures, a corporation or a Limited Liability Company (LLC). To provide assets with maximum security and for a more profitable taxation you may decide to form two Limited Liability Companies in different states, a holding company and a subsidiary company.

The holding company would not be held responsible for the drawbacks of the subsidiary companies if you register and operate them as two individual entities. A limited liability company is not a corporation as it is the combination of the flow through income of a sole proprietorship and the fixed liability of a corporation.

Register your Holding Company

Make sure your holding company is in conformity with all laws and tax regulation of setting up a holding company in your state. After deciding your business structure, you will need to register your business with your state by providing details such as; business name, agent’s name, and an article of incorporation or article of association which contains important business information such as the purpose and goals of the business and officers or agent’s names and address.

You’ll need a unique name for your business, most holding companies have ‘holding’ attached to their company names.

Finance your Business

The subsidiary or operating companies need affirmation from your holding company that they are not at risk. Financing of the holding company is very important, you may seek financing from partners or other sources as you will need funds to start up a holding company.

The valuables of subsidiary companies are stored with the holding company, you should create separate company accounts for the parent and subsidiary companies and store all funds to be used for your holding company in its account.

Keep Records of your Company

Records should be kept on business dealings between your holding company and its subsidiary companies, the records of your holding company should be kept aside from that of the subsidiary company, employees working under the subsidiary company should also be paid by it as the holding company would only concern itself with the general control of the subsidiary.

Employ the services of an accountant who would keep tabs on transactions between the holding company and subsidiary company. The accountant would manage the cash flow and present accounting records from time to time.

Importance of keeping records;

  • To supervise the development of your holding company.
  • To prepare income and expenses statement and balance sheet.
  • Monitor tax returns.
  • To explain items on cash returns.

Operating

Sales of goods and services is categorized as an operating activity; these activities should be carried out by subsidiary companies. Holding companies should not carry out operating activities as they will not be held for creditors of the companies. The only condition where a holding company would be held responsible for the debts of its subsidiary is when the two companies are so entwined.

When starting up a holding company, most of the cash in the holding and operating companies should be kept in the holding company. The subsidiary company can receive loans from the holding company when its needed, but the holding company should not be subjected to the drawbacks of the subsidiary company.

Taking up Subsidiary Companies

You may have decided to set up your holding company to hold the shares of your operating company, but if not, you should take up smaller upcoming companies.

As named, the main function of a holding company is to hold. You may decide to set up a holding company for your smaller companies for its added benefits. Plan your business properly, take down business strategies, goals and objectives as well as business information for a successful holding company.

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