What Is an Investment Holding Company?
A holding company is a company that owns voting shares in other companies. The holding company does not conduct any business of its own, rather is purpose is to manage the assets of its subsidiaries. In addition to owning other companies, a holding company may own other assets, as well. These assets might include: bonds, hedge funds, private equity funds, real estate, trademarks, patents, copyrights, and more.
An investment holding company specifically refers to a company that owns investments. These investments might include real estate or other long-term investments that derive income, such as rental income, dividends, or interest. The principal activity of the company is holding these investments. Regardless of not conducting any business of their own, a holding company still has a CEO and board of directors, which guide decision-making and manage the company’s investments.
Investment Holding Company Benefits
There are several appealing advantages that the holding company structure can offer you. One of the most important is that a holding company can act as a potential shield from bankruptcy or other excessive loss should one of the subsidiary companies go bankrupt. In this event, the holding company is not held liable and creditors do not have the ability to go after any of its assets.
The holding company structure can also act as a vehicle for investors. It is often most efficient to hold disparate investments via a single LLC, Corporation or S-Corporation. By doing this, it allows you to simplify your taxes through use of consolidated filing and can provide other benefits, as well.
How to Start a Holding Company
If you are interested in forming a holding company for your investments, you will have a few choices to make as you get started. One of the first will be whether you want to create a corporation or an LLC. There is also the option of creating two LLCs, in which one is used for holding and the other is used for operations.
Your holding company is essentially used as a vehicle for an individual or partners to make investments while gaining an extra layer of liability protection. In forming your holding company, here are the steps you will want to take in both strategy and formation:
Form Your Investment Strategy.
If you’re not already certain, you will want to determine which asset type your holding company is going to hold. Holding companies can invest in a variety of assets, such as stocks, bonds, real estate, and more. In addition to this, you will want to develop a plan for a balanced portfolio. Balancing your risk is a smart investment move.
Choose a Structure For Your Company.
There are a few different factors that might influence your choice here. Generally, the type of investment that your holding company is going to hold should play a big part in your decision. For example, if you plan on holding highly-speculative or highly-leveraged investments, be sure to consider an LLC or S-corporation, both of which provide liability protection.
Register Your Company With the State.
The process may vary a bit from state to state but generally you will need to submit your registration documents to your state’s secretary of state office. Additionally, if you need any guidance in registering your company, they can inform you of the appropriate documents and criteria required for registration. Also, be sure to check for any licensing requirements specific to your state that apply to investment holding companies.
Procure Start-Up Funds.
The amount of initial financing your holding company needs will depend on your type of investments, as well as your investment goals. For example, holding companies that will focus primarily on real estate may require many large mortgages from a single lender. If your holding company is going to focus on stocks, you may not require quite as much initial funding as you can continue to grow with a solid strategy.
Build Your Investment Portfolio.
Once you have your start-up capital, you can begin purchasing your holding company assets. Remember to adhere to your devised strategy and asset allocation plan. Once you have made your initial investments, your holding company is officially running. This is just the beginning, of course. Be sure to monitor your assets and amend your strategy as you grow and can take on larger holdings.