An investment holding company is a company that does not engage in business activities itself, but instead owns stock in other companies that engage in business activities. An investment holding company may also own real estate, patents, trademarks, and other assets.
A company that is owned by an investment holding company is, generally, referred to as a subsidiary of that holding company. Subsidiaries generally manage and operate themselves, but are governed by the holding company.
Holding Company vs. Subsidiary
One of the main differences between a holding company and its subsidiaries is that the subsidiaries usually engage in business by selling products or marketing services and assume liability for those activities, while the holding company simply holds on to capital generated by its subsidiaries but does not engage in businesses or assumes any liability.
Perhaps, the best example of an investment holding company is Berkshire Hathaway, whose subsidiaries include, Benjamin Moore & Co., Fruit of the Loom, GEICO Auto Insurance, Dairy Queen, Kraft Heinz, Duracell, and many others. Berkshire Hathaway also owns a minority interest in companies like Delta Airlines, American Express, Apple, IBM, and Coca Cola.
Other well-known investment holding companies include:
- Wells Fargo
- JP Morgan Chase
- Bank of America
- General Electric
Investment Holding Company Benefits
An investment holding company may be owned by one or more individuals or entities. But, regardless of who and how it is owned, its purpose is always the same: to provide its owners with a way to mitigate risk and liability and to maximize profits while minimizing or deferring taxes.
Mitigating risk and liability
One of the main benefits of an investment holding company is its ability to mitigate risk and liability. If a subsidiary of an investment holding company goes bankrupt or has a judgment filed against it, only the assets of the subsidiary can be pursued to satisfy its creditors and claimants. However, the subsidiary's creditors and claimants cannot pursue any other assets owned by the investment holding company.
This makes the holding company/subsidiary structure ideal for isolating risks and limiting liability. For example, one of the investment holding company's subsidiaries may own its real estate, while another owns its trademarks and patents. This way, the ownership of one type of asset or investment will be insulated from the debts and liabilities arising out of ownership of another.
An investment holding company can also help protect the investors’ personal assets. This is because, with an investment holding company, the investments are technically owned by the holding company, not the investors themselves. The investors’ assets are consequently shielded from the debts and liabilities arising out of ownership of the investments.
Reduce or Defer Taxes
Incorporation is often used to help structure income to reduce or defer your tax burden. But, once your business gets sufficiently large, those goals can begin to conflict with one another.
If you want to mitigate risk, you don't want to keep excess capital in your business. For example, if your business made $250,000 in profit last year, you don't want to lose that money if it goes bankrupt this year.
Yet, you may not want to receive $250,000 in income right away either. Perhaps, you are thinking of reinvesting that money or setting up a retirement fund for yourself within the business. Either way, you are against paying personal income tax on a $250,000 dividend right now.
When you don’t want to keep extra money in your business, but you also don’t want to have to declare it as income either, one solution is to create a holding company and make your business its subsidiary.
Income distributed to your holding company as a dividend can be held there. You can then defer paying it out to yourself until you are ready to declare it as income.
Those who invest in a variety of different types of businesses usually own them under a holding company. This simplifies corporate and tax requirements and makes it easier to move funds between businesses.
This also allows for both the transfer of funds to out of a subsidiary, where it may be at risk, and for funds to be transferred from one business to other places where it may be needed, i.e. a new business venture.
For help with determining if you can benefit from creating an investment holding company in Texas, call an experienced and knowledgeable Texas business law attorney to arrange a consultation.