Key Takeaways
- Holding companies own other companies in whole or in part.
- This involves investment and ownership of stock and shares.
- You might enjoy tax advantages, operational benefits, and risk and liability protections if you operate a holding company.
- We’ll briefly explain how to set up this sort of company.
What Is a Holding Company?
Holding companies are businesses that own other companies — including wholly-owned subsidiaries and partially-owned portfolio companies.
Holding companies achieve ownership through stock and share holdings, allowing them to make important decisions for their businesses, sometimes without direct involvement in the operations of those businesses.
In return, subsidiaries and portfolio businesses gain access to capital and other benefits that come with being part of a larger organization.
What Is Controlling Interest?
Holding companies typically acquire voting power through stock ownership.
If a holding company attains sufficient voting power to make key decisions or exert influence over a firm, it’s said to have a controlling interest.
Controlling interest allows the holding company to make decisions for the subsidiary (like adding and removing board members, voting for mergers and acquisitions, determining budgets, and influencing strategies and operations.)
Majority vs. Minority Stake
Usually, controlling interest occurs when a holding company has a majority stake, or more than 50% share ownership, of a company.
However, a holding company can have a controlling interest even when it has a minority stake. This is possible with a dual-class share structure, a model in which one type of share grants more voting power than the other.
Furthermore, holding companies with a minority stake can have de facto control if shareholder factions are divided in their votes.
Two Types of Holding Company
There’s another key distinction: pure and mixed holding companies.
Pure Holding Companies
Pure holding companies don’t make products or provide commercial services themselves. They exist only to hold controlling interest in subsidiary companies.
Pure holding companies usually have a majority stake in subsidiaries — they don’t usually take partial ownership in portfolio firms.
Mixed Holding Companies
Mixed holding companies combine two roles: they manage their own core operations but also maintain ownership of other companies.
A mixed holding company may have majority stake in subsidiaries, minority stake in portfolio companies, or some combination of both. Sometimes, they’re directly involved in the operations of their subsidiary companies, though this varies.
While this distinction is widely recognized, it’s not always clearly defined — and it may be applied differently depending on jurisdiction and context.
How a Holding Company Can Help You
There are several benefits to operating a holding company.
- Asset protection: You can use a holding company to spread assets across different subsidiaries, protecting those assets from risk.
- Tax efficiency: You can potentially gain tax exemptions on capital gains and dividends by setting up a holding company. You might also be able to avoid double taxation across the holding company and its subsidiaries. Exact tax benefits depend on your jurisdiction and its tax laws.
- Liability separation: A holding company can isolate subsidiaries from risk, ensuring that one is protected when another faces financial or legal issues.
- Capital availability: Holding companies can raise and contribute capital to their subsidiaries while simultaneously benefiting from the financial performance of those same subsidiaries.
- Mergers and acquisitions: Holding companies can streamline acquisitions, mergers, and divestitures or sales.
- Management and strategy: Holding companies may become closely involved with their subsidiaries. Taking on a centralized role can help all companies act together and maintain a unified strategy and image.
Real-Life Examples
There are plenty of famous holding companies. Below, we’ll look at two successful holding companies with roots in the UK and EU.
Unilever PLC
Unilever is a multinational mixed holding company. It resulted from a merger between a Dutch margarine company and a British soap company in the 1920s.
In the decades that followed, Unilever acquired hundreds of other consumer brands. It now owns over 400 world-famous brands and household names, including Dove, Lipton, Hellmann’s, and Ben & Jerry’s.
Unilever unified its Netherlands arm (Unilever NV) into its British arm (Unilever PLC) in 2020. The company is now headquartered in London.
Unilever owes its success to a strong strategy: it operated in nearly 200 countries, focused on essential consumer products, and marketed aggressively.
London Stock Exchange Group (LSEG)
The London Stock Exchange Group (LSEG) owns and operates numerous subsidiaries, including its main entity, the London Stock Exchange.
LSEG succeeded by expanding beyond basic exchange operations. Among other deals, it acquired index provider FTSE Russell in 2015 and financial analytics firm Refinitiv in 2021, taking on many roles in the financial sector.
By offering assorted services and serving different regions, LSEG has benefited from many different streams of revenue.
It’s now one of the most important financial holding companies in the world.
How to Set Up a Holding Company
Planning to set up a holding company? Doing so takes time, effort, and money. Here’s what you should consider before you start.
- Think about your goals: Consider what you want to gain from operating a holding company and refer to the benefits outlined above.
- Decide on a pure or mixed structure and think about how closely you expect to be involved with companies that you own.
- Choose a jurisdiction: It’s natural to establish a company in your own jurisdiction, but you might also consider regions known for their favorable laws, such as the Netherlands or Singapore.
- Incorporate: File paperwork to register your firm, create corporate governance documents, and establish a legal structure.
- Secure capital and fund the company: Starting a holding company is no small task. Be sure you have sufficient capital to support acquisitions and mergers. Or, if your holding company will support your own existing businesses, be sure you can support it on an ongoing basis.
- Manage businesses: Once you’ve established a holding company, you’ll need to establish subsidiaries or take ownership in other companies.
Payset Can Help With Cross-Border Payments for Your Holding Company
Holding companies can have a complex financial structure and a constant flow of funds, both between subsidiaries and with the world at large.
You’ll need a financial account for your daily transaction needs — and Payset can help. With rapid service and competitive rates, we provide an alternative to traditional banks that will get your money where it needs to go.
