What Is a Holding Company and How Does It Work?

A holding company is primarily a legal and financial structure that owns controlling interests in other companies, while a conglomerate typically implies operational involvement across diverse business lines. Many holding companies are conglomerates, but not all conglomerates organize themselves as pure holding companies. A holding company is a parent company that owns stock and controls interests in other companies without being active in their daily operations. An LLC or corporation holding company ensures excellent liability protection, allowing for lower overhead costs and fewer taxes. Holding companies is a popular way of holding and protecting a wide range of assets, including intangible assets or IP. Holdcos can leverage these assets to raise capital for business expansion or further acquisitions.

Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb. The holding company may be very involved in the management of the subsidiary’s budget and operations, while others will only intervene if there are issues. The budget will be set before the start of the fiscal year and will state what is needed for investing, purchasing, and other budgetary concerns. By using a budget, this will allow the holding company to see which subsidiary is performing as expected. If there is excess cash, the holding company will decide whether they will keep it in the subsidiary or move it. A well-known holding company is Berkshire Hathaway Inc. (BRK.A), led by the legendary investor Warren Buffett.

Strategic Advantages of Holding Companies

If one company faces financial difficulties or legal challenges, the other subsidiaries and the parent company remain protected. The management role of a holding company typically involves making high-level decisions about the direction and strategy of its subsidiaries. This includes appointing board members, approving budgets, and ensuring that each subsidiary operates in line with the overall objectives of the holding company. The holding company provides guidance and oversight through its control functions while allowing the subsidiaries to focus on their core operations. Its primary function is to control the operations of its subsidiaries by owning a significant portion of their shares. This structure enables the holding company to influence major business decisions, such as strategy, mergers, and financial management, while leaving the day-to-day operations to the subsidiaries.

The Future of ALM: The Rise of Risk-Adjusted Business Planning

To set up a holding company, you must choose a legal structure (LLC or corporation), file the necessary incorporation documents, and register with government authorities.
Appointing chosen directors for the subsidiaries to ensure alignment with the parent company’s interests.5.
The platform automates routine tasks like document formatting, validation, and data entry.
A holding company is a type of business entity that owns a controlling interest in other companies, also known as subsidiaries.
One of the benefits of the holding company strategy is that the businesses that are most at risk are separated from the businesses that are less at risk.
Many holding companies don’t manufacture anything, sell any products or services, or conduct any other business operations.

A holding company can also redirect profits from cash-rich subsidiaries to fund growth opportunities in other units or acquire new businesses, which is less costly than obtaining outside funding. If you provide all necessary documents per incorporation regulations, your application will be reviewed, and if it’s satisfactory, it will be approved. However, if more information is required, especially for offshore business owners, be ready to provide them for verification. Owning 50% or more of the voting rights in a company guarantees greater control, but a parent company with only 10% of the stock controls the decision-making process. The 2025 regulatory environment has accelerated this transformation, with the SEC designating AI as a disclosure priority requiring specific risk documentation across corporate structures.

A holding company is designed as a separate legal entity that owns other companies, referred to as subsidiaries or operating companies.
Lowered tax rates on long-term capital gains and qualified dividends from other corporations where the holding company has more than a 20% ownership stake.
The relationship between a holding company and its subsidiaries is generally one of ownership and control.

Advantages of a Holding Company

Now, let’s say that our entrepreneur wants to buy a fast-food restaurant and a thoroughbred horse farm.

What are the key tax advantages of establishing a holding company structure?

Understanding the role and benefits of holding companies offers valuable insights for both institutional investors and individuals interested in finance and investment. As seen through examples like Berkshire Hathaway, these business structures offer various advantages, from limited liability protection to tax savings and centralized management. However, it is essential to consider their potential downsides as well, such as reduced transparency and ethical concerns, to make informed decisions and mitigate risks. Establishing a holding company is an essential step for entrepreneurs and investors seeking to manage multiple businesses while limiting their financial risk and liability.

Wholly-owned subsidiaries facing difficulties cannot easily raise external capital, potentially requiring holding company financial support to maintain operations. Holding companies can leverage their consolidated asset base Best gold etfs and diversified revenue streams to secure better financing terms for subsidiary operations. Banks and investors often view diversified holding company structures as lower risk than individual operating companies, enabling access to capital at more favorable rates. This structure offers dual benefits, providing asset protection and income generation.

Doing so has several advantages, including helping businesses mitigate the risk of losing assets to creditors. One of the primary reasons holding companies are popular is for tax planning purposes. By creating a structure that separates ownership and control through subsidiaries, businesses can optimize their tax liabilities. Strategies to minimize taxes may include basing subsidiaries in low-tax jurisdictions and implementing downstream guarantees, where the parent company assures the lender of a subsidiary’s loan repayment. Operating companies are those that engage in active business operations, whereas holding companies exist primarily to control other companies and manage their policies. For instance, a company might set up a holding company and create subsidiaries for various business lines or industries to take advantage of tax benefits and geographical differences in regulations.

Control assets for less money

There are different types of holding companies, including pure, mixed, immediate, and intermediate entities. Pure holding companies focus solely on owning other firms without engaging in any business activities, while mixed holding companies have their own operational businesses alongside managing subsidiaries. Immediate holding companies are owned by another entity, and intermediate holding companies are subsidiaries of a larger corporation. Its primary purpose centres around owning and exercising control over shares in other companies, commonly referred to as subsidiaries.

Instead, they own the entities that do all of that and collect dividends, interest, and capital appreciation along the way. Think of them as the CEOs of a business empire—minus the need to actually get their hands dirty. That is the agent required by statute to be appointed by a corporation, LLC, or other business entity to receive service of process and official communications. An important decision is whether to select an individual — like an employee, owner or lawyer — or a professional registered agent. A professional registered agent is a service company that provides the registered agent to many business entities and has expertise in doing so.

Service centralization particularly benefits corporate groups with subsidiaries in similar industries or geographic regions where service needs overlap significantly. The holding company bills subsidiaries for services at market rates, generating profit margins while providing professional services that individual subsidiaries might struggle to afford independently. As noted, a holding company does not have to own all of the subsidiaries’ ownership interests. Sometimes conflicts arise when the interests of the minority owners are different from those of the holding company. Say our entrepreneurs’ horse farm is struggling and has been unable to pay its trainer and veterinarian. They can sue and reach the assets of the subsidiary that owns the horse farm but not the assets of the subsidiaries that own the restaurant and apartment building, or the LLC holding company.

It owns substantial intellectual property through its subsidiaries and is entirely driven by its earnings, cash flows, and assets. Over 85% of its total revenue in 2018 was generated from its primary business, i.e., advertising. Holding companies make money through dividends from subsidiaries, asset appreciation, interest from loans, and fees for managerial services. Businesses that are 100% owned by a holding company are called “wholly owned subsidiaries,” while holding companies may also own smaller but controlling interests in other subsidiaries. As investors and creditors, finding an accurate picture of the overall financial health of a holding company may be a challenge.