Key Takeaways
- Holding companies are corporations that hold assets and subsidiaries.
- Operating companies are standard companies with day-to-day activities.
- Knowing the difference can help you take advantage of opportunities, especially the tax and asset protection benefits holding companies enjoy.
If you run any sort of business, it most likely functions as an operating company. You and your team carry out the company’s day-to-day operations, from handling products and services to managing revenue and employees.
But there’s another type of company: holding companies, which manage assets behind the scenes and influence their subsidiaries’ most important decisions.
Here are the key differences you should know if you own a business.
What Is a Holding Company?
A holding company is an entity that manages held assets or subsidiary companies. This can include many types of assets, including:
- Stock and shares of subsidiaries, often providing controlling interest or dominant voting rights to the holding company.
- Wholly owned subsidiaries that are 100% controlled by the holding company.
- Intellectual property, such as patents, trademarks, and copyrights.
- Real estate assets, including physical property and buildings.
- Investments and financial assets, such as stocks, bonds, and mutual funds.
- Cash and cash equivalents.
- Loans and receivables owed to the holding company.
Unlike other companies, holding companies generally have no day-to-day operations. They usually don’t manufacture or sell goods or offer services, and they have minimal personnel. They exist solely or primarily to manage other assets.
What Is an Operating Company?
Operating companies are what you probably think of as a typical company.
These companies have extensive daily operations. They produce and sell goods and services, generate revenue, and greatly depend on employees to carry out business.
This is an extremely broad category that covers most business-to-customer (B2C) and business-to-business (B2B) companies, including but not limited to retail outlets, e-commerce companies, manufacturers, service providers, and finance companies.
Note that operating companies often exist as subsidiaries of holding companies. This allows operating companies to maintain control over daily activities while surrendering control over broader strategy to a shareholder group or a board of directors.
Why Separate Assets With a Holding Company?
Using a holding company to separate company assets can provide numerous benefits, especially around asset protection and tax planning. Let’s look at these now.
Tax Planning and Deferral
Setting up a holding company can help your company minimize taxes. A properly structured holding company in the right jurisdiction may allow you to:
- Defer taxes on earnings and capital gains, allowing some tax payments to be postponed until distributions are made to shareholders. This strategy can help you reinvest company wealth and pursue growth aggressively.
- Claim tax deductions on management expenses, interest, and professional fees related to the assets held by the company.
- Split taxes between eligible shareholders (such as family members, trusts, or corporate entities) who pay tax at lower rates.
- Operate in foreign countries with favorable tax regimes, benefiting from double taxation treaties, tax rebates, exemptions, and tax-free zones.
By contrast, operating companies are regularly subject to strict and costly tax rules on each of the above points. They may also need to operate directly from high-commerce regions and major countries rather than locations with favorable tax regimes.
Asset Protection and Risk Segmentation
Companies can legally isolate their assets by moving them from an operating company to a holding company. This practice can shield assets from bankruptcy, lawsuits, and creditor claims by limiting claims to a single subsidiary’s assets.
Alternatively, if the holding company only holds assets, it can manage risk for those assets on behalf of an operating company.
Note that holding companies assume direct risk for assets and subsidiaries. Establishing one doesn’t entirely eliminate liability or risk exposure.
Operational and Administrative Efficiency
Setting up a holding company can simplify your operations by unifying reporting, financing, compliance, and other operational duties. This is especially true if your aim is to bring together several corporate subsidiaries under one umbrella.
Board Management and Voting
Holding companies often own a controlling interest in their subsidiaries — either a majority of shares or dual-class shares with greater voting power.
Controlling interest gives a holding company the power to dictate key actions that impact all subsidiaries, such as mergers, acquisitions, and other major decisions. Often, this happens through a board of directors elected by shareholders.
This centralization of power ensures that subsidiaries operate in unison, but it also means that subsidiaries may have limited input on critical decisions.
Financial Advantages
Thanks to their combined strength, larger holding companies may see financial advantages compared to smaller operating companies.
When it comes to internal funding, holding companies can sell assets and reallocate resources between subsidiaries, prioritizing the entities that need funds the most.
A large holding company may also find it easier to get external funding. It may attract investors who would be less interested in individual subsidiaries, or it may build a stronger credit profile that qualifies for larger loans and better credit terms.
Holding Company Structures
Holding company structures can be far more complex than other types, especially when it comes to regulatory compliance. Here are some key legal considerations.
Keeping Assets and Operations Separate
Holding companies must prevent commingling of assets by ensuring their subsidiaries and their assets are managed separately.
This isn’t just an obligation. It benefits you by providing legal separation and isolating risk and liability between entities. Plus, it ensures that business dealings like contracts and loans are always associated with the proper subsidiary.
Holding companies must also maintain proper records for each subsidiary, especially concerning financial transactions, corporate minutes, tax filings, and compliance.
Incorporating as a Legal Entity
Holding companies and operating companies can each operate under standard legal structures. That includes operating as an LLC, C Corp, or S Corp in the U.S., an Ltd or PLC in the UK, and other legal structures throughout Europe.
But if you want to take advantage of a specific region’s legal structure, it’s typically easier if you’re establishing a holding company. Again, that’s because operating companies usually need to be based where they do business.
Be aware that some jurisdictions impose greater requirements on holding companies, such as stricter rules about reporting to shareholders and regulators.
Holding Companies in the Real World
One way to familiarize yourself with how holding companies work is to look at examples in the real world. Let’s examine some of the best-known examples.
Tech Firms
Big tech companies set up holding companies frequently. Meta, for example, owns Facebook, Instagram, WhatsApp, Threads, Oculus, and other products. Alphabet similarly owns Google, YouTube, Waymo, and other companies.
This doesn’t just separate assets and companies — it also helps build brands that the public and potential talent can instantly recognize.
Family Offices
Family offices aren’t always considered holding companies, but they are similar. These privately held entities manage wealth, investments, and assets for high-net-worth individuals and their families. One example is Bezos Expeditions, which oversees the investments, startups, and real estate assets of Amazon founder Jeff Bezos.
Real Estate
Real estate holding companies own and manage assets such as commercial buildings, residential complexes, hotels, and other properties.
A leading example is Simon Property Group, one of the largest real estate holding companies in the United States. It owns and operates iconic shopping malls like The Galleria in Houston and King of Prussia Mall in Pennsylvania. This strategy allows for the efficient management of a huge number of assets in the U.S. and globally.
Financial Holding Companies
Financial holding companies manage institutions like banks, insurance companies, brokerages, investment firms, and other similar companies. JPMorgan Chase and Bank of America have become financial giants through this approach.
Mixed Holding Companies
Mixed holding companies are a unique type of holding company. They don’t just manage assets — they’re also involved in standard business operations, blurring the line between holding companies and operating companies.
One example is Comcast, which owns NBCUniversal, Sky Group, and Xfinity Cable. It’s involved in those subsidiaries’ operations alongside its own.
When Do You Need a Holding Company?
You don’t always need to establish a holding company, but if your business has achieved significant growth or substantial value, doing so can make things easier.
You’ll need to consider whether you have assets in need of protection, whether the potential tax and operational advantages are truly available in your situation, and whether the possible benefits will outweigh the challenges.
Note that there usually is no legal requirement to set up a holding company, and small companies may find it hard to benefit from this structure.
It’s your choice as to whether creating a holding company is right for you, and Payset can help with your payment needs regardless.
Learn how we serve holding companies and other firms — or request an account.
