What is a holding company and what does it do?

If you know Warren Buffett, one of the richest men in the world, you probably also know Berkshire Hathaway (BRK.B), the company of which he is the CEO. Buffett is a well known investor, but what is he currently doing in the company he runs?

Well, they invest. That's all. Buffett began investing in Berkshire Hathaway in the 1960s, when she was still a textile company. While he was buying more shares and he was taking control of it, he left the textile company and started using it to invest in many still successful companies (See & # 39; 39; s Candy, GEICO, Coca-Cola (KO), etc.). and these profits have been used for other investments, creating a massive conglomerate.

That makes Berkshire Hathaway what's called a "holding company". Holding companies, which are becoming more common, belong to all kinds of industries and can also be useful to individuals and their personal assets.

What is a holding company?

A holding company is a company with investments and / or shares in other small companies, sometimes giving them a majority stake in these companies.

Holding companies exist in almost every industry you can imagine, and you may be surprised to know that a well-known brand is a subsidiary of a holding company, as opposed to a standalone brand. You may not have heard of Restaurant Brands International (QSR), but you probably know the two companies that unified it to create it as a holding company – Burger King and Tim Horton's – as well as the fast food chain they bought. in 2017, Popeyes Louisiana Kitchen.

The concept of "holding company" can be quite broad. A company like Berkshire Hathaway, which invests entirely in businesses and industries, is a holding company. Parent companies, such as Macy's, Inc. (M), which includes its subsidiaries Macy's and Bloomingdale, would also be considered holding companies since their sole purpose is to hold large holdings. companies in the department store sector.

This is the particularity of holding companies. For the most part, their existence consists of owning other companies or their actions. Highly performing and profitable businesses will be found mostly in most small businesses, which will enable them to play an important role in business decisions and to recruit general managers and directors for their subsidiaries (although holding companies generally very little in terms of actual operation). for them).

Holding companies do not operate any businesses. There may be extra work to do if your assets are in the majority or 100% in a business. But portfolio companies can not only hold a minority of a company's shares, but also patents, real estate, patents, hedge funds and so much more. Regardless of the investment, it is up to the holding company to oversee it while the assets work by themselves.

Holding companies always have a CEO, as well as a board of directors, to help make decisions regarding the management of current investments / companies and the opportunity to invest in them. new.

What is a personal holding company?

A personal holding company is a corporation created to hold shares of other companies; Unlike a holding company with enough stock to have an impact on the company's business decisions, no PHC service is offered. Holding companies are generally structured either as a C corporation or as a limited liability company (LLC). A personal holding company is structured as a C.

Many forms of criteria must be met in order to qualify as a personal holding company. Let's start with the income criteria. To qualify as SSP, at least 60% of its adjusted gross income (AGI) comes from its investments. This may include dividends, interest and, depending on the type of investment you have, rent or royalties.

The ownership structure also determines whether the corporation can be considered a personal holding company. During the last six months of a taxation year, more than 50% of the shares of the company must belong to five people or less.

SSPs are taxed differently from other companies. A specific tax is levied on the undistributed income of holding companies, which is taxed at 20%.

Creation of a holding company

Have you taken into account the needs of your business, whether it's about your business or your investments, and have you decided to create a holding company? If you are seriously considering starting one after your research, you must first determine whether you want to create a company or an LLC. Another option is to create two limited liability companies: one for the operation and one for the operation. This is done to protect your assets; If all goes as planned, the holding company will not be legally responsible for the operating company and its debts. Consult a lawyer in abundance while doing this.

Before you start a holding company, you need to make sure that you have a fairly concrete business plan and have fully considered a number of options. Do you envision that your investments come exclusively from a single sector and what sector of activity if any? Do you have the capital needed to create a holding company and make the investments needed to succeed? There is a lot to consider.

Holding Holding Advantages and disadvantages

The main benefit of a holding company is probably its potential for savings resulting from bankruptcy or excessive losses in the event of bankruptcy of a subsidiary. If this happens, the holding companies are not held liable and the creditors can not take it to the holding company to try to get assets.

In addition, there are cases where holding companies are still allowed to sell products and services if you are still interested in being a businessman. If 60% of your AGI comes from investments (the same amount that can allow a company to be considered an SSP), you are still a holding company and can still sell products if you wish.

The creation of a holding company has drawbacks. It can easily be used to operate its subsidiaries if it has sufficient influence to influence business decisions. And many portfolio companies are not completely transparent to their shareholders, which means that many decisions may not be taken into account.