How to open a holding company: what it is, constitution, types and costs

Holding: what it is and how it works

A holding company is a type of divisional organization that exists primarily to own and control other companies . Unlike traditional companies that generate revenues through the production and marketing of goods, a holding company generates profits through ownership of assets . Holding companies are parent companies that retain the ability to control the companies they own. This means they can oversee all management decisions and control the policies of these companies, most often without actively participating in their management.

Assets

In addition to companies, a holding company may own various types of assets, such as stocks, bonds, mutual funds, real estate, gold, patents, and copyrights .

The role of subsidiaries

Companies under the ownership of a holding company are subsidiaries , operating as a separate legal entity from the parent company, with their own assets, liabilities and management structure. This means they are responsible for their own debt, protecting the parent company from liability and minimizing risk. Subsidiary companies can be used by the holding company for:

Expand into new markets You can open branches in different countries or regions to access new markets and customers.
Diversify operations Subsidiaries can be created to operate in different sectors, allowing the holding company to diversify its activities and to spread risks.
Acquiring Expertise Subsidiaries can be acquired for their expertise in a particular industry, allowing the holding company to access specialized skills and knowledge.
Access to capital Branches can be used to raise capital independently of the parent company, reducing the risk to the holding company.
Protecting Assets Branches can be used to protect holding company assets from legal and financial liability.

Advantages of a holding company

A holding company can offer a number of benefits, including limited liability, consolidated financial reporting, tax efficiency, efficient use of resources, risk management and improved access to capital. These benefits can help group growth, diversification and resilience.

Limited responsability

A holding company offers its shareholders limited liability protection . This means that shareholders are only liable for the amount of money they have invested in the company and are not personally liable for the debts or liabilities of subsidiaries. If a branch is in debt, the creditor will not be able to access the assets of the holding company or another branch.

Tax efficiency

The structure of a holding company can offer tax advantages, such as the ability to offset profits and losses between subsidiaries and take advantage of tax incentives in different countries.

Efficient use of resources

A holding company can optimize the use of resources, such as skills, technology and capital, by distributing them among subsidiaries according to their specific needs.

Risk management

A holding company can contribute to risk management by diversifying its portfolio of subsidiaries across different sectors, markets and geographies. This can help reduce the impact of adverse events on the overall performance of the group.

Consolidated financial reporting

A holding company can consolidate the financial relationships of its subsidiaries , providing a comprehensive view of the group’s overall performance. This can help identify areas of strength and weakness and support decision making for future investments or divestments. Furthermore, consolidating subsidiaries’ financial statements can help lenders and investors assess the financial health of the group as a whole, rather than the performance of individual subsidiaries. This offers better opportunities when trying to access capital.

Easier access to capital and lower financing costs of debt

A holding company can provide easier access to capital and can have lower debt financing costs for itself and its subsidiaries due to an improved reputation, diversification, scale, access to resources, financial strength and consolidated financial reporting. This can make it a more attractive investment option for lenders and investors, enabling them to negotiate better terms for loans or investments.

Disadvantages

Branch autonomy

Holding companies usually allow their subsidiaries to operate with a high degree of autonomy . Therefore, subsidiaries and minority shareholders may experience a reduction in the level of control they exercise over their companies.

The competition

The divisional structure of a holding company can encourage competition between subsidiaries for company-wide resources.

Corporate image and brand recognition

Since holding companies usually have a diverse portfolio of subsidiaries operating in different industries and markets, it is often difficult to maintain a consistent corporate image . Furthermore, in some cases, the brands of subsidiaries may be more recognizable than the brand of the holding company itself. This can make it difficult for the holding company to establish a consistent corporate image across its portfolio of subsidiaries , especially if they have different branding and marketing strategies.

Differences between standard companies and holding companies

A holding company and a standard company have some key differences in terms of advantages and disadvantages, as indicated in the table below:

	Holding company	Standard company
Legal structure	It owns the majority of stock in one or more subsidiaries, providing limited liability protection to its shareholders.	Independent legal entity operating in a specific sector or market and which is responsible for its debts and liabilities.
Diversification	Designed to diversify its businesses by investing in multiple subsidiaries operating in different industries, markets and geographies. This ensures greater flexibility and resilience to the group as a whole.	It typically focuses on a specific product, service, or market.
Consolidated financial information	It can consolidate the financial relationships of its subsidiaries, providing a complete view of the overall performance of the group. This can help identify areas of strength and weakness and support decision making for future investments or divestments.	Responsible for own financial reporting and does not have access to the same level of consolidated information
Tax efficiency	The structure of a holding company can offer tax advantages, such as the ability to offset profits and losses between subsidiaries, and thus benefit from tax incentives in different countries.	Subject to the tax laws of the country or region in which it operates.
Access to capital	It can provide easier access to capital for its subsidiaries by leveraging its reputation, financial strength and existing relationships with lenders or investors.

In summary, the key benefits of a holding company include limited liability protection, diversification, consolidated financial reporting, tax efficiency, and improved access to capital. These benefits are typically not available to a standard company, which is responsible for its debts and liabilities and operates in a specific industry or market.

Hybrid company

Technically, a holding company can also operate as a standard corporation . However, if a holding company were to undertake operational activities, it would no longer be considered a pure holding company, but rather a hybrid company combining the characteristics of a holding company and a standard company. In this case, the holding company would have to comply with the same regulations and requirements as a standard corporation , including those relating to taxation and reporting. In this article we will only deal marginally with this possibility, since most of the advantages of this type of corporate structure would be lost.

How to open a holding company

1. Analysis of the jurisdiction and choice of the corporate structure

Bearing in mind that holding companies do not directly participate in operational activities, it is possible to choose the state in which to establish the company’s headquarters from a wide range of jurisdictions around the world . For this reason, when starting a holding company, it is important to thoroughly analyze the opportunities offered by the different jurisdictions and the types of incorporation. In particular:

Taxation The tax laws and regulations of a jurisdiction can have a significant impact on the profitability of a holding company. Some jurisdictions offer more favorable tax rates and incentives for holding companies, such as exemptions from certain taxes or tax deductions for certain expenses.
Legal and regulatory environment The legal and regulatory environment of a jurisdiction can affect the ease of doing business and the level of investor protection. Consider factors such as the stability of the legal system, the strength of contract law, and the level of government intervention in business activities.
Regulatory Requirements Some jurisdictions have stringent regulatory regimes for holding companies, while others may have more relaxed requirements.
Liability protection In some jurisdictions the liability protection of holding company shareholders is limited, while in others it is more robust.
Governance structure The governance structure of holding companies can also vary across jurisdictions. For example, some jurisdictions require a holding company to have a separate board of directors from those of its subsidiaries, while others allow the same persons to serve as directors for both the holding company and its subsidiaries.
Ease of Formation The ease of forming a holding company can vary by jurisdiction. Some jurisdictions have simple and streamlined procedures for setting up a holding company, while others can be time consuming and costly.
Political Stability The political stability of a jurisdiction can affect the level of risk associated with investing in a holding company. Consider factors such as the level of political unrest, the likelihood of government intervention in business activities, and the overall stability of the government.

If the holding is configured as a hybrid, it will also be necessary to evaluate the following variables, which are essentially aimed at those who want to open a limited liability company.

Availability of skilled labor The availability of skilled labor in a jurisdiction can impact a holding company’s ability to attract and retain talented professionals. Consider factors such as the quality of education and training programs, the level of wages and benefits, and the general business climate.
Infrastructure A jurisdiction’s infrastructure can affect the ease of doing business and a holding company’s ability to operate effectively. Consider factors such as the quality of transportation networks, the availability of reliable services, and the quality of communication networks.
Cost of doing business The cost of doing business in a jurisdiction can affect the profitability of a holding company. Consider factors such as the cost of labour, real estate and utilities, as well as the overall cost of living in the area.

Types of incorporation

A holding company can be structured using different types of incorporation and there is no specific type of company that must be used for a holding company . The choice of type of incorporation depends on various factors, such as the nature of the business, tax and liability implications, and the regulatory requirements of the jurisdiction in which the holding company is incorporated. Some commonly used types of formation for holding companies are corporations, limited liability companies (LLCs) , partnerships , and trusts . Each of these types of incorporation has advantages and disadvantages, and the choice of type of incorporation will depend on the specific needs and objectives of the holding company. Here is a brief summary of the most commonly used types of constitution for setting up a holding company:

Company A type of legal entity created under the laws of a specific jurisdiction. It is often used as a holding structure due to the ability to issue and trade shares and shareholder liability protection.
Limited Liability Company (LLC) A hybrid legal entity that combines the tax benefits of a partnership with the limited liability protection of a corporation. LLCs are often used as holding companies due to their flexible management structure and protection of shareholder liability.
Partnership A partnership is a business structure in which two or more individuals or entities share ownership of the company. Partnerships are often used as a holding company due to their flexible management structure and low taxation.
Trust A trust is a legal arrangement in which a trustee holds assets on behalf of the beneficiaries. Trusts are often used as a holding company to manage and protect assets for future generations.

2. Business plan development

Developing a business plan helps clarify the newco’s goals, identify potential challenges, and create a roadmap for results to be achieved . It is also an important tool for securing funding and communicating the company’s vision to investors, partners and other stakeholders. A business plan for a holding company typically includes information on the following:

Investment strategy : The investment strategy of the holding company, including the sectors and geographies it will focus on, the types of companies it will invest in, and the return on invested capital target
Capitalization : The amount of capital required to start the holding company, the methods of raising capital and its use
Management and governance : The management team of the holding company, the roles and responsibilities of each team member and the governance structure of the company
Risk management : The risks associated with the investment strategy and how to manage these risks
Financial Projections : Financial projections for the holding company, including revenues, expenses, cash flows, and profitability

3. Choice of company structure

Holdings can be structured in three main ways:

Strategic Holding

Some partners, cross shareholdings (a situation where two companies hold each other’s shares)
Hybrid organization
Less shared services

Operational holding

Partners for specific needs; Joint Venture (JV)
Matrix organization
Some shared services

Corporate holding

No partners, wholly owned subsidiary
Functional organization
Numerous shared services

For the record, there are two other types of holdings that address specific cases: the Bank Holding Company (BHC) , which requires you to own, control, or have the voting power to own 25% or more of a class of a bank’s securities, and the Financial Holding (FHC) , which is able to engage in a wider range of business activities than the BHC.

4. Choose the operating model

An effective operating model is essential to achieve strategic objectives , manage risks and deliver value to customers and stakeholders. It must be designed to align with the organization’s overall strategy and must be flexible enough to adapt to changes in the business environment. Choosing the operating model for a holding company means defining a combination of elements such as the organizational structure , the corporate strategy , the decision-making mechanisms and the ways in which the branches interact with the holding and other branches.

Pure Portfolio Manager

No operational involvement
– No integration

A Pure Portfolio Manager holding company is a type of holding company which owns a portfolio of securities or other financial assets and whose primary activity is the management of that portfolio. Unlike other types of holding companies which may own and manage subsidiaries engaged in a variety of business activities, a pure portfolio management holding company focuses solely on managing its investment portfolio. In many cases, Pure Portfolio Manager holdings are created to provide investors with access to a diversified portfolio of investments managed by a team of professional portfolio managers. These companies may be structured as investment trusts or other types of investment vehicles and may offer shares or other units to individual or institutional investors. The main benefit of a Pure Portfolio Manager holding is that it allows investors to gain exposure to a diversified portfolio of investments without having to manage it themselves.

Conglomerate

+ Potential competitive advantage in the market
+ Cross-selling opportunities
– Difficult portfolio management
– Low integration

Unlike a Pure Portfolio Manager holding company, which primarily owns financial assets, a holding company structured as a conglomerate typically owns and operates subsidiary companies engaged in a broad range of business activities. For example, a conglomerate holding company may own companies that manufacture consumer products, operate retail stores, provide financial services, and own real estate.

Mono-sector holdings

Wholly owned subsidiaries
+ Specific sector
+ Higher level of branch management and control
+ High degree of integration

A mono-sector holding company is a type of holding company that focuses on the ownership and operation of businesses within a specific industry or sector . This type of holding typically seeks to build a portfolio of complementary companies, with the goal of creating synergies and operational efficiencies within the portfolio. For example, a single-sector holding company focused on the technology sector might own companies specializing in software development, cloud computing, cyber security and IT consulting services. By jointly owning and managing these companies, the holding company can create efficiencies in areas such as procurement, sales and marketing, and can leverage the expertise of its management team across the portfolio. The main advantage of such a holding company for the sector is that it can provide a high degree of expertise and focus within a particular sector or industry. This can help the holding company identify and capitalize on emerging trends and opportunities , as well as overcome industry-specific regulatory challenges and requirements.

Competence Driven Player

Wholly owned subsidiaries
+ Higher level of branch management and control
+ High degree of integration

A Competence Driven Player holding company is a type of holding company that focuses on owning and operating companies that share a core competency or set of capabilities . This type of holding company seeks to build a portfolio of companies that can leverage these shared competencies to create competitive advantage and achieve superior performance. For example, a Competence Driven Player holding may focus on companies that excel in areas such as engineering, design, marketing or technology development. By jointly owning and managing these companies, the holding company can leverage its expertise and knowledge across the portfolio, creating operational synergies and efficiencies that can contribute to growth and profitability. The primary benefit of a skill-oriented player holding company is that it can provide a high degree of experience and focus in a particular area of expertise. This can help the holding company identify and capitalize on opportunities for growth and innovation, as well as build a strong brand and reputation within its target market.

5. Development of corporate strategies (parenting strategies)

Holding company corporate strategies (also referred to as parenting strategies) refer to how a holding company manages and supports its subsidiaries in order to maximize their performance and value. These strategies involve a variety of activities and approaches, including planning, resource allocation, and organizational design. Generalizing, the following four parenting strategies represent increasing degrees of parental autonomy.

Investment Management Strategy – No Integration – Subsidiaries engage in multi-year strategic planning – Subsidiaries are fully accountable for delivering results
Strategic management strategy – Moderate integration – Subsidiaries engage in multi-year strategic planning – Annual review – Subsidiaries are accountable for achieving results
Active Management Strategy – Broad Integration – Proactive Headquarters Forecasting – Shared Responsibility between Holdings and Branches
Participatory management strategy – Broad integration – Head office dictates strategic plans and budgets for branches – Head office is responsible for financial and operational performance of branches

In general, the holding company’s strategy focuses on providing guidance, support and resources to subsidiaries within the holding company’s portfolio, in order to maximize their performance and value. By adopting a strategic and proactive approach to managing its subsidiaries, a holding company can create a more cohesive and effective portfolio of assets and improve its overall financial performance and competitive position.

6. Registration of a holding company

Once we have a clear understanding of the structure of the holding company we want to create, have chosen the jurisdiction, and evaluated the type of incorporation and operating model, the company formation process can begin .

Establish management and governance

The first step is to identify the direction and governance to adopt for the establishment of a holding company. The board of directors is responsible for overseeing the management and overall direction of the holding company. It is important to select directors who have the skills, experience and expertise needed to lead the company to success. The board of directors should also establish committees, such as the audit committee or the compensation committee, to oversee specific areas of the business.

Necessary documents

Now we are ready to produce the documents necessary for the establishment of the company. The specific documents required for setting up a holding company vary depending on the jurisdiction and legal requirements of the location. However, here are some common documents that are typically required :

Deed of Incorporation or Foundation Certificate Is the main legal document establishing that the holding company is a separate legal entity. It typically includes the name of the company, its purpose, registered office address, the names of the initial directors, and the amount and type of shares the company is authorized to issue.
Articles of Association or Operating Agreement This document outlines the internal rules and procedures of the holding company, including the responsibilities of directors and officers, procedures for holding meetings and the process for making key decisions.
Shareholder Agreement Is a contract between the shareholders of the holding company outlining their rights and obligations, as well as the terms of their ownership, such as the number and type of shares held and the manner of transfer or sale.
Corporate Resolutions These are formal documents that record decisions made by the board of directors and/or shareholders of the holding company, such as authorizing the issue of shares, electing directors and approving key transactions.
Business Licenses and Permits Depending on the jurisdiction and the type of business the holding company will be undertaking, it may be necessary to obtain various licenses and permits from local or national government agencies.
Other Legal and Financial Documents Depending on the jurisdiction and the specific circumstances of the holding company, additional legal and financial documents, such as tax registration forms, balance sheets and certificates of good standing may be required from other jurisdictions in which the holding company does business.

We strongly advise you to entrust the preparation of these documents to specialists in company formation so that the process is managed in a professional and error-free manner.

Costs

The cost of registering a company can also vary significantly depending on the jurisdiction and type chosen. Some countries may have relatively low registration fees and compliance costs, while others may have higher fees and more complex regulatory requirements. Additionally, there may be other costs associated with setting up a business in a particular jurisdiction, such as legal fees, accounting fees, and taxes.

Is it possible to start a holding without investing money?

Technically, it is possible to start a holding company for very little money . Leaving aside the associated risks, in many jurisdictions it is possible to open a company with minimal capital, but while this may make sense in the case of opening a newco, it does not make sense in the case of a holding company. First, there can be various costs associated with maintaining a holding company, such as legal and accounting fees, regulatory compliance costs, and other expenses, and importantly, a holding company typically requires significant financial resources to acquire and manage assets .

7. Open a bank account

There is no specific type of bank account required for a holding company, but it is strongly recommended that the holding company creates a separate bank account for its operations. This can help maintain clear financial records and separate the company’s assets and liabilities from those of its subsidiaries. When opening a bank account for a holding company, the bank usually requires the company to provide documents such as the certificate of incorporation , business license and tax identification number . It is important to note that the requirements for opening a bank account may vary depending on the jurisdiction and type of holding company. Therefore, it is advisable to consult legal and financial professionals to ensure that the holding company meets all necessary regulatory and compliance requirements.

8. Acquisition of subsidiaries and assets

Once the holding company is up and running, it is time to acquire assets and subsidiaries . If the companies that will join the portfolio are already foreseen in our action plan, we proceed directly to the acquisition of the companies. Otherwise, if we have a budget with which we want to look for companies to include in our portfolio, the path is longer and includes the process of identifying companies that could be part of our objectives. The acquisition strategy involves three phases:

Identification of potential targets and assessment of their strategic fit with the overall corporate objectives For each potentially identified company we will conduct a due diligence to evaluate its financial, legal and operational performance, as well as any risks associated with the acquisition.
Negotiate the deal Once a suitable target company has been identified, the holding company must negotiate the terms of the acquisition, including the purchase price, payment terms and any conditions or guarantees
Complete the transaction Once the terms of the agreement have been agreed, the holding company will have to complete the transaction. This may involve obtaining regulatory clearances, transferring ownership of assets and integrating the acquired company or assets into the holding company’s operations

Conclusions

In summary, a holding company is a type of company that owns the majority of shares in one or more subsidiaries, but does not carry out any operational activities itself. Widely used by businesses of all sizes and sectors, it helps reduce and manage risk, provides better access to capital and improves tax efficiency. While it may not be considered an option for every enterprise, it represents a very beneficial enterprise architecture in a wide range of cases.