Holding Company Guide: How To Set Up a Holding Company

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Alphabet Inc. owns Google, YouTube, Android, and Waymo. Does that mean they’re all the same company? Yes and no. Alphabet is a type of parent company known as a holding company. It oversees a collection of different businesses, the largest and most well-known of which is Google LLC. Rather than create its own products and services, Alphabet’s role is to manage the capital allocation and strategic direction for all its independent businesses.

Holding companies operate in a wide array of industries, from finance to automobiles. If you’re considering managing multiple businesses using a single corporate entity, you may benefit from forming your own holding company. Learn what holding companies do, how they differ from other business structures, the advantages and disadvantages they offer, and the exact steps to start one.

What is a holding company?

A holding company is a businessentity—usually a corporation or limited liability company (LLC)—that exists primarily to own a controlling interest in other companies, which are called subsidiaries. This controlling interest can take the form of voting stock, shares, or membership interests.

Even though a holding company owns one or more subsidiary businesses, it rarely takes an active role in the day-to-day operations of those businesses. Many holding companies exist to manage and control subsidiaries; hold assets such as real estate, intellectual property, or cash; provide resources; and create a corporate structure that offers advantages like liability protection and potential tax benefits. 

Types of holding companies

Most holding companies fall into one of the following three categories, each with its own distinct structure and purpose. Understanding which type fits your business goals will help you structure your holding company correctly from the start—saving legal fees and administrative headaches later.

1. Pure holding company

A pure holding company exists solely to own shares in other companies. It does not engage in any other business activity or provide services directly. For example, Berkshire Hathaway, long controlled by the iconic investor Warren Buffett, serves primarily as a pure holding company for brands like GEICO, Duracell, and many other subsidiaries.

2. Mixed holding company

A mixed holding company, also called an operating company, both owns subsidiary companies and conducts its own business operations. One such example is the Walt Disney Co., which creates its own Disney-branded content but also controls other businesses, like ESPN and ABC News, that produce content of their own. 

Mixed holding companies’ subsidiaries can be engaged in completely unrelated lines of business or industries. For example, Chemed Corp. owns hospice care company VITAS Healthcare and the Roto-Rooter plumbing service. These types of holding companies are sometimes called conglomerates.

3. Financial holding company

A financial holding company primarily manages financial assets such as banking or investment subsidiaries. In the US, these are often formed under the terms of the Bank Holding Company Act of 1956. The act requires such holding companies to register with the Federal Reserve and obtain approval for acquisitions. It also limits them to activities closely related to banking. One such example is JPMorgan Chase & Co., which owns JPMorgan Chase Bank NA, which in turn owns and oversees various smaller, specialized bank and financial services subsidiaries.

Advantages of a holding company

The holding company structure can afford groups of businesses several key benefits. 

• Asset protection. If one of a holding company’s subsidiaries underperforms or fails, it remains separate from other subsidiaries, generally protecting their assets from seizure. 
• Financial advantages and borrowing power. Banks may offer a lower interest rate to a stable holding company with diversified revenue sources and a strong portfolio of investments, reducing the cost of capital when borrowing money.
• Long-term stability. A well-structured holding company can endure for decades, while its subsidiaries change. Even as it acquires and sells businesses from its portfolio, the holding company can preserve cash, maintain control over key assets, and provide ongoing oversight across its various entities.

Disadvantages of a holding company

Starting a holding company makes sense for large businesses that want to engage in a broad array of activities simultaneously. It’s probably not the right fit for smaller entrepreneurial efforts that are more focused. Here are some downsides to running one:

• Higher administrative and legal costs. Holding companies often need to conduct separate audits and prepare individual financial reports and regulatory filings for each entity they own. This increases costs and requires a team of skilled finance professionals.
• Cash flow limitations. The holding company relies on dividends and revenue from subsidiaries to pay expenses. This can cause a shortage of available funds if those subsidiaries underperform.
• Unappealing to some investors. Some investors may balk at backing a complex structure where ownership and profits are spread across multiple companies rather than a business with a single focus.

How businesses start a holding company

1. Define your purpose
2. Choose your business structure
3. Name and register your holding company
4. Get an EIN and open a business bank account
5. Draft company governance documents
6. Form or acquire your first subsidiary
7. Maintain financial separation

Setting up a holding company follows similar steps to starting any LLC or corporation, with one key difference: its purpose. Here’s a step-by-step guide for starting a holding company:

1. Define your purpose

Determine the primary goal of your holding company, whether that’s asset protection, tax optimization, centralized control over multiple businesses, or future acquisitions. Due to the complexity of legal and tax implications, it is crucial to consult with a business attorney and a tax professional (like a CPA) early in the process.

2. Choose your business structure 

Choose whether your holding company will operate as a limited liability company (LLC) or a corporation. Forming multiple businesses under one LLC ensures that the holding company can provide funding, handle major financial decisions, and collect profits from subsidiary LLCs while maintaining a protective legal barrier between different ventures.

3. Name and register your holding company 

Choose a unique name and check its availability in your chosen jurisdiction. Holding company names often include terms like “Holdings,” “Management,” or “Group.” Register the holding company with your state secretary of state (or equivalent government agency in your region) by filing either articles of organization for an LLC or articles of incorporation for a corporation.

4. Get an EIN and open a business bank account 

Before opening a dedicated bank account for your holding company, obtain an employer identification number (EIN) for tax filings, bank accounts, and payroll. Getting an EIN is free from the IRS. This step is critical for maintaining the legal separation between the holding company and its future subsidiaries.

5. Draft company governance documents

Draft an operating agreement (for an LLC) or bylaws and resolutions (for a corporation). These rules explain who manages the company, detailing the ownership structure and control of its subsidiaries. They vary from one company to the next, but they typically also define practices for appointing and removing board members and other officers, and include rules for issuing stock, voting, and scheduling annual meetings.

6. Form or acquire your first subsidiary

A holding company structure requires that it hold at least one subsidiary or operating division. If you create a holding company first, you can create a subsidiary by forming a separate legal entity, such as an LLC or corporation, to act as an operating unit. The holding company will be named as the owner (the sole member or majority shareholder) in the subsidiary's formation documents and internal agreements.

If you already have an existing business—or if you’re planning to buy another business—the holding company will purchase a controlling interest (usually 50% or more of the voting shares or membership interests) to acquire it as a subsidiary.

7. Maintain financial separation 

For effective limited liability protection that shields owners and investors from the company’s obligations, the holding company and its subsidiaries must operate as completely separate legal entities. This requires separate bank accounts, accounting records, and financial statements for each entity, including the holding company. Each should file its own annual reports and pay its own taxes. All transactions between the holding company and its subsidiaries, such as loans or lease payments, must be formally documented as if the transaction were between unrelated, independent companies.

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