What does Holding Stand for?

holding company

A holding is a specific structure of several companies, but not a separate legal form. The structure is done in such a way that several companies are hierarchically structured among each other and accordingly there are holdings and economic dependencies among each other.

In this article we summarize the advantages and disadvantages of such a structure, how a holding is set up and what needs to be taken into account.

Holding – definition

The term “holding” comes from English, from “to hold”. What is meant is that there is a parent company that holds shares in other companies, which are therefore subordinate. This creates the hierarchy of the companies and the so-called holding structure with the relationships between the affiliated companies.

This structure is typically used to combine different business areas into their own companies and still bundle these companies under a central parent company. Central tasks are bundled in the parent company, which is at the head of the holding company. This usually involves the administration of the investments, the strategic planning and the financing of the subsidiaries.

Structure of the holding company and its components

As already described, a holding company typically consists of more than two companies, with one company representing the parent company that holds shares in the subsidiaries. The central parent company is superordinate, it is at the head of the holding company. This results in a dependency between all companies that are in this structure.

The organization of the holding company can subsequently be structured differently depending on the size of the overall structure and the size of the individual companies. In the case of corporations, the subsidiaries can be broken down according to country, and a structure according to business areas is also advisable.

In simpler structures, it is also possible for the holding company to hold several stakes in various start-ups and for the parent company to bundle central services for the subsidiaries, such as accounting or legal advice.

In general, it can be said that a holding company is very flexible. It can be tailored exactly to your business needs. It is important that you invest a lot of time in planning and get advice on which holding structure represents the best, most suitable solution for your company.

The holding structure: Different types of holding

Not all holding companies are created equal, because the possibilities for building a holding company are diverse. We will now take a closer look at some of these options.

Financial holding

The financial holding is a company that focuses on holding and managing financial interests in subsidiaries. The focus here is on minimal influence and ongoing optimization of the financial income that flows from the investments in the financial holding company.

Operational holding

The operational holding is probably the most common form in which a holding is set up. This company is itself operationally active in the market and at the same time holds shares in various subsidiaries. It not only manages investments, but also actively pursues its own corporate purpose in the market.

Management holding

This form of holding focuses on strategic planning and advising the subsidiaries. Management services are bundled in the parent company and made available to the subsidiaries as and when required. The management holding thus mainly intervenes in the long-term orientation of the subsidiaries.

Organizational holding

Here the holding mainly serves to better structure the company. As briefly described above, large companies can be structured according to business areas or countries in order to always maintain an overview of the existing subsidiaries.

These types of holding structure are examples of how a holding works most often. However, you also have the option of designing your company structure differently, even if it is a holding company. Since the holding company is not a legal form , there is a lot of room for maneuver for you.

Establish a holding company

The holding company is not a separate legal form. If you want to set up a holding structure, you have to found a company in the classic way.

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The simplest option is to set up the parent company first and then set up subsidiaries. Obviously, a type of company with limited liability, such as a GmbH , should be chosen. In order to create a holding structure, at least two companies must be founded, which accordingly takes a little longer than the establishment of a single company.

Incidentally, referring to the parent company as a “holding” can be difficult in the company name, as this term is sometimes rejected as confusing. The IHK can check whether the planned company name is accepted .

It means a little more effort to set up a holding company after the companies already exist that are to become daughters of the parent company, which is only to be newly founded. In this case, the shares have to be laboriously transferred to the parent company, which can lead to tax disadvantages and a lot of bureaucracy. Whether or not it is worth setting up a holding structure at a later date can only be assessed on a case-by-case basis.

Purpose of a holding

The purpose of a holding depends entirely on the individual circumstances. In corporations, the structure is often only used to structure business areas. With start-ups, it can be helpful to have a central company that takes care of the investments and possibly also provides central services.

The structure also ensures that the entire risk is not bundled in one company, but always in the individual companies, which ideally have limited liability with their assets. This can make sense in a wide variety of industries, be it in the construction sector for individual projects by real estate developers or in the financial sector, in which investments in various companies are bundled in this way.

Advantages and disadvantages of a holding company

The advantages and disadvantages resulting from the holding structure must always be clarified individually. It should always be remembered that the parent company itself, as a corporation, also involves a certain amount of effort, just for ongoing bookkeeping , tax advice, the establishment of a company itself and all other running costs of a company.

The advantages of a holding, in general terms, are, for example:

  • Structuring of large companies according to industries and countries
  • Diversification and limitation of financial and liability risks
  • Protection against bankruptcy for the parent company
  • Tax advantages when transferring profits and sales of shares – here there are opportunities for financial optimization by the holding company

So that the costs for the parent company are kept within reasonable limits, they should hold more than 15 percent of the subsidiary, because in this case there is no trade tax for the parent company.

Overall, the advantages and disadvantages of the holding structure can only be described very generally. If you are considering bringing your company into this form, you should definitely discuss this with professionals, be it experienced management consultants or your tax advisor, because many individual circumstances influence the usefulness of the structure. Then it must also be clarified which costs will actually be incurred and how the new structure will affect the medium and long term, so that you can assess in advance whether it is worthwhile to set up a holding company.

Conclusion

Building a holding means dividing your own company into a parent company and at least one subsidiary. The holding company creates this relationship of dependency, because a holding company is “only” a certain structure, but not its own legal form.

A holding structure can make sense for various reasons. It is important that the entire concept is well thought out and that it is ensured that the structure is set up as well as possible from the beginning. Subsequent conversions by companies are possible, but always involve a lot of effort. A holding company can also pursue a wide variety of purposes. It makes sense in particular to structure companies and minimize risks. At the same time, the costs of this structure must always be taken into account, which should not be underestimated.

holding company