What is a holding company? Purposes and benefits

Do you know what a holding company is? Business terminology in English can be confusing, but this is a widespread concept given that holding companies have been set up in every country in the world.

For example, you're bound to have heard of The Coca-Cola Company, which covers companies and brands such as Fanta, Aquarius or Nestea, among others; or Fininvest, a business group created by Silvio Berlusconi that includes Mediaset, Mondadori and Medusa Film. 

What is a holding company? Discover how they can be set up and what advantages they offer.

What is a holding company?

Oxford Languages defines this business term as “a company created to buy and own the shares of other companies, which it then controls.” In other words, a holding company is a group of companies in which one of them controls the business. As such, with a holding company there will be one company called the 'parent' or “umbrella” and a number of other companies that rely on the parent and are known as "affiliates" or “subsidiaries”.

In general, for a holding company to exist, there needs to be a given set of circumstances between the parent company and its subsidiaries, which, depending on the law in each country, tend to be as follows: 

• The parent company holds the majority of voting rights.
• The parent company can appoint or dismiss the majority of the Administrative Board members.

In short, the holding company needs to have effective control over the other companies in the grouping.

How is a holding company set up?

Now that you know what a holding company is, it's important to understand how they can be set up. There are two ways to do this: 

• Create a new company. First of all, a new trading company should be established. Check the articles of incorporation in the country or jurisdiction where you would like to register the company.

Meanwhile, the partners of the subsidiary companies need to move their shares to the new company, which becomes the parent, and must give up their right of first refusal. 

• Use a pre-existing company. In this second case, the process is similar; however a company that already exists is used, which becomes the parent company. Furthermore, in this case the existing business capital needs to be increased in order to issue new shares.

Advantages of a company holding

When a company grows or has several lines of activity, the time comes to consider setting up what is a holding company in order to prevent decision-making deadlocks from damaging the business, as well as any conflict between the partners that might affect the company, or excessively high tax. 

Holding companies offer a number of advantages that every entrepreneur should know about before setting one up. Among these, the following are of note: 

• Simplifying the business. Each subsidiary company is assigned a business field or activity. Additionally, general services such as marketing, accounting, legal advice or human resources, can be centralised at the parent company, meaning costs are reduced, profits increase and processes are standardised. 
• Easier to sell. If you want to sell off one area then it's much easier, as only one specific subsidiary or affiliate needs to be sold. 
• Ease of access for investors. If an investor or a group of investors wants to join and participate in a business field, one of the subsidiary company's capital is increased. 
• Speedy decision-making. The processes to decide on important company issues are streamlined because the parent company controls the voting rights and the appointing of posts, i.e., it has full control over the decision-making process. 
• Tax benefits. In general, holding companies tend to benefit from tax breaks such as exemption in the distribution of dividends, exemption from capital gains on corporate income tax when transferring shares from the parent company to subsidiaries, and the option to be taxed under a tax consolidation regime, in other words, as a group of companies. However, these aspects will also depend on the applicable regulations in each country. 
• Avoid conflicts between partners. In the case of family businesses, it's common for conflicts to arise between partners who are members of the same family. However, with a holding company, decision-making stalemates are reduced and avoided. 
• Protection for the company's immovable assets. Any properties belonging to the companies that form part of the business group can be transferred to the parent company in a way that protects them from the risk of each individual affiliate's business activity. 
• Business Risk Management. Each affiliate or subsidiary shall address its business risk with its own resources, without the other companies bearing the consequences. 
• Improving the organisation's image. A group of companies portrays a better image vis-a-vis suppliers, customers and potential investors, because it conveys strength and reliability. This may also make it easier to access funding, with more flexible conditions.

What is a holding company? A business concept to remember

As you can see, business terminology in English can take some explaining. Now you know what a holding company is, but if you want to work in the economic sector, the fact is that you will come across other terms, such as compliance, fundraising, lobby, mentoring or crowdfunding, which you will need to understand because they will be a routine part of your job. 

In this sense, a command of English is fundamental because, in addition to helping you understand these terms, it will allow you to interact with other professionals at an international level to foster synergies and new opportunities. In fact, the English Proficiency Index has identified a correlation between a company's level of economic development and its English proficiency. Specifically, a higher level of English means the economy is more competitive, since, according to the economist Pankaj Ghemawat, countries that share a common language trade 42% more with each other than those that don't.

As observed, possessing the skill to communicate in English offers opportunities that extend beyond mere understanding of technical terms. Whether collectively or individually, being at ease with this language eases the establishment of valuable international connections and synergies.

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