Some of the world’s largest companies operate under holding company structures. Berkshire Hathaway and Apple are two examples. For owner-operated businesses, holding companies offer key advantages over holding assets and operations in a single company.
Holding company structure – A holding company owns all of the shares or units of one or more subsidiaries. Individuals or their trusts own the holding company. The subsidiaries and the holding company act as separate companies. Each subsidiary has separate bank accounts and ledgers, and the subsidiaries enter into agreements with each other. Separate subsidiaries may own physical assets, intangible assets or real estate. One subsidiary may manage the company’s operations.
Example – Suppose a company has two product lines in different industries and patents it licenses to third parties. To create a holding company structure, the company could create three new companies: the parent holding company and two new subsidiaries, one holding one product line and one holding the patents. The company would transfer the product line and patents to the holding company, which would then assign the assets to a subsidiary. The patent-holding subsidiary could license the patents to other subsidiaries.
Advantages – This structure provides the company with advantages:
- Risk management. Assets are segregated into separate companies. When properly administered, product liability claims can be limited to a single subsidiary’s assets. Riskier operations, such as trucking, can be similarly segregated.
- Tax advantages. 100 percent owned subsidiaries may be treated as disregarded entities for tax purposes. Therefore, no separate tax returns are filed, and corporate and limited liability protections can be maintained.
- Ease of transfer/confidentiality. The structure provides for easier sale of a product or service line. One line may be sold by selling the subsidiary. Without this structure, a sale may require extensive due diligence for the buyer or reveal trade secrets unrelated to the product or service line.
- Licensing. Licensing of patents and other intellectual property can be broken down by industry or territory. Property can be licensed for multiple purposes to different entities.
— Tom Kammerait and Bill Jackson are attorneys at von Briesen & Roper S.C. in Milwaukee.