In business, it is always good to spread out your business interests, try to reduce any legal liabilities that you may have, and to properly manage all your tax obligations. In order to do this, you need to know the difference between a parent company and a holding company. They may seem similar but the legal implications of setting one up over the other, are quite different and there are really significant differences if you set up as a personal holding company. Let’s look at some of the differences between a holding company and a parent company.
A holding company’s purpose is to hold legal title to the outstanding stock of another company or companies. Generally, the holding company does not manufacture anything and does not provide any services at all. It exists simply to control other companies in an attempt to manage all the legal liabilities and in some cases, to reap benefits by consolidating some tax obligations. A good example of this would be setting up additional companies to make sure that you don’t lose all your money and investments, if you are sued by a third party. Swiss holding companies are set up in this way so that if someone tries to sue the company actually providing a service, then the company actually holding all the tangible assets may not be affected because it is after all, a totally separate entity. Different countries have different rules regarding how many shares a holding company needs to hold, before it can receive tax benefits and allow tax free dividends.
By definition, a parent company is almost the same as a holding company. Parent companies are able to acquire other companies, usually subsidiaries, and usually through some kind of merger or other acquisition. There are reasons for doing this, like buying a smaller company because it is competition for your company. You may also want to extend your operations into the acquired company’s field or to make more money or to get bigger tax benefits. There don’t seem to be very many differences between holding companies and parent companies except in the legal definition. As mentioned before, a holding company doesn’t manufacture anything or provide a service and its purpose is to hold other companies. A parent company on the other hand, has got its own business in place and does operate a service or manufacturing plant. When it buys a subsidiary, it does it for investment reasons and to help assist with its own current operations. It may, for example, purchase a related business that can help it reduce its expenses or it may use it to increase its sources of funds.
Personal Holding Company.
The personal holding company can not be owned by more than five people who get their income from property or investments. The company cannot be involved in tax-exempt businesses, foreign corporations, life insurance companies, surety companies and almost all financing and lending businesses. As you can see, parent and holding companies do seem similar until you look at the legal aspects and then there are noticeable differences.