Benefits of Holding Companies
Many businesses may believe that they can operate effectively with only one corporate entity. Indeed, creating additional companies may complicate business operations, and there may be fees associated with filing government paperwork, drafting governing documents, and other tasks associated with creating additional corporate entities. However, there are a number of benefits of holding companies, and businesses should consider using multiple corporate entities for their operations in a variety of circumstances.
Limited Liability
One of the benefits of holding companies and establishing single-purpose entities for specific operations is that this can limit liability. If one does not create a single-purpose operation to complete a project, then individuals having claims against the business may be able to assert liability against all of the operations of a business. However, with a single-purpose entity, claimants can generally only seek a recovery against that entity and not the larger business.
Single-purpose entities are especially important for tenants because this can limit the liability of a business to only the entity that runs a given location. Moreover, some landlords are willing to cancel personal guarantees after a certain notice period, only leaving liability against the entity on the lease. As a result, the benefits of holding companies and a single-purpose entity may be the best way to go to avoid liability in case there are issues with a lease or other operations.
Ownership Flexibility
Another one of the important benefits of holding companies is that they can provide flexibility in the ownership of a business. For instance, if there is one holding company, there can be other companies that operate a business in a given market. Those other companies can have different owners than the people who own the holding company. As such, this ownership structure allows companies to provide an ownership interest in a part of the business without impacting the ownership of the holding company itself.
Furthermore, having holding companies can also provide flexibility in the type of company the business uses to run its operations. In certain instances, it makes sense to run a business as a partnership, limited liability company, corporation, or other structure. Businesses are usually permitted to use one type of ownership structure for the holding company and another ownership structure for the subsidiary companies. This may permit the business to realize tax and other financial benefits associated with running a business through different ownership forms.
Franchising
Somewhat related to the content above, another one of the benefits of holding companies is that this helps a business to enable franchising. Franchising is when independent business operators license the rights to a business to operate in a given geographic area. Franchising can be a great way for businesses to expand their operations because this permits businesses to seek more capital and new partners. Moreover, franchising allows businesses to profit off of the drive and passion of independent business operators.
In a typical franchise arrangement, a holding company owns all of the intellectual property and other rights associated with the business at large. The holding company then licenses the rights to use this intellectual property based on negotiated terms and conditions. Each franchise ordinarily operates as its own corporate entity separate and apart from the holding company. This arrangement allows businesses to operate with multiple levels of limited liability and separation of operations.
Ease of Operations
Another one of the benefits of holding companies is this can make it easier for a business to operate. For instance, businesses operating in a given geographic area often need to register to do business, sign up for workers’ compensation programs, and complete other steps. It may be easier for a company operating under a holding company to complete these steps and operate the business more efficiently. Furthermore, businesses usually need to keep information on file about the business in each jurisdiction in which they operate. It may be easier for businesses to complete these steps through a company that operates in that location rather than have the holding company itself complete these steps. In any case, the layers of operations afforded by holding companies may make it more efficient to operate in certain instances.
Control
Another one of the important benefits of holding companies is that this corporate structure permits business owners to have more control over subsidiary companies and franchises. For instance, the holding company typically has rights over intellectual property, branding, and other aspects of the company. The holding company can use these rights in order to leverage power over the subsidiary companies. In addition, having the holding company own all of the intellectual property for a business means that such rights likely cannot be put in jeopardy for any of the acts of the subsidiary companies. Moreover, having a holding company and other companies to carry out the operations of the business means that a business can make changes to the subsidiary companies without having a substantial impact on the holding company.
The Rothman Law Firm is experienced in handling all types of transactions matters for corporate clients which to take advantage of financial and legal advantages of organizing holding companies and subsidiary companies. If you are looking for an experienced New York and New Jersey corporate attorney to handle your legal issue, please feel free to contact The Rothman Law Firm to request a free consultation.