Starting a holding company with zero money will require you to form a business entity first. According to the USA business law, you have to either form a Corporation or a Limited Liability Company. Then you have to create a fund to invest in various assets.
- In order to form a holding company, you must have at least one small business
- A holding company doesn’t have its own products
- A holding company can be a corporation or an LLC
- A holding company offers full asset protection which is one of the most important reasons people want to open a holding company
- Forming a holding company doesn’t require a huge investment; if you have a business then you can form a holding company with money or without money
What is a Holding Company?
According to Wikipedia –
“A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies to form a corporate group.
In some jurisdictions around the world, holding companies are called parent companies, which, besides holding stock in other companies, can conduct trade and other business activities themselves. Holding companies reduce the risk for the shareholders and can permit the ownership and control of a number of different companies. The New York Times also refers to the term as parent holding company.”
So, basically, a holding company is a type of company that holds and controls the securities of other companies. The main business operation of this type of company is to purchase and owns shares of other companies. You should keep in mind that a holding company doesn’t have its own products like other businesses. That being said, you can still form an LLC for your holding company!
What is the Main Purpose of a Holding Company?
The purposes of forming a holding company vary depending on the situation. Moreover, it also depends on the person who is trying to form the company. Many investors want to form a holding company so that it will allow them to separate their valuable assets from the operating business. A holding company offers full asset protection which is one of the main reasons people want to open a holding company. For example, you have a small toy business. Now if you open a holding company for your business then it will allow you to register three companies. You can collect rent from your land, then you will also collect rent from your toy shop, and finally, the holding company will act as the parent company. So, the land and the shop will be the subsidiary of the holding company. Now, if for any reason your business faults and the toy shop become bankrupt then your land will remain safe from settling the liabilities! Moreover, forming a holding company allows you to control 3-4 businesses at a time. But you should keep in mind that you must have at least one company to form a holding company.
Details Steps of Starting a Holding Company without Money
Well, it is possible to start a holding company without money or a big investment. But to do so, you have to follow the below steps. Let’s check them out below!
Step – 1: Check the Legal Status of your Company
I have already mentioned that you will need at least one company to form a holding company. So, if you have a business then you have to check the legal status of your company or business according to the state law where your business is. State laws for small businesses from one state to another therefore you must check your state’s law before moving to the next step.
Step – 2: Choose a Name for the Holding Company
The next step is to choose a suitable name for the holding company. You have to pick a name for that holding company that is easy enough to memorize and doesn’t look too ridiculous. You have to ensure that the name you have picked for your holding company doesn’t have an existing registered trademark. If the name contains any registered trademark then you will break rules for violating a mark for commercial purposes. Therefore, you should check whether the name is available or used by other companies. If you can find a unique name for the holding company then you have to move to the next step.
Step – 3: Set Your Business Goals
The next step is to set your business goal. You must take time to evaluate and prioritize your plans for the future. It means you should think through your personal, professional, and financial goals because these goals will influence how you start and build your holding company. Make step by step business plan for five, ten, and fifteen years. Then plan and implement more immediate steps to help you get here. Business goals not only help businessmen stay focused, but they also help them take action.
Step – 4: Conduct In-Depth Research
A successful business plan can successfully be implemented through in-depth research. Moreover, it will help you Identify a specific niche, market area, and potential competitors. There are lots of strategies available that you can focus on to establish your holding company. Moreover, depending on your business goal, you can implement buy-and-hold strategies as well. Besides, you should also research your market area. Orefice says –
“A good understanding of the market is important to close better deals, I wish I knew this earlier because I often made random investments that resulted in losses, and it took me considerable time to bounce back to normal. With proper research about the market, one can make informed decisions and close better deals.”
Step – 5: Create the Holding Company
The next step is to create your holding company. There are lots of entity structures available that you can choose to open your holding company. Each entity structure offers certain preferential tax treatment based on the type of business you are planning to start. If you are new in this industry then you can consult with an experienced licensed professional like a law attorney or accountant to gather experience. You can easily register the company yourself in your state’s Division of Corporations for a fee. You’ll need to know:
- The business address that includes P.O. Box, home address, or office space
- The name of your company
- The managing members or managing managers
After creating the holding company, you have to request an employer identification number (EIN) from the IRS to file taxes for the company.
Step – 6: Form an LLC for the Holding Company
Next, you have to form an LLC for your holding company. Usually, the LLC protects business costs from interfering with an investor’s personal finances. It allows the investors to purchase and own companies without involving personal liability. Each state has its own fees and regulations associated with establishing an LLC but the overall process is the same. In order to form a real estate LLC, you should –
- Confirm the regulations in your state
- Choose a unique business name
- File an Article of Organization with your state
- Create an operating agreement for the business
- Publish an intent to file
- Apply for a tax identification number through the IRS
Step – 7: Filing of the Articles of Organization
This is a very important step. Once you have formed an LLC for your holding company, the next step is to file the Articles of Organization. The first condition of forming an LLC is to file articles of organization with the Secretary of State’s office in your state. The best part is, that you can fill the article of organization online with the required documents. You have to pay a fee for filing the articles of organization. Depending on the state, the fee could be between $40 and $3000.
Step – 8: Create an Operating Agreement
The final step of forming a holding company is to create an operating agreement. This is very important for a holding company. You should create legally binding shareholder agreements. Trust me, these agreements will protect you and your investor’s investment from various legal issues.
Pros and Cons of Forming a Holding Company
|Pros of Forming a Holding Company
|Cons of Forming a Holding Company
|It is very easy to form a holding company
|Forming a holding company can increase the chance of overcapitalization
|With a holding company, you can easily control 3 – 5 companies
|Members of the holding company have financial liability which might result in the misuse of power
|A holding company can take on various large projects to increase the profitability
|A holding company can easily exploit the subsidiary companies
|You can easily avoid the completion between holding and subsidiary companies
|Members of the holding company can manipulate the information of the subsidiaries for their personal use
|A holding company offers asset protection
|Sometimes forming a holding company leads to secrete monopoly
|It reduces various legal risks because you can’t be held by a holding company responsible for the loss of a subsidiary
|It is not easy to sell the shares of a holding company
|You can reduce the tax amount for your subsidiary company with the help of the holding company
|Forming a holding company reduces the transparency of the subsidiary companies
Last Updated on December 25, 2023 by Magalie D.
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.