What is a holding company, why set it up and how to do it

In an increasingly competitive economic context, such as the one we live in, it is essential to keep up with the times and know how to behave so as not to fall behind competitors. In particular, it is good to be informed about the various benefits, so as to be able to save a lot of money that can be used to promote the growth of your business. A concept, the latter, that is valid both for small and large companies.

Regardless of the size of your business, in fact, it is essential to make targeted choices, taking into account the starting point and the objectives you wish to achieve. It is precisely in this area that it will be interesting to know that more and more entrepreneurs decide to set up a holding, in order to benefit from the various advantages, both at a fiscal and management level, offered by this corporate form. But what is it, how does it work and why is it appropriate to set it up? Let’s see everything there is to know about it.

What is a holding company: meaning and definition

Going into detail, as explained on the Treccani website, this term holding indicates a:

"company (called parent company or parent company) which, due to the amount of shareholdings held in other companies of the group, has the power to control their management. Control over the administration of such companies (which lose economic autonomy, while retaining legal autonomy) derives from the possession (direct, indirect, through companies in which they are in turn a shareholder or reciprocal) of a share".

In practice, it is a financial company that controls, in part or in full, other companies through shareholdings or quotas. To better understand what it is, let’s compare this corporate form to a tree, whose trunk is precisely the holding company. The branches, on the other hand, are the various controlled companies, or the subsidiaries.

Most important types of holding companies to know

First of all, it is good to distinguish between two types of holding companies, namely pure ones and impure ones.

• Pure or financial: they do not carry out any production or exchange of goods and services. Instead, they simply deal with controlling and coordinating the operational and strategic activities of the subsidiaries.
• Impure or mixed, also known as operational: they deal with the performance of industrial or commercial activities, or the production or exchange of goods or services.

But not only that, among the types of holding companies available are also the following.

• Investment holding: that is, they acquire shares in order to obtain dividends and capital gains, without having to manage the capital of the related companies.
• Management or sectoral: they can be either financial or operational in nature. They manage companies that have strategically interdependent businesses, with the aim of being able to manage them synergistically.
• Subholding: this is a company that is placed between a parent company and the operating companies. In practice, it is a corporate structure that sees a holding company control another holding company, namely the sub-holding, which in turn controls other companies.
• Family holding: as can be easily understood from the name, this is a corporate form where the shareholders are members of the same family. Among the most famous family holding companies, we can mention Exor of the Agnelli family and Fininvest of the Berlusconi family.

How a holding company works and why to set one up

A holding company is a corporate form that sees the presence of a controlling financial company, called parent company, which controls two or more controlled companies, known as subordinate, subsidiary or daughter companies. The main characteristic of this corporate form is to be found in the fact that each company has its own legal independence. It follows that each company is only liable with the paid-up capital.

The main activity carried out by a holding company is to plan, manage and control the various companies that are part of the group. Establishing a holding company brings with it countless advantages from a fiscal, financial and also management point of view. In the following paragraph we will see what these are, in order to better understand why it may be appropriate to establish a holding company.

All the advantages of a holding company

As already mentioned, establishing a holding company brings with it countless advantages from a fiscal, financial and also management point of view. Going into detail, the advantages that can be enjoyed include the following.

• Develop and diversify the business. Thanks to a holding company it is possible to extend the activities to complementary or similar sectors. In this way, it is possible to always keep up with the times and follow the various market developments.
• Protect company assets. Thanks to a holding company, it is possible to protect the company assets from the requests of potential creditors, but above all, to preserve them from possible personal, fiscal and inheritance events.
• Efficiently manage the generational transition. Focusing on inheritance events, it is good to know that the establishment of a holding company helps to solve the problem of generational transition. This is because it makes it easier to transfer the capital and company management from the founders to the successors, favoring the continuity of the company itself. Thanks to the holding company, in fact, it is possible to divide the family business into various activities, assigning roles of responsibility compatible with the personal inclinations of each interested party.
• Have a common policy. If a single family owns several companies that do not operate in the same sector, but are still complementary, the holding company helps to have a common policy.
• Optimize tax management. A holding company proves to be a particularly valid tool for tax planning, since it allows you to take advantage of some preferential tax regimes, such as the Participation Exemption. But not only that, it also allows you to implement particular allocation strategies thanks to which you can optimize the distribution of profits and improve efficiency from the point of view of tax collection.
• Rationalize the financial structure. Through a holding company, it is possible to optimally manage the financial availability of the various controlled companies. In practice, it is possible to centralize all the financial resources in a single company, which will have the important task of managing the liquidity and payments of the other companies. Thanks to this mechanism, for example, a company in the group can transfer its excess liquidity to another company that needs it. All this without having to resort to a bank loan which involves significant costs.

As with any corporate form, the first step to set up a holding company is to open a VAT number. Before taking this important step, it is essential to make the various assessments, so as to opt for the solutions that best suit your needs. In particular, the fundamental elements to consider include governance and legal form.

Original article published on Money.it Italy. Original title: Cos’è una holding, perché costituirla e come farlo