What is a Holding Company ?
A holding company is a corporation that owns shares in another company. It is usually between the operating company and the individual shareholder, and it owns the operating company’s voting stock and assets and controls its management and policies.
Holding company under the Saudi company law
It can either be a Joint Stock Company or a Limited Liability Company, which aims to control other joint-stock or limited liability companies, called subsidiaries, by owning more than half of the capital of such companies or by controlling the formation of their boards of directors.
Subsidiaries cannot own shares in the that type of companies . Any act leading to the transfer of shares or stocks from the holding company to the subsidiary will be considered null and void.
It must prepare, at the end of every financial year, consolidated financial statements with its subsidiaries.
Purposes of a Holding Company
- Managing its subsidiaries or participating in the management of other companies in which it owns shares and providing support thereto;
- Investing its funds in shares and other securities;
- Owning real property and movable assets necessary for its operations;
- Providing loans, guarantees, and financing to its subsidiaries;
- Owning and utilizing industrial property rights, including patents, trademarks, franchises, and other intangible rights, and leasing the same to its subsidiaries or third parties; and
- Any other legitimate purpose in conformity with the nature of the company.
Advantages of a Holding Company
Using holding companies is an asset protection planning strategy that helps to limit the liability risks of a business structure. It is an ideal business structure consisting of an operating entity that does not own any vulnerable assets and a holding entity that owns the business’s assets. With this structure, the small business owner can eliminate or limit the liability for both business debts and personal debts.
A holding company needs to control its subsidiaries but doesn’t necessarily need to own all shares or membership interests. This allows it to obtain control over the assets of another company at a lower cost against all of the subsidiary’s interest.
Lower debt financing costs
A holding company that has a good financial standing can obtain loans for a lower interest rate than its operating companies could, specifically in instances wherein the business in need of capital is a startup or the other venture is considered a credit risk. it can obtain the loan and distribute the funds for its subsidiary.
Operating companies are separate entities therefore there is less risk in investing in startups or other ventures that seem risky.
Day-to-day management is not necessary
A variety of unrelated industries can be owned by a holding company. It doesn’t matter if the owners and managers of it don’t know about those businesses because each subsidiary has its management to run the day-to-day operations.
Disadvantages of a holding company
Formation and ongoing compliance costs
That company and each subsidiary that is formed require the payment of formation fees. There will also be, in most cases, annual reports and franchise tax obligations.
As noted, a holding company does not have to own all of the subsidiaries’ ownership interests. This can be both an advantage and a disadvantage. It does not own 100% of the interests and will have to deal with the minority owners. In some instances, conflicts may arise when the interests of the minority owners are different from those of the holding company.
The use of these companies and subsidiaries adds an element of complexity not found in the single-entity structure. When a publicly-traded corporation uses a holding company structure, it can be very complex, with many subsidiaries to keep track of.