Holding companies aren’t the same as retail or service businesses. They don’t sell products or conduct any other business operations. They serve only one purpose, which is to hold the controlling stock in other companies.

As such, you’d usually hear that a holding company owns several subsidiaries. For example, JG Summit Holdings owns Universal Robina, Robinsons Land, and Cebu Pacific, among others. But those companies are completely separate entities. Each has its own revenue and profits. JG Summit simply oversees their managements’ decisions but doesn’t participate in their day-to-day operations.

For that reason, a holding company is also called an “umbrella” or parent company. With that in mind, can you start a holding company without other businesses?

Understanding Holding Companies

Aside from other companies, a holding company can also own and control real estate, stocks, patents, trademarks, and other assets. As such, if you’d like to completely rely on passive income, you can start a holding company without managing wholly-owned subsidiaries.

In that case, you can form just one company-preferably a limited liability corporation (LLC)-and start “projects” within that company. Give those projects “Doing Business As (DBA)” designations. It would make it appear as if you have several businesses under your holding company.

If you’d rather start a holding company for your other small businesses, assess the sizes of your potential subsidiaries first. If they are just home-based, e-commerce companies, creating a holding company may be too much of an expense. Focus on creating a diverse investment portfolio instead. That way, starting a holding company would be more practical.

Reasons to Create a Holding Company

Why should you create a holding company, anyway? Well, a holding company can protect your assets, reap tax benefits, and give you control over other companies. If you’re going to manage subsidiaries, you can all file them under the same tax return. What’s more, if the stock value of your subsidiaries goes up, then so does the stock of the holding company.

As a holding company, you can also choose not to co-sign onto your subsidiary’s debt. This will allow you to avoid being responsible for your subsidiary’s debts. As a result, you can protect your holding company’s assets from creditors. The company’s worth and capital won’t decline even if the subsidiary suffers bad debt.

How to Set Up a Holding Company

Now that we’ve discussed the benefits of a holding company, let’s get right into setting it up.

Form the Board of Directors

If you’re going to manage subsidiaries, you’d need a board of directors. You can choose among the executives in your future subsidiaries or other businesses. You may also assign another professional who wants to invest in the company.

Choose a Business Structure

A holding company is often a corporation. Limited liability, specifically. But before deciding on anything, consult a lawyer to ensure that you’d choose the right structure.

Register the Company

The registration process depends on your country or state. Generally speaking, you should register the company in your city, state, or municipality. Provide the business name, articles of incorporation, and the agent of the operating and holding company. If you want to, you can be the agent of both. This means you own and control both the holding company and its subsidiaries.

Provide the Right Details in the Articles of Incorporation

Don’t forget to state the purpose of the holding company in its articles of incorporation. List the names of the board of directors and the methods you’d use for making business decisions.

Open a Separate Business Bank Account

A holding company needs its own bank account. Avoid using your personal bank account. It should be another corporate account specific to the holding company.

Deposit Your Assets and Start Growing Your Investments

Once your holding company is up and running, deposit its assets into the bank account. Diversify its portfolio by investing in money market funds in the Philippines. Oversee the management of your subsidiaries and participate in important decision-making processes. If you’ll only manage assets and not other businesses, ensure that you’d have a skilled fund manager. A fund manager monitors your investments, especially mutual funds, bonds, and equity funds.

File Taxes on Time

Lastly, keep track of tax due dates and file your returns accordingly. Your subsidiaries will handle their taxes themselves, but their losses and gains will be factored into the holding company’s tax return. This can be a tricky process, so work with a Certified Public Accountant (CPA) to get it right.

As your company moves forward, continue consulting your lawyer and CPA about your current situation and future plans. This is to ensure that you’re abiding by the laws. Also, just because you’re not responsible for your subsidiaries’ debts doesn’t mean you can abandon a struggling subsidiary. It is your duty, first and foremost, to prevent any of your other businesses from going downhill.