The term holding company is a common one in the business world, but it may not be obvious to everyone what it means or what the point of one is. Here are three things you need to know about holding companies.

1. What Holding Companies Are

Holding companies are entities with a controlling interest in other companies’ securities. These companies may be created for a variety of reasons. First and foremost, it can be created to house a corporate group, where the holding company owns stock in each company within the group. For example, Stefan Soloviev created the holding company The Soloviev Group for this reason. Holding companies may also be formed to give an organization the opportunity to expand into new industries and markets via subsidiaries.

2. How To Create One

The method for creating a holding company varies by jurisdiction. In general, there are five things you need to consider when planning to create a holding company. First, decide how many business entities you should create and what kind or kinds. Then, decide where to form and register the entity or entities. You’ll also need to choose a name and a registered agent for each entity. Finally, you’ll need to decide whether to set up the holding company as a pass-through entity or a separate taxable entity for tax purposes.

3. Related Challenges

Forming a holding company comes with several key challenges: complexity, management and costs related to formation and compliance. Complexity challenges are related to the fact that a holding company is meant to manage two or more subsidiary companies, as well as the fact that it makes budgeting and reporting taxes more complicated. Managing a holding company means you’re less likely to have experience in all of the industries your subsidiary businesses are involved in.

4. Their Benefits

A holding company also has many benefits. Daily operations can be managed by each subsidiary company, rather than by the holding company. Using a holding company can also lower costs related to debt financing and controlling the company’s various subsidiaries and assets. Holding companies help you to better protect your various subsidiaries and assets from liability because debts and assets aren’t shared across subsidiaries.

You should always do your research on companies you plan to build relationships with, be they holding companies or other entities. Make sure you understand everything about their structures and policies so you can ensure your relationship is beneficial for both of you.