Are you one of the domain investors who have multiple assets and a diverse domain portfolio? As your investments and profits grow, you may be thinking of ways to protect your money and other assets.
Aside from that, as your business builds up, the taxes you pay are also growing and are taking a huge chunk of your earnings. One way of securing your valuables is by not putting them all in just one pocket.
By dividing your domain names into several groups, you will be able to protect your investments and save money at the same time. Forming a holding company would help you do just that.
In this article, we will further discuss what a holding company is and how it is formed. Moreover, we will identify the advantages of setting up a holding company and why it is considered to be the best business structure for your domain portfolio. Let us start by defining the business structure itself.
What is a Holding Company?
A holding company is a business entity, usually a limited liability company (LLC) or a corporation, that owns other companies called their subsidiaries. It is mainly formed to control these subsidiaries and own their assets. Owning companies happens when they buy certain interests of other companies. They do not sell products or services. They loan assets and funds to their operating companies and play a huge part in investment decisions. However, they are not involved in the daily activities of the subsidiary. This type of business structure is often referred to as a parent or umbrella company. You may see large corporations operating diverse businesses under different names. More often than not, these corporations are holding companies.
How to Form a Holding Company
If you have a diverse domain portfolio, you can categorize your domains according to their niche or goals. Create a company for each category. Divide your assets among these companies and make them your subsidiaries. Create a domain management team for each of these subsidiaries to supervise the daily operations. Your role as a holding company is to oversee them and keep their assets. Nevertheless, you can also purchase stocks from other domain businesses and make them your subsidiary to help increase your holdings.
Business Goals
It is wise to define your goals and vision for your domains. Two reasons why most business owners lean toward forming a holding company are to reduce taxes and to protect their assets. It basically separates the operating companies from its assets to secure them in case of debts and other liabilities. If you have several operating units, it is also advisable to have a board of directors to keep an eye on them. If you are thinking of expanding your business and have a long-term vision for it, then it is advisable to evaluate the benefits of forming a holding company.
Application
Forming a holding company requires you to file the articles of incorporation of your business. This indicates your goals, the names of the officers, and the process of how business decisions will be made. It is important to keep it updated in case changes in your domain company are made. In this case, you are also allowed to be the agent for both your holding company and other business units under it.
Bank Account
Open a bank account for your holding company. This establishes the separation of the company from its subsidiaries. For protection, finances and other assets must be kept in your holding company. You can lend them to your subsidiaries when the need arises. In case you already have a domain investment business running before you decided to form a holding company, you can sell all your valuable assets to the holding company to safeguard them.
Recordkeeping
Separate accounting records must also be maintained. This somehow validates that your holding company is of your operating units. In the event of loss of one of your subsidiaries, your assets are still protected. Because again, your holding company will not be held responsible for your subsidiary’s debts and liabilities. Separate recordkeeping is a preventive measure to keep all your other assets safe from such occurrences.
Advantages of a Holding Company
Asset Protection
As mentioned above, your holding company is separate from your subsidiaries. This means that creditors cannot make your holding company liable for unpaid debts. This shields your assets when one of your subsidiaries experiences loss. If one of your operating companies fails to succeed, it is still considered to be a separate entity from your holding company. This is the reason why it is important to keep the subsidiary’s bank accounts, financial records, and management of daily operations separate from your holding company. Otherwise, you may end up “piercing the corporate veil.” It is when your holding company is too entangled in the subsidiary’s activities, that it can be held liable for the debts incurred by the subsidiary.
Tax Reduction
A holding company does not have to file individual tax returns for each subsidiary. In filing a consolidated tax return, you can write off the losses of one of your subsidiaries against the profits of another to lower all their tax bills. Monetary distribution is also exempt from tax. Dividends paid by subsidiaries to your holding company are free from taxation. However, there are certain requirements for filing a consolidated tax return. The parent company must hold at least 80% of voting power in all of its subsidiaries. In addition to that, a signed agreement between the holding company and the representatives of the subsidiaries is also required by the Internal Revenue Service (IRS) for it to be made legal.
Lower Interest Rates
Holding companies are usually given lower interest rates for loans than other business structures. For this reason, your holding company can fund your subsidiaries from a loan obtained at a lower cost. You can also distribute this loan among your subsidiaries.
Centralized Oversight
As a holding company, you can manage your domains in different subsidiaries with ease. This gives you control over all your operating units without worrying too much about their day-to-day activities. You still have authority in business decisions for all of them which would make it consistent with your domain investing business goals and brand. If one of the officers of your operating business decides to leave, you can still oversee it through the holding company.
Diversification
By having a holding company, it will be easier for you to diversify your portfolio. Funding, as mentioned, is at a lower cost. And you can provide a minimal start-up investment for domains without risking all your assets. This provides more flexibility in growing your domain investing business.
Credibility
Lastly, having a holding company may help build up your image. It demonstrates your credibility in the domain investing business. It signifies that you are well-versed and established in the domain industry. Not only that, but it somehow shows your professionalism as well.
Key Takeaways
For a domain investor that has a large number of assets, and a diverse domain portfolio, it is best to have a holding company. It is not just to organize them according to their niche or purpose, but to also keep their profits and losses separate from one another.
Instead of laying it all down in one company, you can still secure a significant portion of your assets by having a holding company. It is vital that your holding company has the biggest portion of cash among all your operating businesses to keep it protected.
Bear in mind that your holding company should not deal with the operations of your subsidiaries. Only employees of the operating company must deal with the daily operations and are paid using the operating company’s funds. Funds from your holding company are treated as just that, funds, and not directly paid to a certain expense that a subsidiary may have.
This is to maintain its separation from the operating companies and keep creditors away from your holding company in case of unpaid debts. Likewise, funding of all your subsidiaries must be done by your holding company. Since all your assets are kept by your holding company, other assets may be leased to the subsidiary and must be paid to the holding company as an operating expense.
Another important thing to remember is to keep all records and bank accounts separate. This will help you track all transactions better and is useful when reports are needed.
As with any other type of business, it is always best to consult legal experts, such as financial and tax advisors, or lawyers, before deciding on what business structure will suit your domain investing business. Your business needs may differ from those of other businesses. Consider all the factors that may affect your needs and your goals.
Although having a holding company may seem like a lot of paperwork, the benefits of forming one seem to outweigh this. After all, you cannot risk losing all your assets with the failure of just one.