A Holding Company or 'HoldCo', is a company with the sole purpose of holding assets. In the world of real estate, a holding company is the owner of all land assets, property assets and other subsidiary companies. The holding company is owned by one or many shareholders/partners.
Why would anyone need a Holding Company?
Holding companies are often used because of the limited liability protection they provide over all the assets which the company owns. This is important if/when legal battles occur which might jeopardize its asset holdings if the opposing party seeks monetary damages.
This limited liability using a holding company works best when it is used in conjunction with an Operating Company (OptCo) when leasing out income properties or other investments.
Example of how protection with a HoldCo works:
After years of building your property portfolio, you find yourself being sued by a former business associate for unrelated damages. This long drawn out court battle takes a toll on your finances and ultimately forces you into personal liquidity.
Because your assets have been kept in a holding company, any damages you are liable to pay reduce the risk that any assets in your holding company can be used as part of the final payout.
We say "reduces risk" as this is not always the case. Depending on the circumstances surrounding the legal battle, it has been possible in the past for an individual to directly attack a holding company as part of the law suit.
Are there tax benefits?
In the past there have been some great tax incentives to use a Holding Company. With more and more loopholes being closed in tax law, it has become increasingly difficult to take advantage of taxation benefits vs if you were holding assets in your own name.