We’d like everyone to close their eyes, count slowly to ten, and picture a garage. And not just any garage. Picture a huge garage with, like, ten cars in it. Maybe there’s a brand-new Jaguar over here, maybe there’s a ten-year-old Subaru Outback over there. Okay, everyone got their garage pictured? Great. Now let’s say that one of those cars—let’s go with the Jag—is out on the road when, all of a sudden, it’s involved in a major car accident. The vehicle isn’t totaled, but it’s close. That really sucks, but the good news is that none of the other nine cars were affected by the Jag’s accident, even though they all share a garage.
This is kind of how a “protected cell company,” or PCC, works. There is one overarching legal entity—the garage—that oversees and manages all the little protected cells, which are the cars. Each cell operates on its own, and if it incurs liabilities (like our Jaguar), those liabilities are its own only, and do not get pushed off onto the other cells.
Some folks out there might be thinking, “Gosh, PPCs sound a lot like segregated portfolio companies, or SPCs.” To them, we would say...yes they do, because they’re the same thing.
And others might be saying, “Gosh, this sounds like your standard parent company-subsidiary corporate structure.” To them, we would say...sort of, but there are some significant differences. For one, PCC cells are a lot more financially and legally separated than sister companies are. And two, parent companies and their subsidiaries are everywhere, but PCCs only exist in a handful of places, like the Cayman Islands, Bermuda, and the state of Delaware.
The whole purpose of this arrangement is so that, if one cell goes belly-up, the other cells can’t be held liable for its losses. So far, this theory has never actually been tested in court, so we don’t know if cells would be legally treated like subsidiaries…or like the separate entities they sometimes really want to be.
You can open your eyes now.
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Finance: What is a Holding Company?6 Views
Finance a la shmoop what is a holding company? okay okay enough of that [Man and woman crying in each others arms]
different kind of holding company your great grandpappy Milton died and left
you 20 million bucks you've always wanted to own your own bar or like 20 of
them so you hop in your f150 which you lovingly named Roscoe and you buy 20
bars for a million dollars each but they produce so much cash that well a year
later you have five million bucks to spend on more bars but you're kind of [Car drives between bars across the US]
done with driving all over creation in old Roscoe there so you buy a mega
distillery and then you buy a DJ music management company and then you buy an
insurance company specializing in insuring bars you know it's a lot of
pool tables and fights that happens in that way in movies anyway and then you [Man punches a man at a pool table]
buy a pool cue stick supply company because well in those fights they
always seem to be the first thing to break each of these businesses exist
separately and makes money on its own so you have a whole pile of assets here
kind of different divisions they're pretty well separated in each of which
kind of lives on its own but it's happy to have a dotted line relationship with
the other companies that are sort of in the family and you note that in any [Person highlights day in the calendar]
given year one company might be very profitable while another might be losing
money so you come up with a clever idea of having a holding company put all of
the assets into one legal entity framed as an operating company so that taxable
gains from one division can be efficiently offset by losses from
another and the party rages on so this is a pretty common structure in [People partying at a club]
industries where one hand kind of sort of washes the other
check out all the little companies that comprise Time Warner, HBO, Turner, TBS and
kind of part of Hulu and on and on and on and what about alphabet you have a
holding company for Google yeah well there's you know YouTube and nest labs
and calico and WayMo a bunch of other stuff so yeah a holding company holds
other companies and a lot of times it's done just for tax optimization and for
friendly dealings among the various partners got it when things aren't going well well [Man and woman crying]
and it's a different kind of holding company and there's a whole lot of
crying....
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