Proper allocation of capital is an investor’s number one job. — Charlie Munger, Poor Charlie’s Almanack
What does your company expect to make annually in profit in your most optimistic scenario? Imagine, ten years down the road you want to re-invest some of that money into a great new idea. Now imagine paying Germany’s peak income tax rate of 45% on any extracted funds before being able to re-invest. The funding for your new venture would be drastically reduced if you didn’t have a holding structure in place.
Holding structures are popular among startup founders because they offer many benefits. In this ownership model, each founder first forms a limited liability company (such as a UG or a GmbH), which he or she owns 100%. These companies become the parent companies of a joint subsidiary, which becomes the operating company for the venture.
The operating company is the one that builds the product and markets it to customers. The holding companies are generally passive and do nothing except hold shares in the operating business and potentially in other ventures.