Following the previous example here, the relationship between entities and parties are draw, but a related entity to ABC Entity is added in XYZ Entity, which serves as the holding company for ABC Entity’s business assets. The business web might look like this:
This business web demonstrates why a holding company is an effective approach to protecting assets. ABC Entity leases assets from XYZ Entity, (even as they share common ownership), although the personal guarantees for Lender One expose the owners’ interest in XYZ Entity, (which is one reason why businesses want to avoid personal guarantees if possible). If ABC Entity defaults on its loan with Lender One, only the assets of the ABC Entity are exposed and not XYZ Entity’s assets, (as ABC Entity utilizes them through a lease).
The connections to XYZ Entity are limited to acquiring assets and leasing them to ABC Entity. By limiting contracts to just ABC Entity and lenders, XYZ Entity minimizes its exposure to actions that would attack the assets. If ABC Entity were to cease operations, XYZ Entity could enter into other lease agreements with a similar entity owned by John Doe and Calvin Smith. A holding company can be established for different types of assets, like equipment and buildings, which both protects the assets and makes them easier to sell separately from ABC Entity.