A holding company is a corporation or limited liability company that retains a controlling interest in the stock or assets of other businesses. Typically, the holding company won’t be actively engaged in business operations but instead hold equity interests or assets. A holding company is also called a parent company. Operating companies or subsidiaries are any businesses that are subordinate to the parent company.
Holding Companies Explained
Advantages of holding companies
Holding companies give the businesses they group together benefits from which they would not otherwise be able to take advantage if they operated independently. Here is a list of advantages a holding company has:
Minimizes taxes
Typically, holding companies file consolidated tax returns that allow losses in one subsidiary to be offset against the profits of the other companies. As a result, all the companies pay less in taxes.
Reduces risk
The holding company is not responsible and the loss will not be felt by them if a subsidiary performs poorly, fails, or declares bankruptcy. The company could continue by selling its remaining stock in the failed subsidiary.
A subsidiary is also shielded from any problems other businesses may experience inside the holding company. A holding company may still be protected even if it did not guarantee the subsidiary’s debts, and a plaintiff may not seize the assets of the other subsidiaries.
Protects assets
A holding company may own the valuable assets that belong to its subsidiary. They might possess assets like real estate, machinery, and intellectual property. The assets would be shielded from creditors and any liabilities the operating company might incur while the subsidiary would take over the trading duties of the business and its daily operations.
Increases growth and development
The subsidiary may invest in new business ventures, exit existing ventures, and more effectively diversify their business when the holding company holds valuable assets. Because there is less risk involved with a holding company, the subsidiary will be more inclined to try to expand and develop their business. They have more power to invest in more ambitious projects thanks to a holding company.
Maintains control with less capital
Holding companies can take over a business by acquiring 51% of its stock. A holding company’s company can take control of a company with less capital by buying a portion of it. Additionally, if the subsidiary has a broad portfolio, a holding company may be able to purchase 25% of the stock of the company and take the lead as the largest shareholder. When a company does not have to invest in full ownership of each company, it can control more businesses with smaller sums of money.
What is a holding company?
A holding company is a corporation that doesn’t manage a specific business or take part in its day-to-day operations. Holding companies possess or “hold” a variety of investments, including privately held businesses, stocks, bonds, mutual funds, real estate, gold, patents, and copyrights.
They are regarded as parent corporations that uphold the ability to monitor the operations of the businesses they own, so they have complete control over all management choices and corporate policies. These companies are known as subsidiaries of the holding company.
Disadvantages of holding companies
Overuse of debt
Holding companies frequently use debt, such as corporate bonds and bank loans, to fund their investments and acquisitions. Holding companies that rely heavily on debt instruments may expose themselves and their subsidiaries to changes in interest rates and overcapitalization.
This could lower the holding company’s and its subsidiaries’ overall value. Inaccurate financial reports and numbers that are too optimistic for the company may result from high debt obligations.
Exploitation of subsidiary companies
No significant decisions may be made by a subsidiary’s senior management or staff. All decisions are made by the holding company, which bears little accountability or responsibility. This can lead to frustrated management teams and employees.
Minority shareholders are at a loss
Minority shareholders may be excluded by holding companies from a subsidiary’s decision-making process. This occurs as a result of a holding company’s majority control over a subsidiary, which enables it to appoint directors, a management team, and officers that advance its interests rather than those of the minority shareholders. Minority shareholders are unlikely to possess sufficient voting stock or political influence to prevent the holding company from taking certain actions.
Tax evasion
Some holding companies manipulate accounting statements to lower the tax liability of the holding company and the subsidiary in order to use the subsidiaries as a means of tax evasion.
Example of a holding company
You may be familiar with a number of businesses that function as holding companies. Here is an illustration of a hypothetical holding company and how it might run:
FAQ
How does a holding company make money?
It can earn money either directly from subsidiaries or indirectly by owning more extensive assets. In addition to receiving dividends from its subsidiaries, the holding company will benefit from centralizing services for the benefit of the larger corporate group. They also make a profit from selling assets and subsidiaries.
What is the point of a holding company?
A holding company is one that people establish with the intention of acquiring and holding shares of other corporations. The parent company gains the right to control and sway business decisions by “holding” stock.
Who controls a holding company?
A holding company is a type of financial organization that holds a majority stake in subsidiaries and other businesses. The parent company may oversee management decisions and control the subsidiary’s policies, but it does not carry out day-to-day operations.
What can a holding company own?
- Shares of stock in a corporation.
- Securities, like stocks, bonds, and mutual funds.
- Intangible assets like patents and copyrights.
- Real estate.
- Vehicles or equipment.
- In other words, anything that has value 1
