What is a Holding Company?
A holding company is a business corporation or limited liability company (LLC) that owns a significant amount of shares in other companies known as subsidiaries, to control and manage their operations. Also known as an umbrella or parent company, a holding company does not engage actively in other companies’ day-to-day activities but exercises control and oversees policies and management decisions through its ownership over them. The holding company may also own assets of the subsidiary company including real estate, patents, trademarks, and stocks.
Companies that are entirely owned by a holding company are called “wholly owned subsidiaries”. While a holding company can oversee these subsidiaries, and hire and fire the managers of its subsidiaries, these managers are ultimately responsible for their respective operations.
Types of Holding Company
Pure Holding Company:
- Solely exists to own shares or membership interests of other companies.
- It does not participate in the day-to-day operations of its subsidiaries.
Mixed Holding Company:
- Engages in both owning shares of other companies and running its own business operations.
Immediate Holding Company:
- Though owns other companies but is itself owned by another company.
- It is a holding company that is controlled by a higher-level holding company.
Intermediate Holding Company:
- These holding companies are also subsidiaries of a larger corporation, similar to immediate holding companies.
Advantages and Disadvantages of Holding Companies
Advantages:
- By holding ownership in multiple subsidiaries, a holding company can limit its liability and financial risk. Losses in one subsidiary do not necessarily affect the holding company or other subsidiaries.
- To protect assets, a parent corporation might set up itself a holding company and at the same time create subsidiaries for different business functions.
- Holding companies are also flexible and easy to establish or restructure. This flexibility allows them to take advantage of favorable tax conditions by relocating to jurisdictions with lower business taxes while maintaining operations elsewhere.
Disadvantages:
- There can be conflicts of interest between the holding company and its subsidiaries, particularly if different subsidiaries have competing goals or strategies.
- It may be difficult for investors and creditors to get a clear view of the overall financial health of a company. Unethical directors might hide losses by shifting debt between subsidiaries.
- Holding companies can also misuse their power by appointing favored directors to subsidiaries, making subsidiaries buy or sell products at unfair prices, or forcing subsidiaries to cut staff or sell off valuable assets to increase the holding company’s financial performance. This can result in ‘vulture capitalism’.
