A holding company is a firm that doesn’t produce goods or services, but rather only has investments in other firms. Most businesses are organized as operating companies, meaning they manufacture items or provide services. Essentially, a holding company invests in operating companies that actually produce goods or offer services. When a company has its own operations and also owns other companies, it’s known as a parent company rather than a holding company. Here is an overview of holding and parent companies, including how they are similar to and different from each other.
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Holding Company Basics
The businesses that both holding and parent companies own are known as subsidiaries. If the holding or parent company owns 100% of the subsidiary, it’s called a wholly owned subsidiary.
A holding or parent company may own a smaller stake, including less than 50%, as long as it gives the subsidiary’s managers day-to-day control. But to be a holding or parent company it must have overall control of the subsidiary, being able to hire and fire executives and set strategy. The controlling stake is one thing that distinguishes holding companies from mutual funds and hedge funds that have minority stakes in companies.
Certain tax benefits accrue to holding companies that own greater than 80% of the shares in a company.
Subsidiaries of parent companies are often not acquired by purchasing shares, which is the way holding companies typically get their subsidiaries. Instead, parent companies often create subsidiaries by spinning off operating units.
Unlike mutual funds and hedge funds, holding and parent companies are also long-term owners rather than short-term traders, just buying and selling ownership shares.
Holding Companies and Parent Companies: Examples
One of the best-known holding companies is Berkshire Hathaway. Warren Buffett’s company owns GEICO, Dairy Queen and Fruit of the Loom among other businesses. Another well-known holding company is Alphabet, which owns Google, YouTube, Nest and other companies.
These holding companies are conglomerates that own a number of otherwise unconnected businesses. Other holding companies are umbrella corporations that own, as subsidiaries, various operating units of what might otherwise be the same company. This is often seen in financial services, where examples include JP Morgan Chase and Bank of America.
Facebook is a parent company. It has operations of its own and also has subsidiaries such as WhatsApp and Instagram. Amazon, another parent company, owns subsidiaries such as Zappos and Whole Foods.
Holding Companies and Parent Companies: Benefits
There are numerous benefits to organizing a business as a holding company. One of the biggest is risk management. If a subsidiary is sued and winds up owing a lot of money, for instance, the holding or parent company is not liable. A subsidiary can file for bankruptcy protection and the holding or parent company doesn’t have to make good on its debts.
A subsidiary may enjoy lower borrowing costs if the holding or parent company chooses to make itself potentially liable by guaranteeing the subsidiary’s debts.
Holding companies can also save money on taxes. The holding company can base itself in a state or country with low tax rates. That can reduce the taxes it must pay on money received from subsidiaries. If a holding company owns at least 80% of the subsidiary, it can avoid paying double federal income taxes on dividends the subsidiary pays to its stockholders.
Both holding and parent companies make it easier to divest businesses. It’s simpler to sell a wholly owned subsidiary that operates separately from other subsidiaries than to carve out assets for sale.
Some wealthy families form holding companies in part to simplify inheritance bequests. Rather than heirs getting pieces of several businesses or other assets, they can get shares in the holding company.
Holding companies may own assets other than shares in another company. For instance, they may own intellectual property such as trademarks, copyrights, patents, real estate and mineral rights. A large corporation may set up separate subsidiaries for each of these. Other subsidiaries may own equipment, management services and even individual franchises.
Because they don’t have to own 100% of a subsidiary to control it, holding companies let investors leverage their financial strength. They can purchase 51% of two companies instead of purchasing 100% of one. And sometimes control can be acquired for much less than 51%, allowing investors to achieve greater diversification without relinquishing control.
Holding Companies and Parent Companies: Limits
Holding companies usually don’t directly manage their subsidiaries, however. When a company is acquired by a holding company, its existing management often stays in place. The holding company may direct long-term strategy and allocate capital resources. But it doesn’t get involved in day-to-day management.
Parent companies may be more or less involved in their subsidiaries’ management. Subsidiaries of parent companies may face liability it the parent company’s business activities result in a legal loss or bankruptcy.
Holding companies face some restrictions when it comes to the type of business entities that they can own. For instance, S corporations can’t be owned by other corporations. Nor can they be owned by partnerships. This means that typical holding companies cannot own S corps. Also, sole proprietorships can’t be owned by holding companies. They must be owned by individuals.
Bottom Line
Holding and parent companies can be powerful tools for generating profits and protecting assets. They can help manage risk, reduce taxes and increase leverage. However, this is a complex area of business. Many businesses may be better off sticking with a less complex structure with different operating units.
Business Tips
- Whether being organized as a holding company is a good idea for your business is something a financial advisor can help you with. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to invest in a well-known brand like Google, you’ll actually be investing in an entity known as Alphabet, the holding company that owns Google. To get started investing in these companies, here are some brokerages that can help you identify which holding, parent and independent operating companies would be a good fit for your portfolio.
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