Investopedia: What is a 'Holding Company'?

Holding Company

What is a 'Holding Company'

A holding company is a parent corporation, limited liability company or limited partnership that owns enough voting stock in another company to control its policies and management. A holding company exists for the sole purpose of controlling another company, which might also be a corporation, limited partnership or limited liability company, rather than for the purpose of producing its own goods or services. Holding companies also exist for the purpose of owning property such as real estate, patents, trademarks, stocks and other assets. If a business is 100% owned by a holding company, it is called a wholly owned subsidiary.
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BREAKING DOWN 'Holding Company'

One benefit of forming a holding company is that the holding company itself is protected from the losses. If one of their companies goes bankrupt, the holding company experiences a capital loss and a decline in net worth, but the bankrupt company’s debtors and creditors can’t pursue the holding company for remuneration. Thus, a major corporation might structure itself as a holding company with one subsidiary to own its brand name and trademarks, another to own its real estate, another to own its equipment and others to operate each franchise. This way, each subsidiary as well as the holding company itself has limited financial and legal liability. Structuring a company this way can also limit tax liability by strategically basing certain parts of the business in jurisdictions with lower tax rates.

Holding companies also allow individuals to protect their personal assets. Rather than owning assets personally and therefore being liable for their debts, potential lawsuits and other risks, holding companies can own the assets so that only the holding company’s assets and not the individual’s assets are at risk.

A holding company’s operations consist of overseeing the companies it owns. It can hire and fire managers if necessary, but those companies’ managers are responsible for their own operations; the holding company is not. Although the holding company does not manage the day-to-day operations of the companies it controls, the owners should still understand how these their subsidiaries operate to evaluate the businesses’ performance and prospects on an ongoing basis.
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Wholly Owned Subsidiary
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A wholly owned subsidiary is a company whose common stock is 100% owned by another company, the parent company. Whereas a company can become a wholly owned subsidiary through an acquisition by the parent company or having been spun off from the parent company, a regular subsidiary is 51 to 99% owned by the parent company. When lower costs and risks are desirable or when it is not possible to obtain complete or majority control, the parent company might introduce an affiliate, associate or associate company in which it would own a minority stake.
BREAKING DOWN 'Wholly Owned Subsidiary'
Because the parent company owns all the shares of a wholly owned subsidiary, there are no minority shareholders. The subsidiary operates with the permission of the parent company, which may or may not have direct input into the subsidiary’s operations and management. For example, a wholly owned subsidiary may be located in a country different from that of the parent company. The subsidiary most likely has its own senior management structure, products and clients. Having a wholly owned subsidiary may help the parent company maintain operations in diverse geographic areas and markets or separate industries. These factors help hedge against changes in the market or geopolitical and trade practices as well as declines in industry sectors.

Pros and Cons of a Wholly Owned Subsidiary

Although a parent company has operational and strategic control over its wholly owned subsidiaries, the overall control is typically less for an acquired subsidiary with a strong operating history overseas. When a company hires its own staff to manage the subsidiary, forming common operating procedures is much less complicated than when taking over a company with appropriate leadership already established. In addition, the parent company may apply its own data access and security directives for the subsidiary as a method of lessening the risk of losing intellectual property to other companies. Similarly, using similar financial systems, sharing administrative services and creating similar marketing programs help reduce costs for both companies, and a parent company directs how its wholly owned subsidiary’s assets are invested.
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Subsidiary
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A subsidiary is a company with voting stock that is more than 50% controlled by another company, usually referred to as the parent company or the holding company. A subsidiary is partly or completely owned by the parent company, which holds a controlling interest in the subsidiary company. In cases where a parent company owns a foreign subsidiary, the subsidiary must follow the laws of the country where it is incorporated and operates, and the parent company carries the foreign subsidiary's financials on its consolidated financial statements.
BREAKING DOWN 'Subsidiary'
"Subsidiary" is an adjective that describes when something or someone serves to assist or supplement another thing or another person. In a business setting, a subsidiary becomes part of a parent company to provide the parent with specific synergies, such as increased tax benefits, diversified risk, or assets in the form of earnings, equipment or property. For these purposes, liabilities, taxation and regulations treat subsidiaries as distinct legal entities.

The purchase of interest in a subsidiary differs from a merger in that the parent corporation can acquire the controlling interest with a smaller investment. Additionally, stockholder approval is not required in the formation of a subsidiary as it would be in the event of a merger. Warren Buffett's Berkshire Hathaway Inc., for example, has a long and diverse list of subsidiaries, including Clayton Homes, the Pampered Chef, GEICO Auto Insurance and Helzberg Diamonds.
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