Entrepreneurs around the world are continually seeking methods to safeguard their business assets. One of the most efficient solutions is to split the organisation into several companies that are all owned and managed by a single holding company.
So, a massive, multi-million dollar organisation might come to mind when you think about holding companies. And you are mostly right, too.
In this article, we will take a closer look at this popular and tried-and-tested method of reducing risk. Let’s get started.
What is a holding company?
A holding company is a business that doesn’t carry out any specific business activities or other ongoing projects. The function of a holding company is to control corporations, or subsidiaries, that provide services and goods, as opposed to producing or selling them. Holding companies don’t have any goods or services; instead, they own other business assets.
To put it another way, the company does not purchase or sell any services or products. Rather, the purpose of the organisation is to acquire authority over one or more businesses. That is why, even while it may supervise executive decisions made by the company, it stays out of the day-to-day administration of the subsidiaries’ businesses.
Tata Sons serves as the parent company of the Tata Group and is one of the country’s most diverse holding company examples.
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Different types of holding companies
Holding companies are classified into multiple groups based on how they do business. The following explains the various types of holding company:
It is called pure if a holding company was established only to acquire shares in other businesses. The company’s primary activity is to regulate one or more businesses; it does not engage in any other business.
Along with managing another business, a mixed holding company also conducts its own business.
Even when the company is already under the management of another entity, an immediate holding company keeps voting shares or control over another company.
An organisation that serves as a larger enterprise unit and a holding company for another organisation is known as an intermediate holding.
Features of a holding company
Now that we have a clear understanding of what a holding company is and the different types of parent companies, let’s look at the features it comes with.
- The primary function of a holding company is to exercise ownership of subsidiaries, partnerships, or limited liability companies. It may also be the owner of assets like stocks, trademarks, patents, and real estate.
- A “wholly-owned subsidiary” is a corporation whose 100% shares are owned by the parent company.
- A parent company is protected from financial losses. However, the holding company may suffer financial losses and value losses if a subsidiary files for bankruptcy.
Holding company: Advantages and disadvantages
Putting companies under one holding company gives them certain benefits they wouldn’t obtain if they operated independently. Some of them are:
Advantages of a holding company
- More power at a lower cost of ownership
Without requiring a significant investment, it gives the owner of the holding company a controlling position in another. The holding company immediately acquires ownership of the acquired company upon purchasing 51% or more of the subsidiary. A small company owner may use a minor investment to control many businesses by choosing not to buy 100% of each subsidiary.
- Self-governing organisations
When a holding company manages many businesses, each subsidiary is regarded as a separate legal entity. This implies that the respondents would not be entitled to the assets of the other divisions if one of the subsidiaries was legally challenged.
- Consistency in management
The management of a parent company is usually retained when it acquires other subsidiaries. The holding company has the option to stay out of the subsidiary’s operations except to make strategic choices and keep an eye on the subsidiary’s output.
This implies that the management of the subsidiary company stays in their current positions and goes on with business as normal. However, the owner of the holding company gains financial advantages without necessarily taking on more managerial responsibilities.
- Tax implications
When holding companies own 80% or more of each business, they can file a combined tax report and get tax breaks. A combined tax return brings together the financial records of all the companies that the parent company bought along with those of the parent company.
If any of the subsidiaries experience losses in this scenario, the other subsidiaries’ earnings will balance them out. On top of that, making a joint return lowers the overall tax burden as well.
Disadvantages of a holding company
- Organisational and compliance-related costs
Organisational fees apply to the parent company and each subsidiary. Each must also follow its company or LLC legislation and governance papers.
- The complicated nature
A single-entity organisation lacks the complications of holding corporations and subsidiaries. Managing several subsidiaries under a holding company structure for a publicly listed company may be complicated.
Key differences between holding and subsidiary company
|Having a minimum of fifty per cent of the stocks or appointing a majority of the directors of an affiliate makes it a holding company.
|An organisation operating under a parent company’s or holding company’s supervision is known as a subsidiary.
|Although it does not participate in the day-to-day activities of the subsidiary company, a holding company may decide on management choices and policies.
|Although a subsidiary is free to operate independently and pursue its own goals, it is nevertheless required to adhere to the policies and procedures of the holding company.
|Owning many subsidiaries may provide a holding company with tax benefits, asset protection, risk reduction, and diversification.
|The holding company’s resources, knowledge, connections, and standing may all be advantageous to a subsidiary.
|If a company’s only goal is to own its subsidiaries, it may function as either a parent company or a holding company.
|If the holding company holds 100% of the shares in a subsidiary, it is referred to as a totally owned subsidiary; otherwise, it is referred to as a partly owned subsidiary.
|A holding company may have a complicated corporate structure made up of many tiers of subsidiaries.
|Multiple levels of ownership and control may be established when a subsidiary company has its own subsidiaries as well.
The only objective of a holding company is to own other businesses. The parent company obtains the authority to direct and influence corporate choices by “holding” shares. Remember that this is a complicated framework that isn’t appropriate for every business. However, in addition to lowering tax obligations, holding corporations may assist in protecting their owners from risks.