Last Updated: November 16, 2021
It can get confusing to keep track of all the different types of companies that exist in today’s economy. One type of business is a holding company. You might wonder: what exactly is a holding company? How are they different from other firms?
Don’t worry! In this article, we will discuss holding companies in detail: its types, structures, and benefits. By the time you’re done reading, you’ll be more informed than ever before.
What Is a Holding Company?
A holding company is a business entity that does not manufacture anything, nor sells any product or service. They work by controlling the stock of other companies. Often referred to as the ‘parent company’ or an ‘umbrella’ company, the business whose stock it owns is referred to as subsidiaries.
The main purpose of a holding company is to manage subsidiaries by taking part in major financial and management decision-making. Moreover, just like any other company, it is established with the aim of gaining profit in mind.
Like anything else, there are different types of holding companies. For example, a personal holding company simply owns stocks of other companies. A bank holding company maintains the assets of more than one bank to gain ownership; mutual holding companies allow regular customers to own stocks and gain control over the company.
|DID YOU KNOW? The biggest holding company is JPMorgan Chase & Co. It is a financial holding company.|
How Does a Holding Company Work?
A holding company works by controlling the assets of its subsidiaries. Assets include stocks, bonds, equity, patent rights, and real estate. Holding businesses either buy more than 50% of a company’s stock to gain ownership of the subsidiary, or build up its subsidiaries from scratch while retaining ownership rights.
As mentioned, holding companies do not take part in the day-to-day operations of their subsidiaries; they only take part in major management decisions.
Holding Company Structure
The structure of a holding company is simple. The parent, or mother company, remains at the top, overseeing the management of its subsidiaries. These subsidiaries are below the parent company but are also separate companies on their own. This means that they conduct their own operations.
|DID YOU KNOW? A holding company is usually an LLC or a Limited Liability Company. You can start an LLC and later convert it into a holding company.|
Types of Holding Companies
Now that we have covered what a holding company is, let’s take a look at the various kinds of parent companies.
- Pure – A pure holding company is formed solely to own and control the stock of other companies.
- Mixed – A mixed holding company holds its subsidiaries’ stocks while also running its own operations. Some participate in the day-to-day business of its subsidiary only.
- Immediate – An immediate holding company holds stock of other companies, despite being controlled by another firm. An immediate holding company business plan includes controlling other companies despite being a subsidiary itself.
- Intermediate – As the name suggests, an intermediate holding company is a subsidiary of a large organization, but also a holding company for another entity.
|DID YOU KNOW? There is no minimum number of subsidiaries that a holding company can have!|
|A holding company possesses ownership of several other companies through its own property, stocks, bonds, patents, or other assets.|
|In most cases, these businesses do not take part in the day-to-day operations of the intermediary, but instead, oversee management decisions.|
|Holding companies can either buy more than 50% of stocks of another company or start a holding company from scratch.|
|There are primarily four types of parent companies: pure, mixed, immediate, and intermediate.|
Benefits of a Holding Company
Questioning the benefits of a holding company? Here are a few advantages to consider:
When we think of investing, we usually imagine large sums of money and big corporations. However, with a holding company, you just have to buy 50% of voting stock to gain control. This allows you more control with less investment. A holding company also can elect or remove members based on membership interests.
Even though a holding company has control over a subsidiary, it does not possess any legal liability, financial liability, or debt liabilities. The subsidiaries are independent companies of their own.
a holding company and a subsidiary company can gain tax benefits in this type of structure. Subsidiaries can transfer their profits to a holding company to gain benefits, whereas a holding company can file consolidated tax returns. This combines the profits and losses of the parent company and the subsidiary, making the net profit less than it could have been if the holding company filed a separate tax return. This also reduces tax liability.
Even in the worst-case scenario, if the subsidiary goes bankrupt, it will only mean a capital loss for the holding company. Creditors cannot gain access to the holding company’s assets unless a downstream guarantee is provided.
Holding companies can invest in any company of choice, which provides greater flexibility and a chance to diversify investments.
|DID YOU KNOW? You can easily start your own holding company by getting the help of an LLC service and hiring a registered agent.|
Holding Company Examples
Now we’re going to look at some of the most famous parent companies. You’ve probably heard about some of them!
The first one is Sony. The company doesn’t need an introduction because we all have had at least one Sony gadget. It owns several subsidiaries like Sony Electronics Inc., Sony Pictures Entertainment, and Sony Music Entertainment.
Another famous holding company is Johnson & Johnson. This company does not need an introduction as well, as its products, especially baby care items, are world-famous. It has over 250 subsidiaries! Some of the major subsidiaries are Janssen Pharmaceuticals, Ethicon Inc., and Janssen Biotech.
Lastly, U.S. Berkshire Hathaway, controlled by Warren Buffet, is another famous mutual holding company. Stocks are publicly traded and its subsidiaries include Duracell, Dairy Queen, NetJets, and Helzberg Diamonds.
|DID YOU KNOW? The famous skincare brand Neutrogena is a subsidiary of Johnson & Johnson!|
A holding company does not run its own operations; rather, they possess control over other companies. There are primarily four types of holding businesses: pure, mixed, intermediate, and immediate. These are usually formed because of tax benefits, higher profits, and lower operating capital. You can form a holding company either by buying more than 50% of the stocks of a company or starting one from scratch.
Yes! A holding company has many advantages like tax benefits, more control, less liability, and greater flexibility. Considering all the pluses, it’s a great idea.
The main purpose of a holding company is to control any subsidiaries and look after major financial or management decisions.
To understand this, make sure you know what is a holding company. It is a company whose sole purpose is controlling its subsidiaries. It works by overseeing major decisions of subsidiaries.