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Holding Company

What Is A Holding Company?

A holding company is an entity that does not involve in the operational aspects of a business but exercises complete control over it based on its stock ownership. The firms these entities supervise and keep a hold on are referred to as their subsidiaries. As the subsidiaries grow, they have the liberty to decide and begin their journey independently without a controlling authority further.

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The only motive of the holding firms behind owning maximum shares of another company is to enjoy supremacy. Though these differ from a parent company’s roles, responsibilities, and purpose, they are used synonymously in many jurisdictions.

Key Takeaways

  • The holding company is the company that holds the majority voting shares of another company, referred to as its subsidiary. The former, however, enjoys full control over the management of its subsidiaries.
  • All the directions and policies of the subsidiary are directed by these companies that typically do not produce anything or provide any service themselves but control it.
  • Pure, mixed, immediate, and intermediate are some forms of holding firms found in the business sector.
  • Such holding companies are not necessarily the parent companies of the subsidiaries.

Holding Company Explained

A holding company aims to gain control over more and more companies. They do it by owning stocks and assets belonging to the latter. These entities neither participate in selling the products and services that the firms under control manufacture and market nor are involved in any other business operations or activities. Instead, the sole purpose of those firms is to control and keep a watch on the subsidiaries.

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It is important to learn how they are classified to understand the holding company’s meaning. These entities are categorized as – pure, mixed, immediate, and intermediate – based on their function in the business sector.

  • A pure holding firm is one whose only motive is to gain control over another company with no interest and participation in any other business.
  • Mixed ones are those that already have a business, and they still look forward to controlling other companies.
  • An immediate one is a holding entity under another holding firm’s control.
  • Intermediate holding companies are those that are themselves the subsidiaries of large corporations besides being held by another entity at the same time.

In most cases, these companies may act as the parent company and hold over 50% of rights in the subsidiary companySubsidiary CompanyA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company.read more through stock ownership. They may maintain voting rights in the companies they exercise control over and hold responsibility for tax obligations of the subsidiary and business operations and management of the sister concerns in the respective jurisdictions. As parent companies, if so to their subsidiaries, they could also become a guarantor for the latter in their financial requirements.

Examples

Let us consider the examples below to understand how and why such firms come into existence:

Example #1

In 2015, Google underwent a corporate restructuring and became a subsidiary of Alphabet, Inc., a newly formed holding entity for Google and many other related subsidiaries. It owns the substantial intellectual property through its subsidiaries and is entirely driven by its earnings, cash flows, and assets. Over 85% of its total revenue in 2018 was generated from its primary business, i.e., advertising.

Alphabet, Inc. was formed with the underlying intention of narrowing Google’s business scope, focusing on its core business, and creating a better management scale by running Google’s subsidiaries separately.

Example #2

JPMorgan Chase & Co., one of the largest global investment banking and financial services holding companies, has over 40 subsidiaries worldwide in investment banking, asset management, and wealth management, which include JPMorgan Chase Bank, JPMorgan Asset Management Holdings Inc., JPMorgan Securities LLC, and Chase Bank USA.

Advantages

The concept of holding companies encourage the owners to make smaller investment and enjoy greater control over the subsidiary companies. The holding company and subsidiary company have a stake in the assets. While they share profits, they also enjoy limited liability in case of losses. The holding entity has multiple ownerships, and hence its liabilities remain divided, which makes it easier for them to handle the losses.

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Holding companies that own 80% or more ownership in another firm can have significant tax benefitsTax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place.read more. First, they can file consolidated tax returns. As the name implies, this form helps add up the finances of all the acquired companies and a parent company for the holding firm. As a result, these companies get an opportunity to reduce their tax liability. On the other hand, the parent companies can enjoy tax advantage under the regional taxation laws by declaring the holding firm and its subsidiaries as entities of different jurisdictions. 

In the UK, however, holding company accounting for tax is different. There, it does not engage in operations and only takes an interest in holding the companies’ assets. As these companies could only earn by leasing the owned assets to the subsidiaries, they hardly have any additional corporate tax liability.

Disadvantages

As holding companies do not confine themselves to owning one firm, it is difficult for the stakeholdersStakeholdersA stakeholder in business refers to anyone, including a person, group, organization, government, or any other entity with a direct or indirect interest in its operations, actions, and outcomes.read more to assess their financial health. The confusion that arises further due to multiple ownerships creates a rift between the parties involved. Moreover, the dispute between the holding firm and its subsidiaries makes the latter separate itself if its growth is significant enough to run a setup independently.

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The formation of these entities involves various payments to multiple authorities. Hence, it becomes an expensive and complicated affair for the entities involved. Bearing compliance costs, therefore, becomes one of the major cons of setting up holding firms.

Holding Company vs Subsidiary Company

While the holding firm is the controller, the subsidiary is the one that is controlled. This is the basic difference between the two terms. In addition, the former is the one that owns more than 50% share of another company. In contrast, a subsidiary firm has more than 50% shares owned by another entity or corporation.

However, the holding and a subsidiary firm are not confined to remaining the controlling and the controlled entity forever. Instead, one holding firm can become a subsidiary of another holding entity, and if it grows significantly, a subsidiary company can hold shares of another firm.

Frequently Asked Questions (FAQs)

What is a bank holding company?

Bank holding companies are those corporations that enjoy full control over one or more banking institutions without exercising a role in offering banking services. In short, the sole motive of such entities is to gain controlling power.

How to start a holding company?

If one wishes to start a holding firm, one must register the entity in a state while providing all details about the same. The information includes:
– Providing the business name
– Submitting the articles of incorporation.
– Mentioning the name of the person responsible for operating the company affairs

How does a holding company make money?

The holding firms can make money through the subsidiary firms by leasing the owned stocks to the companies they control while receiving an amount in return. In addition, they might agree to offer back-end services to their subsidiaries and get paid for it.

Holding Company (Parent Company) Video

 

This article is a guide to What is a Holding Company. We explain its examples, advantages & disadvantages, examples & comparison with the subsidiary company. You can learn more about corporate finance from the topics below: –

  • Zombie Company
  • Holding Company Examples
  • Diseconomies of Scale Meaning
  • What is Statutory Merger?


This post first appeared on Free Investment Banking Tutorials |WallStreetMojo, please read the originial post: here

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