Holding Company (Business) - Explained
What is a Holding Company?
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What is a Holding Company?
A holding company is a company that has a controlling interest in another company. In simpler terms, a holding company is a parent company that owns enough outstanding stock in another company to exercise complete control over its policies and management decisions. The company that the holding company controls is called its subsidiary. If a holding company owns a 100% stake in a subsidiary, that subsidiary is called a wholly owned subsidiary. Holding companies as well as their subsidiaries can be corporations, limited liability partnerships or limited liability companies.
How Does a Holding Company Work?
A holding company's primary objective is to control another business. However, a holding company may also be formed for owning real estate, stocks and bonds, and intellectual property such as patents and trademarks. Another reason why holding companies choose to invest heavily in subsidiaries is to shield themselves from losses and other liabilities associated with direct ownership. For example, a holding company is not liable to pay remuneration to investors if one of its subsidiaries goes bankrupt. Successful corporations usually distribute their assets, including intellectual properties among their subsidiaries. This not only minimizes their liabilities but also provides tax benefits in cases where subsidiaries are situated in lower tax zones. A holding company may also help individual investors secure their personal assets by placing their asset investments with a subsidiary, so that during an event of bankruptcy, the investors personal assets are safe from potential compensation claims. The management of a holding company is expected to oversee the functioning of its subsidiaries. However, it is usually neither possible nor advisable for a holding company to micro-manage its subsidiaries. This job is best left to the management of the individual subsidiaries, although the holding company still reserves complete authority to appoint or dismiss managers of its subsidiaries. Being associated with a major corporation has its share of benefits for the subsidiaries as well. In the event that a subsidiary needs to take a loan, its parent company can streamline the lending process by providing a downstream guarantee to the lenders on behalf of the subsidiary. Such a downstream guarantee makes it possible for a subsidiary to acquire loans of substantially higher value and at more lucrative rates of interest than would have conceivable without a guarantee. Below are a few examples of holding companies along with their subsidiaries: Berkshire Hathaway with holdings in GEICO, Dairy Queen, Long & Foster, Coca Cola, American Express, besides several other wholly owned subsidiaries, and majority as well as minority holdings Tata Sons Limited, that has holdings in Tata Steel, Tata Motors, Tata Power and other Tata Group companies Loews Corporation with majority holdings in CNA Financial Corporation, Loews Hotels, Consolidated Container Company and several other subsidiaries.
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