Holding Company Definition: Everything You Need to Know
A holding company definition is an entity that owns an amount of voting stock in a company that allows the entity to dictate management of the company.3 min read
2. Holding Company Examples
3. Benefits of Holding Companies
A holding company definition is an entity that owns an amount of voting stock in a company that allows the entity to dictate management of the company.
What Are Holding Companies?
There are a variety of entities that can be holding companies:
- Limited liability companies
- Limited liability partnerships
- Parent Corporations
If these entities own voting stock in another company, and the amount of stock gives them managerial control of the company, the entity is considered a holding company. Basically, the only purpose of a holding company is the ability to have control over another company. This differs from traditional ownership of a country, where the purpose would be offering services or producing goods.
A holding company can also be used to own different types of property:
- Real estate
A wholly owned subsidiary is created when a holding company completely owns another business.
There are two basic methods for creating a holding company. First, the entity that wishes to become a holding company could purchase a controlling interest in the business. Second, the potential holding company can purchase enough voting stock that they have the power to dictate company management and policy.
The rules for becoming a holding company can depend on the jurisdiction where the business is located. Generally, a holding company will only own assets, and will not engage in any operations or business activities. In addition to socks in corporations, holding companies can own hedge funds, private equity funds, real estate, and even intellectual property rights.
Holding companies get their name because their only purpose is holding an asset or investment. The holding company itself is known as a parent company, and the businesses that the company owns are called subsidiaries. There are a variety of benefits to establishing a holding company. For one, it makes it easier to expand outside of your primary business. Other benefits include:
- The possibility to consolidate taxes
- The ability to share operating losses
- Much easier divestiture
The rules for forming a holding company vary from legal system to legal system. In some cases, the holding company only needs to own five percent of the subsidiary, and in other cases, ownership of voting stock must be one-hundred percent.
Holding Company Examples
If you want to fully understand holding companies, it's a good idea to check out a common example. Imagine that one company is in the process of raising capital, and to accomplish this goal, they decide to sell 60 percent of their shares to another company. Because the second company now owns a majority of shares in the first, it has the power to control the first company.
Some of the biggest, most recognizable companies in the world are actually holding companies. Johnson & Johnson, for instance, is a holding company. The firm itself doesn't actually produce anything, and instead owns more than 200 subsidiary businesses that are responsible for making products under the Johnson & Johnson label.
In fact, a large number of corporations in modern times are holding companies, including GE and Bank of America.
Benefits of Holding Companies
Establishing a holding company can provide a variety of benefits. However, the biggest advantage of this model is loss protection. For example, if a holding company's subsidiary goes bankrupt, the holding company will be impacted, including losing some of their net worth. However, the holding company will be shielded from the debts of the bankrupt subsidiary company.
Large corporations often choose the holding company structure to shield their assets from each other. The corporation could choose to form subsidiary companies to handle individual tasks, including owning equipment and selling real estate. Reducing tax liability is another benefit of structuring a corporation as a holding company. The holding company can form certain parts of their business in states where the tax burden would be much lower.
Personal assets can also be protected by using the holding company model. When an individual owns assets, they can be liable when debts occur, meaning their personal property such as homes and bank accounts can be vulnerable. Having assets owned by a holding company will protect the individual's assets when a lawsuit or debts occur.
Although holding companies will oversee the other businesses that they own, they aren't actually responsible for operating these businesses.
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