Parent Firm: Everything You Need to Know
A parent firm, or parent company, is a company that is in control of other, smaller companies through ownership of an influential portion of voting stock.3 min read
A parent firm, or parent company, is a company that is in control of other, smaller companies through ownership of an influential portion of voting stock (usually over 50 percent) or other means of control. Parent firms usually exercise their control over companies in their same industry or in an industry that complements their existing business. Such a firm can be either hands-off or hands-on in its approach to its subsidiary companies, depending on the amount of control it chooses to exercise.
If a parent firm holds all of a subsidiary company’s stock, it can completely absorb the company, which involves taking control of all the subsidiary’s assets, retiring the stock, and consolidating the company into it. This is known as a merger or acquisition, and although it may hold many benefits for the acquiring company, there can also be anti-trust issues when the merger occurs with two companies in the same industry. Thus, keeping the company as a subsidiary can sometimes be the more appealing option.
How to Become a Parent Firm
If one desires to make their firm into a parent firm, they must own a subsidiary firm. To do this, one can acquire other companies or spin off part of their company into a lesser, subsidiary company. One may also simply create a second company and purchase it. To do this, one may pursue the following steps:
- Form any kind of business allowed in your state; limited liability company, corporation, sole proprietorship, and so on, following the standard rules for business creation as would normally apply.
- List the company as the sole owner of its stock, which can usually be done on the formative paperwork. For LLCs, member’s names and addresses will be requested; for corporations, it will be board member’s names and addresses, along with the number of initial shares. In either case, it should be the company itself that should be listed.
- Purchase a controlling share of the newly formed company, or merely purchase the ownership interest in the company.
- Amend the new company’s formative paperwork. In some states, it is required that the current management or ownership be reflected in the articles of the company or that an annual filing updates the information. Likewise, the company’s registered agent information must be kept up to date. To do all this, an amendment may need to be filed with the company’s articles.
Examples of Parent Firms
Parent firms can exist in any industry, and most large companies have at least one subsidiary. Some of the benefits of the parent firm/subsidiary relationship include, for the parent firm, a reduction of expenses in the production of certain items, and for the subsidiary firm, a new source of funding from the controlling firm. Prime examples of the parent/subsidiary firm relationship are as follows:
- Facebook. One of Facebook’s major subsidiaries is Instagram. In this relationship, Facebook operates as a joint venture with Instagram, allowing Instagram to maintain an autonomous team that includes its original CEO and other founders. The benefit of this for Facebook is that it gets to own and profit from Instagram, as well as gain a valuable advertising channel, but without having to use resources to direct the course of the company.
- Johnson & Johnson. This is an enormous conglomerate that owns hundreds of product lines and business units. The benefit of this is that the company has diverse revenue streams, while at the same time being able to increase the sales of each of its subsidiaries by attaching the Johnson & Johnson name to it.
- Disney. Disney has many diverse holdings in the entertainment industry, including ESPN, A&E, Pixar, Marvel, and Lucasfilm. Ownership of the final three has been especially lucrative to Disney, as not only do they enjoy increased revenue streams from the movies produced under these labels, but they also have gained the rights to use their intellectual property in their theme park attractions.
Parent Firms and Holding Companies
Parent firms may sometimes be confused with holding companies, but they are not the same. A parent firm is a company that owns lesser, subsidiary firms, operating in conjunction with them in the pursuit of business goals. A holding company, on the other hand, is more of a framework for keeping a number of other companies together. The holding company does not usually produce services or goods; rather, it benefits from consolidated tax obligations and the easier management of legal liabilities.
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