You might already know that there are different ways of holding companies. Some popular ones include Private Limited Companies, Partnerships and Limited Liability Partnership. Another common ownership mechanism is a Holding Company. To give you a brief idea, in a Holding Company, the business structure owns other companies. This strategy is often used when an organization is trying to expand to new markets. We get a lot of questions about Holding Companies, and today, we will try to clear the fundamentals around Holding Company with the help of this page.
What Is a Holding Company?
A holding company is a type of business entity that owns and controls other companies’ assets, such as stocks, subsidiaries, or other businesses. Instead of engaging in day-to-day operations, a holding company’s primary purpose is to manage its investments and oversee the strategic direction of its subsidiaries. The Holding Company holds the majority of the stocks of the subsidiaries. This also protects the interest of everyone since it disables any of the major stakeholders from taking over the subsidiary. The subsidiary company may be taking its own business decisions, and the stocks are held by the Holding Company just for the sake of organizational structure.
You will also come across the term Sister Company. Sister Companies are the subsidiaries of the Holding Company that are conducting business in the same domain. The sister company may also have a joint venture partnership among them.
Advantages of Holding Company
There are certainly many benefits of Holding Companies. In this section, we have shared these pros with you. Go ahead and check them out now.
1. The economy of Scale
The subsidiary companies often have the support of the Holding Company. In such a case, the organizations can take advantage of the economy of scale. Here, the company relies on the number of sales to maximize its profits and revenue. This is a win-win situation for the Holding Company and the subsidiary. Moreover, the subsidiary can get easy access to technology.
2. Expansion to New Markets
Since the Holding Company can set up subsidiaries anywhere, it offers them an option to explore new markets. This strategy is often used during business expansion or when Holding Companies are trying to go global. This also improves the customer base of the Holding Company, and it offers them a way out from the existing saturated markets.
3. Going Concern
The parent companies and the subsidiary companies are considered separate entities. In such a case, the core concept of going concern applies to both organizations. This means that the holding company and the subsidiary will continue to operate, and there is no limited life for the business. The death or exit of shareholders will not lead to the cessation of the operations.
4. Independent Identify
The identity of the Holding Company is separate from the subsidiary. The company also offers limited liability. This means that the liabilities of one organization would not put the assets of the second organization at risk. In such a case, the assets of the parent organization remain safe, and there is no risk of bankruptcy.
5. Opportunity to Diversify
Many times, a company may want to enter a new product or a service domain. However, the company may want to do this without diluting its brand. In such a case, the Holding Company will start a subsidiary in a different business. This way, the Holding Company will be able to diversify its products and services without diluting its brand name. Another advantage of this approach is that the Holding Company will be able to create a new brand in the market.
6. Raising Capital
Raising capital for the Holding Company is relatively easy, and they can even get debt financing at a lower interest rate. Moreover, the parent company can also invest in the subsidiary. Hence, you can get the funding easily, making it easy to do business for the parent organization. In addition to this, the Holding Company usually has a cash reserve. The subsidiary can easily take advantage of the cash reserves of the Holding Company and raise capital without any challenge.
7. Research and Development
When it comes to research and development, the holding company can help foster innovation in its subsidiary companies. The cost of R&D is always high, and there is also a financial risk associated. In such a case, the company’s assets can be secured in the parent organization.
8. Tax Benefits
Many times, it has been noticed that the management of the Holding Company creates subsidiaries in countries with lower taxation rates. The Holding Company may divert some of its business through subsidiaries in the foreign land, which helps the Holding Company reduce the tax burden. This is a well-adopted strategy by many conglomerates.
Disadvantages of Holding Company
There are also some cons of Holding a Company. Check them out below.
1. Administration & Management
The administration and management of the subsidiaries of the Holding Company can be challenging. There can be an initial tussle for power and management. There are cases when the Holding Company manages the subsidiaries, and there are also examples where the subsidiaries are managed independently. The holding company also needs to handle the compliance aspect of having subsidiaries.
2. Business Structure
The business structure of the Holding Company can be complex to understand. Moreover, as your progress in time, the Holding Company may lose control of the subsidiary. The management of subsidiaries doesn’t have a major stock, so the Holding Company should vet all the decisions. This can often lead to internal fights.
3. Maintenance of Holding Company
The maintenance cost of the Holding Company can be high since they need to take care of various taxes, compliances and other issues. This may increase the cost of operations in the short term as well as the long term. Moreover, the Holding Company will also need to take care of the paperwork.
4. May Create Monopolies
In some cases, it has been observed that Holding Company keeps absorbing more and more subsidiaries. This may create conglomerates which will further lead to a monopolistic market. The competition commission of various countries may have an issue with this approach.
These were the advantages and disadvantages of the Holding Company. You may also see holding companies with the sole purpose of management of the subsidiaries. This has become quite common. Moreover, if you look at the present trend, you will notice that most of the Holding Companies are large conglomerates operating in different domains and countries.