What is a Holding Company?
A holding company is a parent corporation, limited liability company, or limited partnership that owns enough voting stock in another company to control its policies and management. The company does not have any operations or active business itself; instead, it owns assets in one or more companies.
BREAKING DOWN Holding Company
A holding company exists for the sole purpose of controlling another company, which might also be a corporation, limited partnership or limited liability company, rather than for the purpose of producing its own goods or services. Holding companies also exist for the purpose of owning property such as real estate, patents, trademarks, stocks and other assets. If a business is 100% owned by a holding company, it is called a wholly owned subsidiary.
One benefit of forming a holding company is that the holding company itself is protected from losses. If one of its companies goes bankrupt, the holding company experiences a capital loss and a decline in net worth, but the bankrupt company’s debtors and creditors can’t pursue the holding company for remuneration. Thus, a major corporation might structure itself as a holding company with one subsidiary to own its brand name and trademarks, another to own its real estate, another to own its equipment and others to operate each franchise. This way, each subsidiary, as well as the holding company itself, enjoys limited financial and legal liability. Structuring a company this way can also limit tax liability by strategically basing certain parts of the business in jurisdictions with lower tax rates.
Holding companies also allow individuals to protect their personal assets. Rather than owning assets personally and, therefore, being liable for their debts, potential lawsuits and other risks, holding companies can own the assets so that only the holding company’s assets and not the individual’s assets are at risk.
A holding company’s operations consist of overseeing the companies it owns. It can hire and fire managers if necessary, but those companies’ managers are responsible for their own operations; the holding company is not. Although the holding company does not manage the day-to-day operations of the companies it controls, the owners should still understand how their subsidiaries operate to evaluate the businesses’ performance and prospects on an ongoing basis.
The holding company supports the subsidiaries by lowering the cost of capital due to its overall strength. Using a downstream guarantee, the parent company makes a pledge on a loan on behalf of the subsidiary. A downstream guarantee can be undertaken to help a subsidiary company obtain debt financing that it otherwise couldn't, or to obtain funds at lower interest rates than it could obtain without the holding company's guarantee. In many instances, a lender may be willing to provide ﬁnancing to a corporate borrower only if an afﬁliate agrees to guarantee the loan. Once backed by the financial strength of the holding company, the subsidiary company's risk of defaulting on its debt is considerably less.
A good example of a holding company is Berkshire Hathaway. One of the world's largest multinational companies by revenue, Berkshire owns assets in over one hundred public and private companies. Its major holdings include Berkshire Hathaway Energy, Business Wire, Dairy Queen, Clayton Homes, Duracell, GEICO, Fruit of the Loom, RC Wiley Home Furnishings and Marmon Group. The company also has minor holdings in companies such as The Coca-Cola Company, Goldman Sachs, IBM, American Express, Apple, Delta Airlines and Kinder Morgan.