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, that it can control that company's policies and oversee its management decisions.
Although a holding company owns the assets of other companies, it merely maintains oversight capacities and therefore does not actively participate in running a business's day-to-day operations.
- A holding company is a type of financial organization that owns a controlling interest in other companies, which are called subsidiaries.
- The parent corporation can control the subsidiary's policies and oversee management decisions but doesn't run day-to-day operations.
- Holding companies are protected from losses accrued by subsidiaries—so if a subsidiary goes bankrupt, its creditors can't go after the holding company.
Understanding Holding Companies
A holding company exists for the sole purpose of controlling other companies, whether they be other corporations, limited partnerships or limited liability companies. Holding companies may also own property, such as real estate, patents, trademarks, stocks, and other assets.
Businesses that are 100% owned by a holding company are referred to as "wholly-owned subsidiaries." Although a holding company can hire and fire managers of companies it owns, those managers are ultimately responsible for their own operations. It is thus crucial for owners to keep a sharp eye on their businesses to make sure they are running optimally.
The Benefits of Holding Companies
Holding companies enjoy the benefit of protection from losses. If a subsidiary company goes bankrupt, the holding company may experience a capital loss and a decline in net worth. However, the bankrupt company’s creditors cannot legally pursue the holding company for remuneration.
Consequently, as an asset protection strategy, a parent corporation might structure itself as a holding company, while creating subsidiaries for each of its business lines. For example, one subsidiary may own the parent corporation's brand name and trademarks, while another may own its real estate, another may own the equipment, and still, others may own and operate each individual franchise.
This tactic serves to limit the financial and legal liability exposure of the holding company and of the various subsidiaries. It may also depress a corporation's overall tax liability by strategically basing certain parts of its business in jurisdictions that have lower tax rates.
If a holding company is set up correctly, the debt liability of one subsidiary won't impact any others, meaning that if one subsidiary were to declare bankruptcy, it shouldn't impact the others.
Other Advantages of Holding Companies
Holding companies also let individuals protect their personal assets, because those assets are technically held by the corporation, and not by the person, who is consequently shielded from debt liabilities, lawsuits, and other risks.
Holding companies support their subsidiaries by using their resources to lower the cost of much-needed operating capital. Using a downstream guarantee, the parent company makes a pledge on a loan on behalf of the subsidiary, helping companies obtain lower interest rate debt financing than they otherwise would be able to source on their own. Once backed by the financial strength of the holding company, the subsidiary company's risk of defaulting on its debt drops considerably.
A holding company is also called an "umbrella" or parent company.
An Example of a Holding Company
A prime example of a well-known holding company is Berkshire Hathaway, which owns assets in more than one hundred public and private companies, including Dairy Queen, Clayton Homes, Duracell, GEICO, Fruit of the Loom, RC Wiley Home Furnishings and Marmon Group. Berkshire likewise boasts minor holdings in The Coca-Cola Company, Goldman Sachs, IBM, American Express, Apple, Delta Airlines, and Kinder Morgan.