What is a 'Parent Company'

A parent company is a company that controls other, smaller businesses by owning an influential amount of voting stock or control. Parent companies are typically larger firms that exhibit control over one or more small subsidiaries in either the same industry or complimentary industries. Parent companies can be either hands-on or hands-off with subsidiaries, depending on the amount of managerial control given to subsidiary managers.

BREAKING DOWN 'Parent Company'

A parent company is a larger corporation that has significant ownership over a subsidiary or group of subsidiaries. These partially or wholly-owned smaller companies are controlled by the parent, to varying degrees; however, all parent companies, for the most part, own more than 50% of a subsidiary's voting stock.

Parent companies can either be conglomerates or holding companies. A conglomerate, such as General Electric, is a huge company with its own business venture that also owns other companies with their own business ventures. A holding company, on the other hand, is put in place specifically to own a group of subsidiaries and does not conduct its own business operations. Holding companies normally form to realize tax advantages among a connected group of smaller companies.

Companies can become parent companies by many different means. The two most common ways are through the acquisitions of smaller companies and the spinoff or creation of subsidiaries. For the purposes of accounting, parent companies report results of subsidiaries on audited statements when subsidiaries fall under the same corporate identity.

Examples of Parent Companies

As of 2016, parent companies are common in public markets. in fact, with a rise in corporate mergers and top-heavy industries, parent companies are becoming the norm. When Facebook acquired Instagram, for example, it became Instagram's parent company. Instagram, on the other hand, became Facebook's subsidiary. The two companies operate in joint ventures, but Instagram still has an autonomous team in place, including its original founders and CEO.

This type of parent/subsidiary relationship allows Facebook to realize the benefits of owning Instagram without exerting too much control, giving its team the autonomy it needs to run the business efficiently. Facebook, through Instagram, has an additional platform on which to advertise, an extra source of monthly users and a popular photo-sharing service that strengthens its own platform.

Another example of a parent company is the much more fragmented business of Johnson & Johnson. The company has become a huge conglomerate that is made up of hundreds of business units and product lines. The benefits are two-fold: Johnson & Johnson is able to diversify its revenues, and it is also able increase the sales of its individual business units by branding each product with the Johnson & Johnson name.

RELATED TERMS
  1. Subsidiary Bank

    A subsidiary bank is a type of bank that is located and operated ...
  2. Letter Of Moral Intent

    A letter of moral intent is written to a bank from a parent company ...
  3. Consolidated Financial Statements

    Consolidated financial statements are a merging of the statements ...
  4. Associate Company

    An associate company is a corporation whose parent company possesses ...
  5. Downstream Guarantee

    Downstream guarantee (or guaranty) is a pledge placed on a loan ...
  6. SEC Form 10-12B

    SEC Form 10-12B is a filing required by the Securities and Exchange ...
Related Articles
  1. Investing

    What is a Spinoff?

    Businesses wishing to streamline their operations often sell less productive or unrelated subsidiary businesses as spinoffs.
  2. Insights

    How Instagram Makes Money

    Like many big names in social media, Instagram started as a fun idea without a clear path to profit.
  3. Investing

    Instagram Shopping Now Available More Widely

    Facebook-owned Instagram make Instagram Shopping available to more businesses.
  4. Investing

    Sneaky Subsidiary Tricks Can Cloud Financials

    Use consolidated financial statements to uncover a parent company's true performance.
  5. Investing

    Instagram Claims More Than 1M Monthly Advertisers

    Facebook's Instagram is having a strong 2017, reporting more than a million monthly advertisers.
  6. Investing

    Did Facebook Overpay For Instagram?

    Facebook recently acquired Instagram for $1 billion. Find out if it's worth the price.
  7. Investing

    Instagram: 59% of U.S. Millennials Are Active Users

    Instagram can count more than half of 18-to-24s as active users on the photo sharing platform.
  8. Retirement

    Having the Tough Conversation With Aging Parents

    Here are the most important factors you'll want to cover with your parents sooner rather than later.
  9. Retirement

    Caring for Aging Parents? Consider These 5 Things

    The following are five important considerations that will help you care for your aging loved ones.
  10. Retirement

    How Children Can Help Parents With Retirement

    Sometimes the elderly lose their cognitive skills, that's when it may be time for their children to step in and assist with retirement planning.
RELATED FAQS
  1. What is the difference between a subsidiary and a wholly owned subsidiary?

    Understand the primary differences between a subsidiary company and a wholly owned subsidiary, and their relationship to ... Read Answer >>
  2. What are the Differences Between Affiliate, Associate and Subsidiary Companies?

    The main difference between affiliate, associate and subsidiary companies has to do with the existing level of ownership ... Read Answer >>
  3. How is taxation treated for both the parent and subsidiary company during a spinoff?

    Learn how the potential tax implications of a spinoff can affect both parent and subsidiary companies and how taxes may be ... Read Answer >>
  4. What are the tax implications for both the company and investors in a divestiture ...

    Learn the tax implications for a company and its investors in divestiture events, such as spinoffs, equity carve-outs, and ... Read Answer >>
  5. How does transfer pricing help business?

    Explore several ways that transfer pricing helps businesses. Transfer pricing can often help streamline accounting and business ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center