What is a 'Parent Company'

A parent company is a company that has a controlling interest in another company, giving it control of its operations. Parent companies can be either hands-on or hands-off owners of its subsidiaries, depending on the amount of managerial control given to subsidiary managers.

BREAKING DOWN 'Parent Company'

A parent company is different from a holding company. Parent companies conduct their own business operations, unlike holding companies which are set up specifically to own a group of subsidiaries – often for tax purposes. Parent companies can be conglomerates, made up of a number of different, seemingly unrelated businesses, like General Electric – whose diverse business units are able to benefit from cross-branding. Alternatively, parent companies and their subsidiaries may be horizontally integrated, like Gap Inc, which owns the Old Navy and Banana Republic subsidiaries. Or they may be vertically integrated, by owning several companies at different stages of production or the supply chain. AT&T’s acquisition of Time Warner means that it now owns film production and broadcast networks in addition to its telecommunications businesses.

Becoming a Parent Company

The two most common ways companies become parent companies, are either through the acquisitions of smaller companies or through spinoffs.

Larger companies often buyout smaller companies to alleviate competition, broaden their operations, reduce overhead, or to gain synergies. For example, Facebook acquired Instagram to increase overall user engagement and strengthen its own platform, while Instagram benefits from having an additional platform on which to advertise and more users. Facebook, though has not exerted too much control, keeping an autonomous team in place, including its original founders and CEO.

Businesses which want to streamline their operations often spin off less productive or unrelated subsidiary businesses. For example, a company might spin off one of its mature business units that is not growing, so it can focus on a product or service with better growth prospects. On the other hand, if a part of the business is headed in a different direction and has different strategic priorities from the parent company, it may be spun off so it can unlock value as an independent operation – and perhaps be put up for sale.

Accounting for Subsidiaries

Because parent companies own more than 50% of the voting stock in a subsidiary, they have to produce consolidated financial statements that combine the parent and subsidiary financial statements into one larger set of financial statements – and which eliminate any and all overlaps, such as intercompany transfers, payments and loans. These combined financial statements provide a picture of the overall health of the entire group of companies as opposed to one company's standalone position. If the ownership stake of the parent company is less than 100%, a minority interest is recorded on the balance sheet to account for the portion of the subsidiary that is not owned by the parent company.

RELATED TERMS
  1. Subsidiary

    A subsidiary is an independent company that is more than 50% ...
  2. Minority IPO

    A minority IPO is an initial public offering in which shares ...
  3. Consolidated Financial Statements

    Consolidated financial statements are a merging of the statements ...
  4. Taxable Spinoff

    A taxable spinoff is a divestiture of a subsidiary or division ...
  5. Associate Company

    An associate company is a corporation whose parent company possesses ...
  6. Letter Of Moral Intent

    A letter of moral intent is written to a bank from a parent company ...
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. Retirement

    The Booby-trapped World of Parental College Loans

    Private parent loans can help families pay for college. But the repayment timeline associated with the loans can hurt parents’ retirement savings.
  3. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  4. Retirement

    Tips for Helping an Aging Parent

    Many Millennials and Gen Xers find themselves unexpectedly caring for their aging parents.
  5. Financial Advisor

    Top Tips for Family Wealth Transfers

    Essential tips for tackling family wealth transfers.
  6. Investing

    Comparing Spin-offs, Split-Offs and Carve-Outs

    Spin-offs, split-offs and carve-outs are three methods a company can use to divest certain assets, a division or a subsidiary. Here's how they differ.
  7. Financial Advisor

    Transition Planning: Include the Whole Family

    Death is one of the most uncomfortable - and necessary discussions that a family can have. As an advisor, it can be up to you to lead the conversation.
  8. Retirement

    Are You Prepared for Your Parents’ Retirement?

    Dealing with your parents' retirement will be easier if you have a plan ahead of time.
  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.
RELATED FAQS
  1. 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 >>
  2. What is the difference between a subsidiary and a sister company?

    Discover the differences between subsidiary companies and sister companies, and understand how both are related to parent ... Read Answer >>
  3. How is taxation treated during a company 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. 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 >>
Trading Center