Holding Company

Holding Company

A holding company is a business entity — usually a corporation or limited liability company (LLC). 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. A holding company typically exists for the sole purpose of controlling other companies. If a subsidiary company goes bankrupt, the holding company may experience a capital loss and a decline in net worth. Once backed by the financial strength of the holding company, the subsidiary company's risk of defaulting on its debt drops considerably. An 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.

A holding company is a type of financial organization that owns a controlling interest in other companies, which are called subsidiaries.

What Is a Holding Company?

A holding company is a business entity — usually a corporation or limited liability company (LLC). Typically, a holding company doesn’t manufacture anything, sell any products or services, or conduct any other business operations. Rather, holding companies hold the controlling stock in other companies.

Although a holding company owns the assets of other companies, it often maintains only oversight capacities. So while it may oversee the company's management decisions, it does not actively participate in running a business's day-to-day operations of these subsidiaries.

A holding company is also sometimes called an "umbrella" or parent company.

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 typically exists for the sole purpose of controlling other companies. Holding companies may also own property, such as real estate, patents, trademarks, stocks, and other assets.

Businesses that are completely owned by a holding company are referred to as "wholly-owned subsidiaries." Although a holding company can hire and fire managers of the companies it owns, those managers are ultimately responsible for their own operations.

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 subsidiary may own its real estate.

This tactic serves to limit the financial and legal liability exposure of the holding company (and of its 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; if one subsidiary were to declare bankruptcy, it would not impact the others.

Holding companies can also serve the purpose of protecting an individual's personal assets. With a holding company, 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 can make a pledge on a loan on behalf of the subsidiary. Ultimately, this can help 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.

Example of a Holding Company

An 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.

Related terms:

Berkshire Hathaway

Berkshire Hathaway is a holding company for a multitude of businesses, run by chair and CEO Warren Buffett. read more

Capital Loss

A capital loss is the loss incurred when a capital asset that has decreased in value is sold for a lower price than the original purchase price. read more

Consolidated Financial Statements

Consolidated financial statements show aggregated financial results for multiple entities or subsidiaries associated with a single parent company. read more

Mergers and Acquisitions (M&A)

Mergers and acquisitions (M&A) refers to the consolidation of companies or assets through various types of financial transactions. read more

Operating Company/Property Company Deal (Opco/Propco)

An operating company/property company deal is a business arrangement in which a subsidiary company owns all the revenue-generating properties. read more

Secondary Business: and Overview

A secondary business is a part of a corporation that is not part of its core functions but supplements it instead. read more

Special Purpose Vehicle (SPV)

A special purpose vehicle (SPV), also called a special purpose entity (SPE), is a subsidiary created by a parent company to isolate its financial risks. read more

Subsidiary

A subsidiary is an independent company that is more than 50% owned by another firm. The owner is usually referred to as the parent company or holding company. read more

Wholly Owned Subsidiary

A wholly owned subsidiary, also known as the parent company, is a company whose common stock is 100% owned by a holding company. read more