A company that holds the stocks of some other companies is referred to as a holding company. These types of companies don’t have any functions, services, and any other inaction businesses. Rather, the holding firm will own the assets.
It may be the shares of stock in different corporations, bounded partnerships, bounded liability firms, private equity collection, stocks of the public, real estate, trademarks, brand names, copyright, or virtual things that have value.
As the name symbolizes, its role is to have the membership preferences or the controlling stock of different firms. There are also some companies that do manufacturing, selling or running the business. They are known as operating companies. The rest divisions hold vehicles, real estate, intellectual properties, machines, equipment, or any other things that possess a value used by the functioning companies.
Knowing the Holding Companies
The major aim of the holding companies is to manage other companies, let it be some other corporations, bounded liability firms, or limited partnerships. In many situations, the holding companies will also have trademarks, patents, real estate, stocks, and so on.
The businesses which are fully owned by the holding company are known as “wholly-owned subsidiaries.” Even though the company is able to hire or fire the staff of the firm that it owns, these staffs are in charge of their own activities. Therefore for the owners, it is important to have an eye in their operation to make sure that they are running efficiently.
Different Types of Holding Companies
Pure
A holding company becomes pure if it is developed for the reason of owning stocks in other firms. Moreover, the firm doesn’t get to participate in any other businesses except managing one or more than one firm.
Mixed
In the case of a mixed holding firm, apart from managing other companies, it takes part in its own operations. A mixed holding company is also called a holding operating company.
The holding companies which take part in fully independent lines of business from their subsidiaries are termed as conglomerates.
Immediate
The immediate holding company can be described as the company which manages other companies or keeps a voting stock, despite the reality that the firm itself is managed by another firm. Actually, it is holding a firm which is already a subsidiary of another one.
Intermediate
An intermediate holding is a company that is already a subsidiary of a huge firm and which holds another entity. The intermediate holding company will be excluded from issuing their financial data, being a holding firm for that small group.
How it functions
Mainly, there are two different methods by which corporations may become holding companies. The first one is through nailing the needed shares or voting stocks in other companies. Thus getting the calibre to manage their functions. The next one is by developing a fresh corporation from the ground up and then holding the rest, or the section of the new shares of the corporation.
Even though getting the voting stack above 50% of another company offers better control. Always a mother company can manage the activity of decision-making while owning 10% of its stocks.
This connection between the parent company and the corporations they manage is called a parent-subsidiary relationship. Here, the parent company is called as the mother company, where the organization obtained is known as a subsidiary. When a parent company manages the entire voting stock of another firm, then the organization is known as a wholly-owned subsidiary of the mother company.
Advantages of Holding Companies
Better Control for a Small Investment
It provides the holding company owner with a managing interest without investing a huge amount. If the mother company owns 51% of the subsidiary, then it automatically obtains access to the gained firm. Without owning 100% of each subsidiary, the business owner obtains access to several entities with a minimum investment.
Independent Entities
When a holding firm includes the management of different companies, each subsidiary is observed as a single legal entity. It implies that in case any one of the subsidiaries needs to face any legal action, then the plaintiffs are not apt to maintain the assets of other subsidiaries. Yet, when the subsidiaries are charged independently, it is unlucky that the mother company will be responsible.
Management Continuity
While a mother company obtains other subsidiaries, it mostly keeps management. It is a crucial part in the case of the owners of subsidiaries-to-be, those who are thinking of agreeing to the acquisition or not. The holding company can opt for not to be a part of the functions of the secondary firms, excluding while it reaches strategic decisions and keeping an eye on the subsidiaries’ activities.
It implies that the staff of the subsidiary company keeps their current roles and resumes doing business as common. While checking from the other side, the owners of the holding firm have financial advantages without including his management activities.
Tax Effects
The holding firms which own more than 80% of all subsidiaries can obtain the benefits of the tax by completing the consolidated tax returns. The combination of financial data of the entire records along with the mother company is referred to as consolidated tax returns. Here, in most cases, one of the subsidiaries should meet losses, they may be balancing with the profits of other firms. Also, the total effect of stuffing returns is a reduced tax liability.
A Few Final Words
You can define a holding company as a company that the people start with the aim of buying and holding the shares of other firms. Using holding the stock, the mother company is apt for managing business activities. Holding firms provides a number of advantages, like getting better management within a small investment, keeping control of the subsidiary firm, and experiencing a lower liability of tax.