Holding companies are those companies that hold or keep the stocks of other companies. These companies do not perform any activities like manufacturing. Instead, they possess the assets of other firms.
These companies are known as parent companies as they possess the stocks of other companies. There are various things that have value owned by a holding company. It may be trademarks of other firms, patents, copyright, or their brand names.
Companies that are controlled by a holding company are known as subsidiaries. A holding company will not actively intervene in its subsidiaries' everyday business activities, but it will oversee the policies and management decisions made by the subsidiaries.
There are various companies that perform both as operating companies and functioning companies. They do activities like manufacturing and also control their subsidiaries. They hold valuable assets of other companies too.
Holding companies are not responsible for the losses suffered by their subsidiary companies. If one of the subsidiaries falls into debt traps, the holding company is not responsible for paying the debts of its subsidiaries.
If a parent company or a holding company possesses a hundred percent of the shares of its subsidiary, then it is known as a wholly-owned subsidiary. A holding company can appoint or dismiss the staff of the subsidiaries it owns. The staff hired will be solely responsible for their day-to-day operations. So the proprietors of the subsidiaries should watch over their staff.
Different Types of Holding Companies
Pure Holding Company
A pure holding company is a company that is developed with the sole aim of holding the stocks of other companies. They do not intervene in any other business activity other than managing firms.
Mixed Holding Company
The company that does its own operations is known as A mixed holding company and manages its subsidiary company's business. Holding companies that do business unrelated to their subsidiary company are known as conglomerates.
Immediate Holding Company
The Immediate holding company can be beastly described as a holding company that is controlled by another holding company. It is the subsidiary of another.
Intermediate Holding Company
An intermediate holding company can be best said as a firm between a parent company and an operating company. It holds the shares of another company, but also this company is a subsidiary of another company. This company is exempted from producing financial statements as they are a subsidiary of a huge firm.
Functioning of a Holding company
Huge corporations or firms may change to a holding company through two methods. The first method is by which the holding company buys the shares and voting stocks of other companies and thus establishes the authority to manage their functions. The next method is to start a new firm from the base level and hold the new shares of the firm.
A holding company can acquire better managerial strength in its subsidiary company by acquiring 50 percent of the voting shares of the subsidiary. But the subsidiary will have the power to make decisions even if they hold at least 10 percent of their shares.
Merits of Holding Companies
More control for a small investment
The owner of the holding company can establish power in the decision-making of the subsidiary without investing in full. If the holding company owns more than 51 percent of the shares of a subsidiary, the parent company can make decisions on the functions of the subsidiary.
Separate legal establishment
Every subsidiary of a holding company will be treated as a separate legal establishment. If any one of the subsidiaries of the holding company is to face a legal trial, the litigant will not have any right to claim the assets of the subsidiary company unless and until the subsidiary is accused independently.
Continuation of the management
During the acquisition of a subsidiary, the holding company always preserves the management. It is the owners of the subsidiaries who should be willing to continue in the firm. If the subsidiary owners agree to continue, the firm will get continuity. The holding company can choose whether it should be involved in the functions of the subsidiary. If they choose not to intervene in the functions of the subsidiary, the business will continue as usual, and also the holding company will get a share of the profit without looking into its managerial duties.
The tax liability of the parent company will be reduced according to the number of subsidiaries whose 80 percent of the shares are acquired by the parent company. A parent company can get tax benefits by filing consolidated tax returns. However, there will be a loss for one of the subsidiaries.
A consolidated tax return is the combination of all the financial statements of acquired subsidiaries along with the parent company. The loss acquired will compensate for the profits, and the tax liability will be reduced.
The company that deals with the shares of other firms is the holding company and can be started with less investment. Also, it is a type of company that can experience a lower tax liability.