Holding Company: Definition, How It Works, Types
Have you ever wondered how one can own multiple companies which would remain separate from each other? 🤔
The answer - by setting up a holding company. In fact, you would be surprised to know that many companies that you have heard of or work with are actually owned by a larger holding company.
🏢 What is a holding company?
It is a form of business designed to own multiple other companies which can be structured in many ways and for many different reasons.
Ways Holding Companies Can Be Organized
Horizontal Integration: A Holding Company, through horizontal integration may acquire companies operating in the same industry. This may be done to remove competition and allow the Holding Company to improve strategic coordination among these companies that operate in the industry.
Vertical Integration: A Holding Company may acquire or setup a company as a Subsidiary to provide vertical integration in its supply chain.
Branding Differentiation: A Holding Company may acquire or setup a company as a Subsidiary to differentiate its various brands.
Protection from Liability Incurred by the Subsidiary
With the Subsidiary Company being a separate business entity, the Holding Company is generally not liable for the actions of the Subsidiary, thus protecting it from legal and financial claims.
The Holding Company (or another Subsidiary of the Holding Company) may own the assets used by the Subsidiary. These assets such as intellectual property, real estate or mining rights will be protected from claims affecting the Subsidiary.
Lower Cost of Ownership
The Holding Company may acquire just sufficient controlling interest in a company rather than wholly owning the company. This lowers the cost of ownership of companies thus allowing funds saved to be used elsewhere.
Complying with Different International Rules
The Holding Company may need to form or acquire a company in a foreign country as a Subsidiary to comply with local laws. These laws may forbid total foreign ownership of a company or prevents a foreign company from acquiring the necessary business permits.
The Holding Company may also set up or acquire a company as a subsidiary for the purpose of benefiting from favorable tax laws.
Free from Day-to-Day Management
The Holding Company may have ownership over a diverse range of companies in unrelated industries.
The owners or management of the Holding Company need not have sufficient knowledge to operate the Subsidiary Company as the Subsidiary Company is independent and has its own Board of Directors and Managers.
Complexity and Cost
If the Holding Company is a publicly traded company, it will need to keep track of all its subsidiaries and properly report on them. There is also payment of fees for the formation of each company as a subsidiary. Unlike a single corporate entity structure, each subsidiary will also need to comply with the relevant governing corporate laws and reporting.
Less Control Over the Subsidiary
The subsidiary operates as an independent corporate entity with its own Board of Directors and management team. The Board of Directors and management teams’ decisions and actions will focus primarily for the benefits of the subsidiary rather than the Holding Company that owns it unless the Holding Company exercises tighter control over the subsidiary.
Pure Holding Company is a Holding Company setup for the sole purpose of controlling other companies and does not have their own business operations; that is the company does not produce its own goods and/or services.
Mixed Holding Company is a Holding Company that while it also own and control other companies, the Holding Company also has its own day-to-day business operations producing goods and/or services.
Immediate or Intermediate Holding Company is a company that controls another company or companies while it is being controlled by another corporate entity. The only difference between an Immediate Holding Company and an Intermediate Holding Company is in the form of financial accounting reporting requirements.
If you have any further questions about holding companies, do contact us via WhatsApp https://wa.me/60122192492 📲