The term 'Holding Company' is included in the Investments edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Choose your edition here...
Holding Company refers to a parent company, limited partnership, or limited liability company. The firm controls a majority of the voting stock shares in the subsidiary company to dominate its management and corporate decisions. The sole purpose of a holding firm like this is to control other companies. These held firms might also be limited partnerships, corporations, or limited liability companies. Such a holding enterprise does not produce and market its own services and/or goods.
This type of Holding Company could alternatively be involved in buying and holding property assets. These might include stocks, real estate, trademarks, and patents, among other types of tangible and intangible assets. Those businesses which a holding enterprise owns fully (as in 100 percent of the company stock) are known as wholly-owned subsidiaries. In point of fact, a great number of the best known and most profitable operations around the globe are actually such Holding Companies.
There are various advantages which exist in creating this type of operation to hold other firms. The parent company gains protection against losses or lawsuits from its subsidiaries. For example, if a firm owned by the Holding Company suffers a catastrophic event like a bankruptcy or severely punitive lawsuit, the holding parent will suffer from deterioration in its net worth and sustain capital losses for sure. Yet the creditors, debtors, and judgment holders of the financially impaired subsidiary firm are not allowed to go after the holding operation in an effort to recover their capital losses or judgments.
This explains why a huge corporation might decide to establish itself as a holding operation. Perhaps a single subsidiary might possess the firm’s trademarks and brand names. A second might control all of the parent corporation’s real estate and real property assets. The parent company could create a third set of corporations to operate each of the various company franchises or business lines. Another one might be utilized to own all of the operating equipment of the parent firm. The end result would be that every subsidiary and the holding parent also would maintain both limited legal liability and limited financial losses.
This also permits the parent firm to reduce its overall tax liabilities. They do this by deliberately choosing to headquarter particular subsidiaries of the operation in lower tax rate national jurisdictions, such as Great Britain and Ireland.
Another brilliant feature of these Holding Companies is that they permit individuals involved in or owning a corporation to safeguard their own personally held assets. Instead of possessing such business assets personally, which would make them liable for any and all debts, risks, and possible lawsuits, the holding parent is able to hold the assets in such a way that the assets of the individual will not be placed at risk. Only the assets of the holding parent would be on the line, and not the assets of the individual owner this way.
The entire operations and business of such a Holding Company center on managing the firms it controls. The holding parent might fire or hire managers and staff as it wishes, yet the managers it engages will be the ones who bear full operational responsibility for their companies’ day to day and strategic business. While the holding parent may not engage in daily operational control over these firms, it will still be involved as it may from an oversight position in order to ensure that the business prospects and performance remain strong for the foreseeable future.
There are many successful and well-known holding company operations around the globe today. The most widely recognized by investors might be Berkshire Hathaway, the holding parent of investing and insurance company legend Warren Buffet. Another prominent one is leading global bank (as measured by balance sheet assets) HSBC, which is jointly based in London and Hong Kong.
Johnson & Johnson is a final well-known example for consumers. The consumer products and health care giant owns wholly or controlling interest in 265 distinct companies which carry out the three major business lines and operations of the holding firm in pharmaceuticals, consumer healthcare, and medical devices. These numerous subsidiaries are found in practically every country on earth and are each staffed by locally based employees and managers.