A holding company is a business that’s set up only to own and manage other companies.
While an operating company is set up to produce and sell goods and services, a holding company’s sole function is to own shares and interest in other companies. They only make money from those shares.
A holding company can also be called a parent company.
How does a holding company work?
Holding companies own a majority of the shares in other companies, and have the final say when it comes to strategic goals, board member appointments, and major financial decisions.
The other companies are recognized as separate legal entities, responsible for their own assets, liabilities, and legal obligations.
Many holding companies are investment companies. However, the structure of a holding company can take various forms, such as private companies, public companies, or trusts, depending on the goals of the holding company and its owners.
In a dual-company structure, operating companies handle day-to-day business management, while holding companies own assets without participating in operational decisions.
A holding company gives a layer of protection for the operating companies. This is especially important in scenarios like bankruptcy, as creditors cannot pursue assets held by the holding company.
The advantages of holding companies
- Protects assets. Each company’s assets are shielded from each other. This means that if a subsidiary company goes bankrupt, the holding company is not liable for that debt, and its assets cannot be sold to cover that debt.
- Tax planning. In a group structure, the companies can transfer group contributions. This makes it possible to optimize the amount of tax the group pays. The regulations will vary from country to country.
- Simplified management. Holding companies make administration more efficient since resources can be shared, such as financial management resources or legal counsel.
- Access to capital: It can be easier to attract investors due to the diversified risk from owning multiple businesses. When applying for a loan, the owners can use the overall group credit rating, which may be stronger than any single subsidiary.
