A parent company is a company that owns shares in one or more companies. These other companies are called subsidiaries.
A parent company is a company that has controlling influence in one or more companies. The parent company is sometimes referred to as a holding company, but they are slightly different.
What is a parent company?
In order for a company to be considered a parent company, they must own more than 50 percent of the shares in the subsidiary company. Alternatively, they must have a controlling influence over the subsidiary company through an agreement with the other owners of the subsidiary, but this is less common.
The parent company has the final say when it comes to setting strategic goals, appointing board members, and making major financial decisions in the subsidiary companies.
They can operate and sell goods or services independently or together with their subsidiaries. This is entirely up to the company itself. If they’re not set up to sell or produce anything, but only set up to own shares in other companies—as is often the case—it is a holding company.
What is a holding company?
While an operating parent company is set up to produce and sell goods and services, a holding company’s only function is to own shares and interest in their subsidiary company.
The only way they make money is from dividends—payouts—on those shares or by selling shares.
Benefits of a parent company
All the companies involved are recognized as separate legal entities. This has several benefits:
- Resources can be shared between the parent company and its subsidiaries, such as financial management resources or legal counsel
- Each company’s assets are shielded—if a subsidiary company goes bankrupt, none of the other companies are liable for that debt
- By merging tax losses and capitalising on tax concessions, parent companies and their subsidiaries can optimise their tax structures