Holding Companies: Definition, Pros and Cons

A holding company or parent company holds another company’s controlling stock. Pure holding companies exclusively own shares in other companies and do not create their own goods and services. These parent companies hold controlling stock in the operating company (anywhere from 51 to 100 percent) to ensure the subsidiary can fulfill its mission and avoid other companies or stockholders to take over. A holding company may merely hold onto a controlling stake of another company, allowing it to conduct its own business, maintain company structure, and regulate day-to-day operations.

There are advantages to companies becoming a subsidiary of holding companies. Consider the following pros:

1. 1. Debt: Holding companies can secure lower debt financing costs; if a new business startup or small business needs to secure a loan, well-financed holding companies will have an easier time securing loans with lower interest rates and can then invest that money in the subsidiary.
2. 2. Innovation: Holding companies can also foster innovation in subsidiary companies. With valuable assets in a secure home, subsidiaries have less financial risk, meaning they can spend more resources looking into how the brand can grow.
3. 3. Assets: A parent company can be a holding entity for a subsidiary’s assets. This partnership limits liability and offers asset protection.
4. 4. Scale: With support from a large corporation, operating companies can boost their economy of scale. An economy of scale is a business strategy focused on reaping the cost advantages of mass production.
5. 5. Taxes: There are also tax benefits since management can create holding companies overseas or in areas with better tax rates.

There are some drawbacks to using a holding company. Business owners should consider the following disadvantages:

1. 1. Fees: Subsidiaries will have to pay formation fees and ongoing compliance costs, which can add up.
2. 2. Management: Management challenges may also exist. Holding companies do not have to own all of the subsidiary’s stock, and if they do not, they must deal with minority owners.
3. 3. Monopolies: Holding companies, when absorbing more and more subsidiaries, can also create conglomerates and a monopolistic market if they may own multiple companies in the same industry.

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