How a Parent Company Works: Types of Parent Companies

A parent company, or parent corporation, is a business entity with a controlling interest in another company—like a subsidiary company or daughter company—by owning 50 percent or more of its voting stock. The ownership of that stock also grants the parent company the majority of voting rights in shareholder meetings. As a result, it retains control of the subsidiary and its operations but is often allowed, and in some areas required, to maintain its own board of directors.

The parent company’s control of its subsidiary may be hands-on or hands-off. With hands-on control, the new business owners will directly influence the subsidiary’s business operations. With hands-off control, the parent company allows the subsidiary’s managers to handle most day-to-day operations. The parent company and its subsidiaries can be vertically integrated—all business entities are at the same value level—or horizontally integrated, which means that the parent company controls several subsidiaries along its product or supply chain.

A parent company may take a controlling interest in a subsidiary to gain access to its business assets and specific synergies, such as greater tax benefits. Parent companies are not subject to tax, debt, regulatory, or legal action taken against subsidiaries since they are considered separate legal entities. If the subsidiary is not a wholly-owned subsidiary—meaning that the parent company does not own 100 percent of the company’s shares—then the portion not owned by the parent company is recorded on the balance sheet as a minority interest.

Conglomerates and limited liability corporations are the most common types of parent companies. A conglomerate is a group of different industries, including some that appear unrelated to each other, that a single existing company owns. A conglomerate configuration allows each subsidiary to work together and draw from each other’s resources while maintaining its operations.

A limited liability corporation (LLC) is a business entity that combines elements of a corporation and sole proprietorship to remove personal liability for a company’s debts from its participants. It may be used as a parent company once its principals have met the requirements that various states and jurisdictions have regarding forming an LLC, such as establishing separate bank accounts for the parent company and its subsidiaries.

Larger companies can opt to become parent companies for many reasons, namely tax benefits and business needs. Here are a few ways that a business entity can become a parent company:

• A larger company acquires a smaller company. A parent company can be created when a larger company takes over a smaller company by buying enough of its stock, at least 50 percent, to obtain the majority of voting rights. Acquiring companies has several advantages for the new parent company: it can reduce competition within its industry, benefit from the acquisition of assets and employees by reducing overhead, or expand and support its operations through diversification.
• A company opts to consolidate. A spin-off, or independent company created from a larger business entity, can result from consolidation. A larger company may decide to spin off one or more of a company’s older or underperforming business units to allow the parent company to focus on more productive subsidiaries.
• A company spins off to add value. A spin-off can also occur when a subsidiary’s business operations are moving in a different path from that of the parent company, which allows it to provide value to the parent company from a new and different revenue stream.

The difference between a parent company and a holding company is rooted in their interactions with their subsidiary businesses. Though these business entities are often considered interchangeable, parent companies are in charge of their business ventures and support their subsidiaries through their business activities.

Holding companies do not produce goods and generally have little interaction with their subsidiaries, save serving as a shell company—an inactive business operation—for assets and tax benefits and outstanding stock holdings.

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