A holding company is a company that has a controlling interest in subsidiary companies. Learn the benefits and how to form one.
While it may sound surprising, some companies provide no goods or services at all. In fact, these companies — commonly referred to as holding companies or parent companies — exist solely to manage the assets and provide oversight to smaller organizations.
Read on to learn more about the types of holding company, learn the steps to form a holding company, and discover how board software streamlines meeting governance.
What Is a Holding Company?
Put simply, a holding company exists to control other companies. Holding companies function by buying enough stock in other companies, called subsidiary companies, to give them enough ownership to legally control management decisions.
Although the holding company typically doesn’t contribute to the day-to-day operations of the subsidiary, it provides access to various protections, funding, and other benefits.
Types of Holding Companies
Not every holding company holds the same level of ownership in its subsidiaries or manages business operations in the same way. The 4 main types of holding companies include:
- Pure: Exists only for the purpose of owning stock in other companies and doesn’t provide any other type of business for itself or its subsidiaries.
- Mixed: Participates in some degree of business of its own, while also controlling at least one other company through stock ownership.
- Immediate: A subsidiary that owns stock in another company.
- Intermediate: Simultaneously functions as both a parent company and a subsidiary.
Advantages of Holding Companies
Holding companies offer several advantages to startups and small companies that may have limited financial resources. Some of the key advantages of forming or working with a holding company include:
The typical structure of a holding company allows it to provide assistance to smaller companies without taking on the full financial risk of the subsidiary. With this model, the subsidiary retains responsibility for its profits and debts, even though some or all financial decisions are ultimately made by the holding company. This setup protects the parent company and any other subsidiaries if a particular subsidiary defaults on loans or otherwise struggles financially.
Lower Debt Financing
Startups and other small companies that are trying to scale their operations may face difficulty securing needed funds. Transferring ownership to a larger parent company allows the subsidiary to obtain loans more easily and at a lower interest rate by having the holding company apply for and receive funding on its behalf.
A subsidiary gains the freedom to take bigger chances when it has more funding and assumes lower risk.
How to Form a Holding Company
If you’re ready to form a holding company, here are 3 essential steps to help you get started:
1. Assess Business Goals and Objectives
To create a successful holding company, you first need to clearly define the business goals and objectives of both the holding company and any subsidiaries.
2. Select a Business Structure
Because the relationship between a holding company and its subsidiary can be complex, make sure to seek legal guidance to ensure both companies’ tax responsibilities and other business details are in alignment.
3. Submit a Business Application
After determining your business objectives and selecting a business structure, submit a business application to make the partnership official.
OnBoard Powers Effective Boards
An effective board of directors help companies of all types and sizes achieve success, including parent companies and subsidiaries. However, clearly defining the role of each of your board members can be more challenging when you involve multiple levels of company ownership.
To improve effectiveness, many organizations today invest in board management software to power annual general meetings (AGMs), operations meetings, and traditional board meetings.
From agenda building and meeting analytics to secure messaging and task management, meeting software like OnBoard includes powerful features to help both parent companies and subsidiaries work smarter and smash their goals. Want to learn more about board governance software? Check out our 2023 Board Management Software Buyers’ Guide.
Frequently Asked Questions (FAQ)
Understanding how holding companies function and what makes their unique purpose beneficial can help you decide whether this type of partnership is a good fit for your business. Here are some common questions about the role of holding companies and their typical responsibilities.
1. What Is the Benefit of a Holding Company?
Holding companies can help smaller companies grow by accessing resources that the subsidiary wouldn’t be able to obtain easily on its own. The minimal financial responsibility for the subsidiary means they’re able to assume lesser risk to themselves.
2. What Is the Difference Between a Holding Company and an LLC?
A holding company and a Limited Liability Company, or LLC, function very similarly, but an LLC may conduct business of its own. A pure holding company exists only for the purpose of owning stock in another company. This means that there may be little to no difference between an LLC and a mixed holding company, but most holding companies maintain this distinction.
3. Do Holding Companies Pay Taxes?
Although holding companies own their subsidiaries through shares, they’re still considered to be two separate companies.
4. Does a Holding Company Need an EIN?
Holding companies need some form of taxpayer identification to legally do business as the owner of another company, and this is typically done with an Employer Identification Number (EIN). This information can match that of the subsidiary only when the holding company owns 100% of the subsidiary, and the parent company must identify its ownership of the subsidiary. If the parent company sells any of its stock, the subsidiary becomes a separate company for tax purposes and must obtain its own EIN.
Provide your board with a purpose-built solution for improving and streamlining board governance. Request a free trial of OnBoard today.
About The Author
- Josh Palmer serves as OnBoard's Head of Content. An experienced content creator, his previous roles have spanned numerous industries including B2C and B2B home improvement, healthcare, and software-as-a-service (SaaS). An Indianapolis native and graduate of Indiana University, Palmer currently resides in Fishers, Ind.
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