A parent company is a single company that has a subsidiary or subsidiaries. Learn the types of parent companies, benefits, and how to form one.
Parent companies are responsible for creating, managing, and overseeing their subsidiary companies, which are individual companies or groups operating within a specific industry.
CEOs and executives of parent companies are responsible for the strategic direction and overall performance of their subsidiaries, ensuring they meet their objectives and deliver value to their stakeholders. The relationship between a parent company and its subsidiaries can be complex. Understanding how they operate is essential for anyone interested in the corporate world.
What is a Parent Company?
A parent company, also known as a holding company, is a corporation with a controlling interest in one or more subsidiary companies.
The primary purpose of a parent company is to manage and oversee its subsidiaries, providing them with the resources, guidance, and support they need to operate efficiently and achieve their objectives.
It includes setting strategic direction, providing financial and managerial support, and ensuring the subsidiaries comply with relevant regulations and laws.
Benefits of a Parent Company
The several benefits of having a parent company structure in place include:
- Diversification: A parent company can diversify its operations by creating or acquiring subsidiaries in different industries or sectors. This strategy reduces the risk of relying on a single business line and provides opportunities for growth and expansion.
- Operational efficiency: Holding companies can achieve economies of scale. Centralizing certain functions, such as accounting, human resources, and legal services, reduces costs and improves efficiency.
- Strategic direction: A parent company can provide strategic guidance and support to its subsidiaries, enabling them to align their objectives with the overall vision of the parent company.
- Access to resources: Holding companies can provide financial and managerial resources to their subsidiaries. It enables them to invest in new technologies, expand their operations, or undertake other strategic initiatives.
- Brand recognition: Subsidiaries can benefit from the brand recognition and reputation of the parent company, which can help to attract customers, investors, and other stakeholders.
- Tax advantages: In some cases, a parent company structure can provide tax advantages, such as the ability to offset losses incurred by one subsidiary against the profits of another.
Parent companies can create a more efficient and effective corporate structure by centralizing certain functions, providing guidance and support, and facilitating collaboration.
Types of Parent Companies
There are several types of parent companies, each with unique characteristics and advantages. The two common types of parent companies are:
1. Holding Company
Also known as a parent corporation, a holding company owns a controlling interest in other companies but does not engage in operational activities.
They exist solely to manage and oversee a subsidiary company, providing it with resources, support, and guidance. Holding companies have a diversified portfolio of subsidiaries in different industries, allowing them to spread risk and benefit from various sectors’ strengths.
Conglomerates are companies operating in multiple industries and sectors, often with no apparent connection between them. They can be created through mergers and acquisitions of unrelated businesses, allowing companies to diversify their operations and minimize risk.
Conglomerates can provide benefits such as economies of scale, increased market power, and synergies between different business lines.
How to Form a Parent Company
Forming a parent company involves following a series of steps that are similar to starting any other type of business. Consider these general steps to design a parent company:
1. Draft Articles of Incorporation
When drafting articles of incorporation, include key information such as the name, purpose, business structure, shares of stock, registered agent, board of directors, bylaws, and dissolution process.
The articles of incorporation must then be filed with the state where the parent company will be incorporated, following the state’s specific filing requirements.
2. Draft Bylaws
Your parent company must draft bylaws outlining the business’s operating procedures. These bylaws should cover topics such as the election of directors, meetings, voting, and other key aspects of your business.
Bylaws should provide clear guidelines and procedures for conducting business and can help to prevent disputes and conflicts.
3. Select Business Structure
The structure will determine the legal and financial obligations of the company, as well as the amount of personal liability that owners will be exposed to.
There are several types of business structures, including corporations, limited liability companies (LLCs), partnerships, and sole proprietorships. Each structure has its benefits and drawbacks.
4. Appoint a Board of Directors
Appointing a board of directors provides a critical leadership structure for the organization. The committee oversees the company’s operations and makes strategic decisions to impact the organization’s growth and development.
You should identify potential candidates based on their qualifications and suitability.
5. Leverage Technology
Board management software is a powerful tool that enhances the effectiveness of a parent company’s board of directors. By providing a centralized platform for communication, collaboration, and management of responsibilities, the platform streamlines operations and helps board members stay informed and engaged.
Additionally, the software’s features for meeting management, task tracking, and performance evaluations can improve accountability and ensure board members fulfill their obligations.
Examples of Parent Companies
There are many examples of parent companies in various industries, including:
- Alphabet Inc.: the parent company of Google, which includes various other subsidiaries such as YouTube and Waymo
- Berkshire Hathaway Inc.: a multinational conglomerate holding company that owns several subsidiaries, including Geico, Dairy Queen, and Duracell.
- Procter & Gamble: a consumer goods corporation that owns various brands, including Pampers, Gillette, and Tide.
- Johnson & Johnson: a multinational medical devices, pharmaceutical, and consumer goods corporation with subsidiaries such as Ethicon, Janssen Pharmaceutica, and Neutrogena
- The Walt Disney Company: a media and entertainment conglomerate that owns various subsidiaries, including ABC, Marvel, and Pixar
- General Electric: a multinational conglomerate holding company that owns various subsidiaries, including GE Aviation, GE Healthcare, and GE Power
Effective Boards Leverage OnBoard
OnBoard is a leading board management solution that can simplify and optimize board effectiveness by providing a centralized platform for collaboration, communication, and management of board responsibilities. By leveraging OnBoard, board members can enhance productivity, streamline processes, and make informed decisions.
Additionally, OnBoard comes equipped with the following board management features:
- Industry-leading security, compliance, and data protection that’s certified and accredited
- Agenda Builder and Minutes Builder for simplified meeting administration
- Secure Messenger and Zoom Integration to enhance communication
- Board Assessments to empower boards to measure their performance against the organization’s goals
To dive deeper and learn more about key features, pricing, and other tips for choosing a meeting management tool, check out the board management software buyer’s guide today.
Frequently Asked Questions (FAQ)
What is the Difference Between a Parent and Subsidiary Company?
The parent company has control over the subsidiary and may use this control to influence the subsidiary's strategic direction, financial performance, and other aspects of its operations.
What is the Purpose of a Parent Company?
A parent company controls a subsidiary company, owning a majority stake and influencing its direction. Reasons for a parent company include diversification, capital access, tax benefits, and expansion through acquisitions.
About The Author
- Adam Wire is a Content Marketing Manager at OnBoard who joined the company in 2021. A Ball State University graduate, Adam worked in various content marketing roles at Angi, USA Football, and Adult & Child Health following a 12-year career in newspapers. His favorite part of the job is problem-solving and helping teammates achieve their goals. He lives in Indianapolis with his wife and two dogs. He’s an avid sports fan and foodie who also enjoys lawn and yard work and running.
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