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What Is A Holding Company? – Importance, Operation, And Pros & Cons

What Is A Holding Company

What is a Holding Company? – A Holding Company is a type of company that generates revenue by owning assets and does not conduct any operations, ventures, or active tasks. If you want to start a holding company, you must be prepared to earn revenue by not engaging in the buying and selling of products and services. You can form it to gain control over one or more companies or any other assets.

In this article, you will learn about what a holding company is and what is the importance of having a holding company. Apart from that, you will also learn how a holding company works, where we will give you an idea of its operations. Finally, you will learn about the major pros and cons of running a holding company. Hence, to learn more about holding companies read on through to the end of the article.

What Is A Holding Company?

What Is A Holding Company

According to Investopedia,

A holding company is a business entity—usually a corporation or limited liability company (LLC). Typically, a holding company doesn’t manufacture anything, sell any products or services, or conduct any other business operations. Rather, holding companies hold the controlling stock in other companies.

You can understand from this definition that a holding company basically owns the assets of other companies. However, it has the power of only overseeing those assets. Just having a mere oversight does not let the holding company actively participate in the business’s daily operations or the operations of its subsidiaries. In many cases, holding companies are also termed as “umbrella” or parent companies.

The major purpose of creating a holding company is to have ownership of investments, which can be private businesses as well. The businesses that a holding company owns are known as subsidiaries. All the subsidiaries of a holding company are responsible for their own debts, and hence holding companies remain protected from the liability of subsidiaries.

On the other hand, subsidiaries of a holding company and minority shareholders of the main company can also experience a reduction in the level of control they have over a business.

Read More: Marginal Cost: Definition, Formula, Examples, And More

Why Is A Holding Company Important?

Why Is A Holding Company Important

Having a holding company gives the parent business greater control of its smaller investments.

According to the Corporate Finance Institute,

It gives the holding company owner a controlling interest in another without having to invest much. When the parent company purchases 51% or more of the subsidiary, it automatically gains control of the acquired firm. By not purchasing 100% of each subsidiary, a small business owner gains control of multiple entities using a very small investment.

In addition to that, if a particular holding company has control over different small subsidiaries, each of the subsidiaries can be considered a legal entity. It implies that if one subsidiary faces a lawsuit (for whatever reasons), the plaintiffs do not have the right to claim the assets of other subsidiaries in the holding company. 

Apart from that, if the subsidiary that is under lawsuit acts independently, then no one can hold the parent company responsible. This is how the parent company can save its assets from lawsuits by creating a holding company.

Other than strategic decisions and monitoring the performance of the subsidiaries, a holding company cannot get involved in the activities of its subsidiaries. This means that the management of the subsidiary retains its roles and continues to conduct business as usual.

How Does A Holding Company Work?

How Does A Holding Company Work

According to Indeed.com,

A holding company is a corporation that doesn’t run a particular business or participate in the daily operations of a business. Holding companies hold or own investments such as private businesses, stocks, bonds, mutual funds, real estate, gold, patents, and copyrights. Holding companies are parent corporations that maintain the oversight capabilities of companies that they own.

Due to being parent organizations, holding companies can oversee all the management decisions of their subsidiaries, as well as have control of the policies inside. The sole purpose is to have control over other companies. Apart from that, holding companies can also get ownership of properties like real estate, stocks, trademarks, patents, and more.

Holding companies have this kind of structure, as it serves to limit the financial and legal liability exposure of itself (and also of its subsidiaries). It also has the power to depress the overall tax liability of a corporation. They can do this by strategically basing certain parts of their business in those areas where there are lower tax jurisdictions.

What Are The Pros And Cons Of A Holding Company?

The following are the major pros and cons of having a holding company:

Pros Of A Holding Company

Here are the major pros of holding companies that you will benefit from:

  • Holding companies can oversee the assets of the business and make decisions related to it.
  • They can make strategic decisions and monitor business performance.
  • These companies enjoy the benefit of protection from the losses of their subsidiaries.
  • These companies enjoy the benefit of protection from lawsuits against a subsidiary.
  • It is easy to create or change a holding company.

Cons Of A Holding Company

Here are a few cons of holding companies that you must be aware of:

  • Along with a subsidiary, the holding company can also experience capital loss and a decline in net worth.
  • It is difficult to find an accurate financial health of the holding company.
  • Unethical directors might hide their losses by moving debt among their subsidiaries.
  • Holding companies can also force or exploit their subsidiaries to make decisions.

Read More: Inventory Turnover Ratio: Definition, Formula, Working, And More

Final Thoughts

What is a holding company? – Hope this article was helpful for you in getting an idea of how holding companies operate. A holding company is a financial organization that owns a controlling interest in other companies. The holding company oversees the assets of the business, while the parent company manages the daily core operations of the business.

Holding companies have protection from losses that their subsidiaries make. Hence, if a subsidiary goes bankrupt, the holding company is not responsible. Do you have any more information to add regarding holding companies? Share your information and ideas with us in the comments section below.

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Soumava Goswami

Inspired by The Social Network, Soumava loves to find ways to make small businesses successful – he spends most of his time analyzing case studies of successful small businesses. With 5+ years of experience in flourishing with a small MarTech company, he knows countless tricks that work in favor of small businesses. His keen interest in finance is what fuels his passion for giving the best advice for small business operations. He loves to invest his time familiarizing himself with the latest business trends and brainstorming ways to apply them. From handling customer feedback to making the right business decisions, you’ll find all the answers with him!

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Boxed packaged goods can help you quickly develop your brand name in the right manner.  The main reason behind it is that it can help you achieve your objectives in the right manner and in the correct way. In addition, proper customization of the boxed packaged goods can make things work in your favor. DaklaPack US has over 40 years of experience in custom packaging design. What Are The Best Packaging Materials For Goods? There are several materials available in the market now that can help you deliver the best packaging material for your goods. So let’s find out some of the best materials for boxed packaged goods that can uplift your brand image drastically. Machine Stretch.  Hay baling stretch.  Blown Stretch.  Pre-stretch.    Color stretch.  Hand Stretch.  VCI Stretch.  UVI Stretch.  Re-enforced Stretch.  Vented Stretch.  No Cling Stretch.  These are some core boxed packaging materials to help you showcase your brand with better visibility. Work out the best strategy that can help your brand to grow. Frequently Asked Questions!! (FAQs): Q1. How Long Do The Canned Foods Remain Edible? Ans: Most canned foods have a long shelf life and remain edible by all means. Proper planning can work well in your favor for developing your business in the right direction and in a short period. The high acid canned foods like juices, pickles, fruits, and tomatoes can be stored from 12-18 months. It can help your business to move forward correctly. Work out the plans that can help your business to grow in the right direction. Q2. Why Should You Store Canned Foods? Ans: The dry place is the best option to store canned foods. However, you need to ensure that you do not store them in the warm place where you want to keep the things correctly. The bottled and jar packaged foods are now in great demand in the market. Work out the plans that can help you to achieve your objectives in the best ways. Q3. What Are The Best Canned Foods In A Healthy Eating Lifestyle? Ans: There are several canned foods you can try for your healthy eating lifestyle. Work out the plans that can work well in your favor. Let’s find out some of the best-canned foods that can help you achieve your objectives in the right direction.   1. Beans.    2. Canned Meat And Fish.  3. Diced Tomatoes.  4. Coconut Milk.  5. Diced Green Chilies.  6. Non-Starchy Vegetables Known As Baby Corn.    7. Mandarin Oranges. 8. Olives. 9. JackFruit 10. Pumpkin All these food items have high nutritional value and can add essential nutrients to your daily diet. Work out the best plans that can help you to maintain the nutritional value of the food items. Final Words The application of the boxed packaged goods is now the business that gives more profit to your brand. It is one of the best means to develop your business to grow in the right direction. Work out the plans that can help you to expand your business in the best possible manner. You can also consider it one type of marketing that can help your business to grow Read Also: Why  Create A Powerful Business Continuity Plan? What Is Network Marketing And How To Do It In 2021 How To Start A Business In 2021 – Best Business Strategies