Meaning and definition of holding company
Holding company can be explained as a parent corporation which owns sufficient voting stock in another corporation to control its board of directors (and, thus, controlling its policies and management). As explained by Investopedia, it is essential for a holding company to own a minimum of 80% of voting stock to obtain tax consolidation benefits, like tax-free dividends.
Putting it simple, a holding company is a firm or company which owns the outstanding stock of other companies. It generally refers to a company not producing goods and services on its own; rather aiming at owning the shares of other companies. Moreover, holding companies are helpful in reducing the risk for the owners in addition to allowing the ownership and control of several different companies.
However, a holding company does not indicate that it owns the complete subsidiary stock or even a majority of it.
Advantages and disadvantages of Holding Companies
There are certain advantages to acquiring a controlling interest in a subsidiary as a holding company. The most important ones include:
- The capability of controlling operations with a small percentage of ownership thus lesser up-front investment.
- Holding companies can take risks through subsidiaries, thus limiting this risk only to subsidiaries instead of placing the parent company on the line.
- Expansion can occur through the way of simple stock purchase in public market, which shuns the difficult step of obtaining approval from the subsidiary’s board of directors.
However, there are also some disadvantages associated with holding companies model. These include:
- If less than 80% of the stock is owned by the parent company, the holding company pays numerous taxes on the federal, state, as well as local levels.
- A holding company can be required to dissolve more easily as contrasted to a single merger operation.
- Moreover, there are possibilities of a holding company to expand through the use of debt or leverage, building an intricate corporate structure which can include unrealized values, thus creating a risk if interest rates on obligations or the evaluation of assets posted as guarantee for loans alter radically.