What is a holding company?

A holding company is a business entity that doesn't manufacture or sell products. As the name implies, it holds the controlling stock in other companies or acts as a 'parent company to them. The holding company's subsidiaries produce and sell products and services and conduct business as a normal company would. These comapnies are the 'operating comapnies.' Some subsidiaries also hold property such as real estate, intellectual property (IP), or other assets the operating companies use.

Holding companies can own 100% of the subsidiary or just enough stock to have membership interests in the voting or a say in the company's direction.

Does a holding company run its subsidiaries?

No, each subsidiary has its management team who runs the everyday business processes. The holding company does not actively run the company itself, but it oversees how the subsidiaries are run. The parent company can elect for or retire the directors and CEO of the subsidiary. It can even make big policy decisions, such as merging or dissolving the company.

What are the benefits of a holding company?

1. Reduced cost of financing - A holding company has the financial strength and can receive loans at lower interest rates than its subsidiaries/operating companies could. It can then distribute the funds to its subsidiaries.

2. Increased growth and innovation - Because the subsidiaries/operating companies are separate entities, the risk of investing in new projects is reduced. Restructuring separates the core profitable business from riskier ventures and thus boosts innovation.

How is a holding company financed?

The holding company is managed by its owners. It can use the owner's equity for the funds needed for investment in subsidiaries, sell equity interests in itself, or even take loans from the bank or private agencies. Holding companies also earn revenue from subsidiaries via dividends, distributions, interest payments and payments for other services it provides.

How is a holding company used?

All types of businesses use holding companies. Many of the biggest public corporations are holding companies traded on the stock exchange. For example, ABC group owns Google. Most people don't even know they are trading stocks or holding companies.

Holding companies' structure helps them manage multiple business units. For example, a large holding company could manufacture and sell multiple consumer goods such as skincare, haircare, fragrance, etc.

What’s the difference between a holding company and a conglomerate?

The difference between a holding company and a conglomerate is that a conglomerate is one company with multiple divisions or departments. A holding company is a separate company that has multiple subsidiaries. Each subsidiary is a separate company. The holding company has a controlling interest in its subsidiaries. The company's trademarks and equipment etc. may also be used by the subsidiaries, who may pay to use its assets.

Is a holding company just for large businesses?

It’s a misconception that holding companies are only for large businesses. Many smaller businesses may use holding companies, even single entrepreneurs. For example, an entrepreneur wants to expand operations. They sell shares in the holding company and use the capital to buy a restaurant or any other asset. A new subsidiary can be formed for their investment.