Holding Company vs. Parent
Individuals and partners who form or invest in a variety of different types of companies usually own them under one umbrella company called either a parent company or holding company. This simplifies corporate and tax requirements and makes it easier to move funds between the companies owned by the parent or holding company, also known as subsidiaries.
What’s a Subsidiary?
A subsidiary is a company that is owned or controlled by another company, usually referred to as its holding company or parent company. A subsidiary company is a separate and distinct entity from the related parent/holding company. This means that the parent/holding company and the subsidiary company both have their own set of financial statements.
When referring to the control a parent/holding company has over a subsidiary, what that means is that the parent/holding company:
- Enjoys ownership of the company either directly or indirectly or owns 50% of its voting power; or
- Controls the composition of the Board of Directors or controlling body of the company; or
- Exercises or controls over 50% of the total share capital in the company, either on its own or with one or more of its other subsidiaries.
In the United States, if a parent/holding company controls over 80% of the shares in a subsidiary, it receives certain tax advantages, most notably, the ability to file one consolidated tax return for itself and the subsidiary and to allow income to flow to the parent/holding company tax-free when the subsidiary pays dividends.
A parent company is a company that operates its own business and controls the business operations of one or more subsidiaries. A company becomes a parent company by either:
- Acquiring a controlling stake in an existing company; or
- Starting a new company under its control.
For example, if Company A buys a controlling interest in Company B, Company A becomes the parent company of Company B. Likewise, if Company A forms Company C under its proprietary umbrella, Company A becomes the parent company of Company C, its subsidiary.
Parent Company Advantages
One of the biggest advantages provided by the parent/subsidiary structure is that it can reduce the costs associated with the production and or delivery of certain products or services. Also, the subsidiaries may benefit from funding, know-how, personnel, technical expertise, and other advantages that are provided by the parent and that it may not have been able to afford or get on its own.
Parent Company Examples
A parent company can structure the working relationship between itself and its subsidiary in a variety of different ways. Some parent companies are large conglomerates, like The Walt Disney Company, which has subsidiaries like Disney Parks Experiences and Products, Marvel, Lucas Film Ltd., Pixar, 20th Century Studios, ABC, and ESPN, all focusing on film and television production, theme parks, and other forms of entertainment.
Other parent companies are “horizontally-integrated," meaning that the parent company and its subsidiaries all operate at the same level and in the same or similar industry. One example of a horizontally-integrated conglomerate is Facebook, Inc., which owns Facebook and Instagram.
A parent company can also be “vertically-integrated,” like Target Corporation. Target creates, distributes, and sells its own products through its subsidiaries Target General Merchandise, Inc., Target Brands, Inc., Target Enterprise, Inc., and Target Capital Corporation that all operate at different stages of the supply chain.
What is a Holding Company?
Like a parent company, a holding company is one that owns a controlling interest in one or more companies. But, unlike a parent company, a holding company does not engage in business operations of its own.
A holding company’s sole purpose is to unite and control a number of other companies or investment interests. A holding company does not produce or provide any goods or services of its own. Forming a holding company along with its subsidiary companies is a very attractive option for investors in industries ranging from real estate to finance.
Holding Company Advantages
The holding company/subsidiary structure offers its owners the following advantages:
Certain business entities create separation between the business owner's personal assets and the assets and liabilities of their business. This is referred to as a corporate veil and shields the business owner's personal assets from liabilities arising out of their business's activities. This corporate veil does not, however, shield the assets owned by the business from being levied to satisfy its creditors. For many business owners, this means that they still have a great deal of property, funds, and businesses equipment exposed.
However, by holding each of these valuable business assets in a separate subsidiary company underneath the parent company, they can all be protected from liabilities arising out of other aspects of the parent company's operation. A judgment against one subsidiary will not expose the other subsidiaries to that liability.
Similarly, if you are a real estate investor and own and operate multiple properties, you can hold each property in a separate subsidiary entity to protect it from lawsuits and creditor actions filed against you or arising out of the operation of any other property you own.
Potentially Lower Taxes
When a holding company controls 80% or more of its subsidiaries voting stock, it qualifies to receive tax-free dividends from that subsidiary company. Also, in some states, a subsidiary is only taxed on the profit it generates in that state, rather than the total profits of the parent company.
In some states, a business owner can set up a corporation or LLC with a nominee manager, allowing the true ownership of the company to go undisclosed. These states are Wyoming, Nevada, Delaware, and New Mexico.
For states that require you to disclose the identity of the company's ownership, you can first create a holding company in a state that allows anonymity of ownership and then list that holding company as the owner of a subsidiary company in the state where disclosure is required.
Holding Company Examples
Example of different types of holding companies include:
- Pure Holding Companies - companies created solely to own stock in a number of other companies. The closest example of a well-known pure holding is Berkshire Hathaway, which does not produce or provide any service itself, but owns or holds controlling interests in many other well-known companies that do including Geico, Heinz, Fruit of the Loom, Benjamin Moore, and Dairy Queen.
- Financial Holding Companies - companies that do not control the affairs of other companies but earn their profits by financing the operations of other companies.
- Investment Holding Companies - companies that do not control the affairs of other companies but invest in the securities of other companies, deriving the benefit of diversified investments for its members/owners.
While holding companies and parent companies are similar in that they are both set up to own and control other companies, there is a fundamental difference in the purpose of that ownership and control. Understanding the differences between a parent company and a holding company can help you with diversifying your business interests, minimizing personal liability, and preparing for your tax obligations.
For more information, contact us to arrange a free consultation with an experienced Wyoming business law attorney.