Understanding the concept of ‘Holding Company’
Definition: A holding company is a parent company that carries limited liabilities or partnership but owns enough voting share (owns more than 50 percent in subsidiary) to control its management and policies.
Purpose of formation: The holding company doesn’t produce any goods or services but is only established with a single aim to control another company. The holding companies are also formed to own property such as real estate, stocks and other assets.
What is wholly owned subsidiary?
Any company that is 100 percent owned by a holding company is called wholly owned subsidiary.
Benefits of establishing holding company
· It is immune to losses. In the case of subsidiary going bankrupt, debtors and creditors can’t ask holding company for compensation. In the case one of the subsidiaries faces losses, the holding company only experiences capital loss and fall in net worth.
· Major corporations also act or structure themselves as holding companies dividing different businesses in the name of different subsidiaries i.e. real estate with one, financial services with another and so on. The holding company and its subsidiaries share very less financial and legal liabilities in this way.
· It also helps in limiting tax liability by structuring some parts of a business in the jurisdiction with lower tax rates.
· The owners of the parent organization are better of establishing holding companies since at times of loss only holding company’s assets are at risk not individual’s.
· The holding company in no way is responsible towards day-to-day functioning of operations of the subsidiary and only supervises the overall working.