Definition: A holding company is a business created with the purpose or mission to own and control other firms or assets. A holding company usually refers to a corporation that exists as a parent company instead of doing manufacturing, service or commercial activities.
What Does Holding Company Mean?
Holding companies are very common in today’s economy. This kind of corporations might have advantages when there are diverse assets to own and manage. The holding company owns shares of other companies or subsidiaries, at least to a considerable extent, and the owners only have shares of the holding company.
The overall risk is diversified because of the various businesses involved while the relative strength of the parent company brings various benefits. Since the whole business is larger than each separate firm, the holding company can obtain higher benefits when negotiating with third parties or borrowing money.
Control over the subsidiaries and the application of corporate policies or strategies should be easier when supervising from a holding company in comparison of managing the firms separately.
Example
Jeremy Hills is a successful entrepreneur that inherited a large manufacturing firm and later created other four companies. Two of these firms provide services to the manufacturing firm although not exclusively. The remaining two firms are not related at all with the former three. Jeremy has found partners along the way for each venture and now faces a complex network of ownerships, Boards and internal controls.
He would like to take advantage of the overall size of his consolidated business and to simplify the monitoring and control process of the five firms. He therefore decided to create a holding company that would own these five subsidiaries. Mr. Hills and his partners would own the holding company. Mr. Hills now chairs the Board of Director of Hills Corporation and controls the various businesses from there. When asking for financing and bargaining with suppliers, he will now has the leverage of a large corporation.
