Advantages Of A Holding Company For Investments

By Staff Reporter Mar 04, 2020 11:22 AM EST

Business people collaborate together in office. Double exposure effects. Corporation, corporate.(Photo : Bigstock)

Holding companies are brilliant innovations in the world of investing. Essentially, they are a holding company of a parent corporation that has enough voting stock in another business to control its decisions. Holding companies don't actively take part in a business's daily routine, but rather overviews the business' operations. Firms that the holding company controls with 100% of their stock become known as 'wholly-owned subsidiaries.'

Why Create a Holding Company?

Holding companies exist for the sole purpose of owning assets. They don't take on the responsibilities of their wholly-owned subsidiaries, which operate independently of the holding company. The CEO of the investment holding company has the task of ensuring that the subsidiaries that the company owns hit its goals in line with the expectations of the company's board. The company seeks to acquire businesses that have a proven track record of posting profits so that the board members and investors can benefit from its profitability. Creating a holding company offers several benefits to those on the board of that company

The Limitation of Risk

Holding companies perform an essential role by ensuring that each subsidiary is kept independent of one another, so that if one folds, it doesn't impact the rest of the company. If one of the subsidiaries is the subject of a lawsuit for a particular infraction of state or federal law, the shareholders of the holding company don't have to worry. The risks of the subsidiary are it's own. The holding company owns the business, but none of its previously negotiated debts and liabilities.

Consolidated Tax Statements

Legally, both holding companies and their subsidiaries may create a consolidated financial statement for tax purposes. There are certain benefits to the holding companies and their subsidiaries for doing so. If a holding company has multiple subsidiaries and one of those businesses takes a loss, the consolidated financial statements can seek to balance that loss through the profits of another subsidiary, making the holding company profitable for that fiscal period. Subsidiaries can pay dividends to its parent holding company without creating a tax liability in the process. The holding company can then distribute those earnings to shareholders or reinvest it wherever they see fit.

Adding Value through a Parent Company

Holding companies can serve as a sturdy backing entity for their subsidiaries, as well. By exchanging information within the subsidiaries within a company, a business could potentially generate customer leads through the data collected by one of its sister enterprises. Additionally, the parent company can combine different areas of expertise in its subsidiaries, to take on complex projects that any one of those businesses would be unable to complete themselves. By creating a single, unified entity, it expands the marketability of each of those child companies. It creates opportunities for them that their businesses would be unsuitable to undertake otherwise.

More Control through Less Investment

Holding companies don't need to own a subsidiary completely to control it. In most cases, a business can be acquired simply by purchasing 51% of its voting stock. The purchase ensures that the holding company has a majority stake in any decision the business makes. In an enterprise that has a diverse shareholder base, it might even cost less to gain control of the company. In such a case, the holding company merely needs to acquire more shares than the highest majority holder at present. What this means for the holding company is that it can gain control of the business's decisions without having to buy the controlling percentage of stock of the company.

Holding Companies Allow for Easy Diversification

A holding company is an ideal way for a small investor to diversify their portfolio without acquiring the associated risk. Once a holding company starts acquiring subsidiaries, it sets itself up to profit from their combined abilities. Subsidiaries get the benefit of a secure corporate structure with other companies able to lend support and expertise under the holding company's umbrella of enterprises. The holding company, in turn, gets a profitable business that will generate revenue and help to shore up its shortcomings.