Normally, when we think of corporations, we usually assume their primary function is to produce a good or deliver a service. Holding corporations have a different purpose entirely, which is to “hold”—or contain—a portfolio of other businesses.
However, the role of a holding corporation goes well beyond simply being a vessel for other corporations. In this article, we’ll cover exactly what a holding corporation is, how it operates, and its benefits and potential drawbacks.
What is a holding corporation?
A holding corporation, also called a parent company, is a legally established business entity that exists primarily to own and control other companies, known as subsidiaries. They can also own other financial assets, such as stocks, bonds, GICs, or real estate properties.
These parent companies are used by business owners and investors to achieve a variety of business goals, like tax optimization, strategic planning, and asset protection.
Usually, holding companies aren’t directly involved in the day-to-day operations of their subsidiary companies. Instead, they provide high-level oversight and guidance.
Pros and cons of holding companies
While holding companies can provide many benefits to business owners, they aren’t without their drawbacks.
Pros of a holding company
Holding companies can be used strategically to realize a variety of benefits:
- Asset protection: Holding companies can provide liability protection for business owners by separating their business and personal assets.
- Tax optimization: Depending on the jurisdiction in which it’s created, unique tax benefits or deductions may be available by establishing a holding company.
- Diversifying risk: By owning and managing a variety of companies and investments, holding companies can be better positioned to weather volatility in the markets.
- Centralizing management: By centralizing the operations of a portfolio of subsidiary companies, holding companies can streamline operations.
Cons of a holding company
While these benefits might sound attractive, holding corporations aren’t necessarily the best business structure for everyone.
- Expensive to establish: While the cost of establishing a holding company is generally no different than establishing any other corporation, legal fees may be incurred in the process of transferring assets and buying subsidiaries.
- Limited control: Since holding corporations don’t typically interfere with the daily operations of their subsidiaries, there is usually a limit to the control that can be exerted by a parent company over the corporations in its portfolio.
- Interference with subsidiaries: On the other hand, holding companies can interfere too much with subsidiaries, hindering their autonomy and hampering innovation.
- More complex tax and regulatory requirements: Due to the unique nature of holding companies, tax requirements may be complex.
- Limited transparency: Investors may be hesitant to do business with a holding company if they can’t adequately gauge the performance of its subsidiaries.
Types of holding companies
Types of holding companies include:
- Pure: These hold and manage investments in a portfolio of subsidiaries, without directly engaging in commercial activities.
- Mixed: These may own a portfolio of operating subsidiaries, non-operating subsidiaries (such as other holding companies), and other investments and assets.
- Standalone: These solely hold a portfolio of assets and investments, but do not hold any other subsidiary companies.
- Intermediate: These are holding companies that hold subsidiaries while themselves being subsidiaries of a larger holding company.
How is a holding company financed?
Holding companies are usually financed by selling equity in the corporation. Investors can buy stocks or shares, and the holding company, in turn, uses the capital it gains through the sale of shares to invest in its subsidiaries.
A holding company may also use its own earnings from the business activities of its subsidiaries or borrow from financial institutions or investors.
Finally, holding companies can sell off stocks, other investments, equipment, and other assets to raise capital.
Holding corporation vs. operating company
A holding corporation is a type of company that exists mainly to own and manage, or control, other companies. An operating company engages directly in commercial activities, such as the production, distribution, and sale of goods and services.
They have distinct primary functions: holding corporations hold and manage investments, often in the form of other businesses, while operating companies generate their own profits directly by engaging in business activities.
Examples of a holding company
Many large corporations that are recognizable to consumers are subsidiaries of holding companies.
For example, Google, YouTube, FitBit, and Nest are widely familiar brands to consumers. All of these are subsidiaries of Alphabet Inc, their parent holding company.
Berkshire Hathaway is another well-known holding company that includes companies as diverse as Coca-Cola, American Express, BNSF Railway, Dairy Queen, Acme Brick Company, and See’s Candies.
In Canada, a well-known holding company is the Jim Pattison Group, which owns interests in car dealerships, real estate, entertainment, media, and more.
What is a holding corporation FAQs
What is the purpose of a holding company?
The purpose of a holding company is to own and control other companies, investments, and assets. Holding companies are used to manage a diverse portfolio, helping business owners minimize risk, reduce costs, and maximize returns.
How do you create a holding company?
To create a holding company, you need to establish a legal entity through the process of incorporation. This includes filing the necessary paperwork and establishing a governance structure. Once the corporation is created, you can acquire subsidiaries and transfer assets to the newly formed holding company.
Do holding companies pay taxes?
Yes, holding companies are subject to taxes on income, capital gains, and other sources of revenue. The specific tax rates for different types of income will vary depending on the province in which the holding company is incorporated.
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