What is a Holding Company?
Holding Company Definition
It is a corporate ownership structure in which a parent company owns sufficient equity and voting stock in another company, called a subsidiary, that it can control that company’s policies and management decisions.
Holding companies may also own real estate, commodities, intellectual property, or a variety of other assets.
While the holding company legally owns the assets of its subsidiary, it often only maintains oversight and does not always participate in day-to-day business operations.
The Purpose of a Holding Company
The purpose of a holding company is to consolidate control of several companies under one umbrella corporation.
This offers holding companies a few advantages.
For example, they are protected from losses in the event that one of their subsidiaries goes bankrupt.
If this happens, the holding company may experience a capital loss, but it is not legally liable for the debt of one of their subsidiaries, meaning that creditors cannot collect directly from the parent company.
Furthermore, the loss of one subsidiary does not impact the other assets held by the holding company, so the remainder of its sources of income will still be safe.
Example of Holding Company
When a subsidiary company is entirely owned by a holding company, it is said to be wholly owned.
For example, Warren Buffet’s company, Berkshire Hathaway, wholly owns GEICO, Fruit of the Loom, Helzberg Diamonds, and several others.
However, many holding companies also have significant partial ownership of some companies; Berkshire Hathaway owns 26.7% of Kraft Heinz, 17.6% of American Express, and 9.9% of Wells Fargo, among others.