A holding company is a parent company that is created to buy and control the ownership
interests of other companies. The companies that are owned or controlled by a holding
company are called its subsidiaries.
holding companies don’t manufacture anything, sell any products or services, or conduct any
other business operations. Their sole purpose is to hold the controlling stock or membership
interests in other companies. This type of holding company is called a pure holding company.
In a typical holding company structure, the subsidiary companies manufacture, sell, or
otherwise conduct business. These are called operating companies.
The holding company can own 100% of the subsidiary, or it can own just enough stock or membership interests to control the subsidiary. Having control means it has enough stock or membership interests to ensure that a vote of owners will go its way. This can be 51%. Where there are many owners, it can be a much lower percentage.
Each subsidiary has its own management who run the day-to-day business. The holding company’s management is responsible for overseeing how the subsidiaries are run. They can elect and remove corporate directors or managers and can make major policy decisions like deciding to merge or dissolve. The people running the holding company do not participate in the operating companies’ day-to-day decision making.
The holding company’s management is also responsible for deciding where to invest its money. A pure holding company can obtain the funds to make its investments by selling equity interests in itself or its subsidiaries or by borrowing. It can also earn revenue from payments it receives from its subsidiaries in the form of dividends, distributions, interest payments, rents, and payments for back-office functions it may provide.
A holding company structure is popular with large enterprises with multiple business units. Take, for example, a large corporation that manufactures and sells several different consumer goods, including hair care products, skincare products, baby care products, and others. Rather than using one corporation with different divisions, this enterprise could be structured with one holding company and several subsidiaries. Each business unit could be operated as a separate subsidiary in which the holding company owns a controlling interest. The company’s intellectual properties, equipment, and real estate may also be placed in separate subsidiaries, with the operating companies paying to use the intellectual properties, lease the equipment, and rent its offices.
LLC holding companies
Holding companies can also be used by much smaller businesses — even by single entrepreneurs. Take, for example, a person who wants to buy an apartment building for the rental income. Two business entities could be formed: an LLC operating company that would own the apartment building and an LLC holding company that would own the LLC operating company.
Now, let’s say that our entrepreneur wants to buy a fast-food restaurant and a thoroughbred horse farm. A new subsidiary LLC can be formed for each new investment.
A holding company can own businesses in a variety of unrelated industries. It doesn’t matter if the owners and managers of the holding company don’t know about those businesses because each subsidiary has its own management to run the day-to-day operations.
