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Thursday, May 30, 2024

How parent and holding companies work

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Business structures can be varied and complex with lots of different types of companies all interconnected. It is important that you know the difference between parent companies and holding companies when setting up or restructuring your business.

Both types of business can be called ‘umbrella companies’ but there is a difference between parent companies and holding companies.

Parent companies

Parent companies are companies that have a controlling or majority interest in another, also known as a subsidiary company. This gives the parent company the right to control the subsidiary company’s operations and direction.

Parent companies can have a hands-on role when it comes to the management of the subsidiary company, but equally they can be uninvolved. Commonly, parent companies can have control or majority interest in multiple different companies. These can often be across multiple different sectors, making them a conglomerate.

By having smaller companies under their control, parent companies have access to staff and management meaning they can bring on new talent which can benefit the group as a whole.

Holding companies

Holding companies are similar to parent companies in a lot of ways. Both types of businesses have a controlling interest in other companies, known as subsidiaries.

Most companies provide some form of goods or services but holding companies do not. Instead, they are firms that have investments in other companies that do make goods or provide services.

Holding companies can control other companies in order to manage any legal liabilities. It can also be a way to manage tax obligations, although this is not always the case.

What are the differences?

Whilst both business types are similar, the main difference between parent companies and holding companies is the amount of control they have over their subsidiaries.

The relationship between parent companies and their subsidiaries can be complicated. Parent companies must have a controlling or majority interest in the subsidiary company. This means that their shares must be 51% or above. Due to this, parent companies have the option to control the operations and direction of the subsidiary companies. They also have the right to change the board members and senior executives at their discretion. Holding companies, whilst still having an interest, are generally inactive.

Another difference is the status of the ruling company. A holding company exists solely to have an investment in other companies and to act as a financial investor. Parent companies, however, can have their own business operations. It is usual but not essential that the parent company is linked in some way to their subsidiary’s business production. An example of this is Meta Platforms, formerly known as Facebook. They are the parent company for WhatsApp and Instagram as well as others but still operates as a social networking site in its own right.

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