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What Is A Holding Company?
What Is A Holding Company?
By AMY FONTINELLE
Reviewed By THOMAS BROCK
Updated Aug 24, 2020
What Is a Holding Company?
A holding company is a business entity—usually a corporation or limited liability
company (LLC). Typically, a holding company doesn’t manufacture anything, sell any
products or services, or conduct any other business operations. Rather, holding
companies hold the controlling stock in other companies.
Although a holding company owns the assets of other companies, it often maintains
only oversight capacities. So while it may oversee the company's management
decisions, it does not actively participate in running a business's day-to-day operations
of these subsidiaries.
KEY TAKEAWAYS
If a holding company is set up correctly, the debt liability of one subsidiary won't impact
any others; if one subsidiary were to declare bankruptcy, it would not impact the others.
Holding companies can also serve the purpose of protecting an individual's personal
assets. With a holding company, those assets are technically held by the corporation,
and not by the person, who is consequently shielded from debt liabilities, lawsuits, and
other risks.
Holding companies support their subsidiaries by using their resources to lower the cost
of much-needed operating capital. Using a downstream guarantee, the parent
company can make a pledge on a loan on behalf of the subsidiary. Ultimately, this can
help companies obtain lower-interest-rate debt financing than they otherwise would be
able to source on their own. Once backed by the financial strength of the holding
company, the subsidiary company's risk of defaulting on its debt drops considerably.