Advantages and Disadvantages of Holding Co.

for Management
Managers face several challenges with a holding company form of organization.
Since the holding company likely has a controlling interest in several corporations,
management may have limited knowledge in the industry, operations and
investment decisions of the controlled company. Such limitations may result in
ineffective decision-making. New management may be less equipped to tackle the
challenges of the company’s day-to-day operations and respond to competition and
market conditions.
Disadvantages for Subsidiaries
The newly owned subsidiary of a holding company also faces challenges with a
change of control. With a new reporting structure in place, former management
reports to a larger shareholder and new board of directors while continuing to
manage with the best interests of the subsidiary’s shareholders in mind. Therefore,
competing interests between management may result in contention and poor
decision-making, which can negatively affect share prices.
Related Reading: How to Start a Holding Company
Disadvantages for Shareholders
Minority shareholders may also face challenges with a holding company form of
organization. While the holding company pays taxes on profits from its subsidiary
companies, shareholders pay taxes on dividends received from the holding
company. Shareholders may also disagree with the new management’s approach
and decision-making. Also, with a new controlling shareholder, minority
shareholders must pay more to maintain their previous shareholding and replace
the directors. This change of control may cause contention between the
shareholders and the holding company.
Other Disadvantages
The holding company form of organization also faces liquidity issues. Since the
conglomerate owns a controlling interest in many corporations, in a highly volatile
market or market crisis, the holding company may find it difficult to remain
profitable, solvent, or convert its assets in a timely manner to avoid substantial
losses. Additionally, many of the holding company’s investments may have
unprofitable assets or business lines. If the holding company engages in similar
industry sectors, management may face systemic risk, or conversely if the
company is engaged in different industry sectors, the holding company may fall
susceptible to several volatile market changes that make it difficult to mitigate risk.
This can result in residual losses that the holding company may not have
envisioned before purchasing the corporations.

 
Advantages and disadvantages of Holding Companies and Subsidiary
Companies
 
Advantages
There are certain advantages to acquiring a controlling interest in a subsidiary as a
holding company.The most important ones include:
The capability of controlling operations with a small percentage of ownership
thus lesser up-front investment.
Holding companies can take risks through subsidiaries, thus limiting this
risk only tosubsidiaries instead of placing the parent company on the line.
Expansion can occur through the way of simple stock purchase in public market,
which shuns
the difficult step of obtaining approval from the subsidiary’s board of directors.
 
Disadvantages
However, there are also some disadvantages associated with holding companies
model. Theseinclude:
If less than 80% of the stock is owned by the parent company, the
holding company paysnumerous taxes on the federal, state, as well as local levels.
A holding company can be required to dissolve more easily as contrasted to a
single merger operation.
Moreover, there are possibilities of a holding company to expand through the
use of debt or leverage, building an intricate corporate structure which can include
unrealized values, thuscreating a risk if interest rates on obligations or
the evaluation of assets posted as guaranteefor loans alter radically.
Advantages of a subsidiary company
 The holding company provides the subsidiary company with buying
power, research and development funds, marketing money and know-how,
employees, technical expertise andother features which otherwise it could
not afford or accomplish alone.
The parent can provide the monetary means and capability to jump start
new companies and products.
Ability to offset profits and losses of one part of a business with another 
Liabilities and credit claims are locked in that subsidiary and cannot be passed
on to the parent company
Allows for joint ventures with other companies with each owning a portion of
the new business operation.
Disadvantages of a subsidiary company
A major disadvantage of being a subsidiary of a large organization is the limited
freedom in management
Decision making can become time consuming as issues often must go through various
chainsof command within the parent bureaucracy before any action can be taken.
Legal paperwork involved with creating a subsidiary can be lengthy and
expensive
Control also becomes an issue when a subsidiary is partially owned by another
outside organization

It's not unusual for one company to own another company. In this lesson, you'll
learn about wholly owned subsidiaries, their advantages and disadvantages. You'll
also have a chance to take a short quiz after the lesson.
Definition
A wholly owned subsidiary is a company that is completely owned by another
company called the parent company or holding company. The parent company
will hold all of the subsidiary's common stock. Since the parent company owns all
of the subsidiary's stock, it has the right to appoint the subsidiary's board of
directors, which controls the subsidiary. Wholly owned subsidiaries may be part of
the same industry as the parent company or a part of an entirely different industry.
Sometimes companies will spin-off part of itself as a wholly owned subsidiary
such as a computer company spinning of its printer manufacturing division.
Advantages
Wholly owned subsidiaries offer some advantages to the parent company.
Companies that must rely upon suppliers and service providers can take control of
their supply chain by use of wholly own subsidiaries. This is a means of vertical
integration where companies in a supply chain are under the control of a common
owner. For example, a car manufacturing company may have several wholly
owned subsidiaries including a tire company and several different auto parts
companies.
Wholly owned subsidiaries also offer an opportunity for company's to diversify
and manage risk. Diversification is a means for a company to reduce risk by
developing different types of businesses so that if one business or industry isn't
doing well, its other businesses may be able to pick up the slack and keep the
company profitable. For example, a computer company may decide to get into the
 printer business, the television business and the tablet business and either buy or
form a wholly owned subsidiary for each new business. Damage from the failure
of one subsidiary will not necessary be fatal to the parent company. Similarly, a
company can reduce its risk in entering into a new market or industry by using
subsidiaries, which help minimize the parent company's exposure. For example, if
your company wants to enter into an emerging market that hasn't been established,
it can form a subsidiary to enter the market leaving much of the risk of loss on the
subsidiary's shoulders.
A company may also create or purchase wholly owned subsidiaries when
conducting business abroad. Sometimes a parent company will create a subsidiary
in a foreign country because it will receive favorable tax treatment from the foreign
government. Alternatively, a parent company may be required to form a local
subsidiary in order to conduct business in the country. The subsidiary may even
have to be formed with a local business partner.
 To unlock thi

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Advantages of a subsidiary company

 The holding company provides the subsidiary company with buying power,
research and development funds, marketing money and know-how, employees,
technical expertise and other features which otherwise it could not afford or
accomplish alone.
 The parent can provide the monetary means and capability to jump start new
companies and products.
 Ability to offset profits and losses of one part of a business with another
 Liabilities and credit claims are locked in that subsidiary and cannot be
passed on to the parent company
 Allows for joint ventures with other companies with each owning a portion
of the new business operation.
Disadvantages of a subsidiary company
 A major disadvantage of being a subsidiary of a large organization is the
limited freedom in management
 Decision making can become time consuming as issues often must go
through various chains of command within the parent bureaucracy before any
action can be taken.
 Legal paperwork involved with creating a subsidiary can be lengthy and
expensive
 Control also becomes an issue when a subsidiary is partially owned by
another outside organization
Holding Company Structure and Benefits
JUNE 18, 2014 BY RICHA

A holding company is a firm that owns the

outstanding stock of other companies. The term usually refers to the company that does not produce
or manufacture goods itself, but owns the shares of other companies that produce goods and
services. Holding companies reduce the risk of owners and allow the ownership of multiple
companies. You can turn your business into a holding company for the purpose of owning property
such as patents, estates, trademarks, and other assets. There are numerous benefits of forming
holding companies. The primary benefit is that the holding company is itself protected from loss.
You can structure a major corporation as a holding company by basing certain parts of business in
jurisdiction with lower tax rates. Get an insight into the legalities of setting up a company
with this course.

Starting a Holding Company

The holding company can be organized with the purpose of acquiring other companies. If a company
acquires another company completely, it is referred to as a wholly owned subsidiary of the holding
company. If you are looking to start a holding company, the below points will provide a step by step
guide to start a holding company:

 Determine the fields and domains that you want to focus on and look for markets that are
ripe for consolidation. There are numerous small banks that could be combined by reducing
the staff and increasing profitability.
 Develop an appropriate business plan that defines the acquisition strategy of your business.
You can learn more about defining a differentiated, successful business strategy
with this course. Set goals like how large a holding company you want to create over the
next 10 years, how many staff members and how much capital you need and so on.

 Make a corporate entity by taking help of legal and accounting firms that can facilitate the
acquisition process. Make sure that you are in compliance with the laws and regulations of
tax. Choose advisors who are experienced with acquisition process and can provide ongoing
advice as you proceed with the closing transactions.

 Arrange the finance sources by presenting your business plan to equity partners. The owners
of the companies you need to acquire require the assurance that you have the capability of
completing the transactions.
  Create a website that presents the preferences of your acquisition along with the details of
your contract. Send a new release announcing the launch of the new holding company to
encourage intermediaries.

A holding company is a special type of business that owns all investments such as stocks, gold, silver,
mutual funds, real estate, patent, licenses, private, copyrights, patents etc. The term holding
company comes from the fact that states that your business has a job to hold the investments.
Holding companies such as Allegheny, Walton Enterprises, Loews, Cascade Investment, The Marcus
Corporation, Berkshire Hathaway, etc. created history with their operations. A number of banks and
financial institutions are holding companies as they own a number of other small businesses.

Holding companies basically come in two forms.  One, wherein the company serves as an investment
vehicle for investors and the other wherein the company serves as a risk management tool for large
companies. For investors, a holding company can provide the ability to make an investment in a
broad array of assets that include minor stakes in the business. A lot of multinational companies use
this structure and have IP holders located in low tax rate countries, because the income paid to it by
the companies will be charged a lower rate. It is very important that you use the most qualified
accountants and attorneys as the rules that surround investment are very complex. In addition to the
above said, a holding company is the preferred vehicle of a true investor as it allows business owners
to open an office and have it devoted to nothing but finding places to invest the money. Our course
in business management will help you build a strong focus in skill transfer for further
growth of your business.

Holding Company Structure and Benefits

A holding company structure can minimize your tax liabilities in a very desirable way. Holding
company benefits in a number of ways with corporate tax planning, which in many cases is a crucial
factor that helps companies reach their business goals and maximize profits for shareholders. The
holding company structure precludes it from manufacturing, selling or distributing goods of the
subordinate company.   It does not get engaged in any business operation, which enables the holding
company to reduce the responsibility of owning a business. As the holding company owns maximum
outstanding shares of another company, the holding company is considered as a legal entity.

If we have a look at the benefits of a holding company structure, we will find that a majority of
companies are creating holding companies to reduce tax liabilities. The jurisdiction under which the
holding company runs, may even give additional tax benefits. Creating a holding company enables a
business to maximize the expenses. The normal corporate tax in any country ranges between 20-
25%. There is a possibility that no tax will be triggered when the capital shares are converted into
business shares.  As a holding company is like a regular business, they come under auspicious tax
laws. In addition to this, holding companies can be formed without any stamp duty, which makes the
process of creating a holding company less complicated. Visit our online course on Corporate
Finance for Business Managers for more insights. The advantages of the holding company
structure for owner operated business are as below:
 As the assets are segregated into separate companies, claims can be limited to single
subsidiary assets. Risky operations can be segregated similarly, which results in effective risk
management.
 Business owners can create 100% owned subsidiaries for tax purposes. This means no tax
return needs to be filed, yet limited liability protection can be maintained for business
purpose.

 Licensing of patents can be broken down by the industry, which can be licensed for multiple
entities.
  The holding company structure provides an easy sale of product or service line, wherein a
single line is sold by selling the subsidiary.

Using a holding company to protect the assets of your business should be a well planned strategy that
helps to limit the risks of liabilities in your business. With a holding company structure, business
owners can reduce or eliminate the liability for personal debts as well as business debts.  The limited
liability company can emerge as two best choices for different types of organizational forms available
to the business owner, in terms of limiting the liability structure of your business. This helps one to
avoid the loss of business assets in case of financial difficulties.

If your business runs into financial crisis, the LC will be superior to the corporation for small
business owners, where tax ramification should be considered carefully.  If you want to protect your
assets from business as well as personal creditors, the best method is to accomplish both the
objectives simultaneously by proper funding and structure of the business. To know more how to
structure a holding company, visit our course in how to create a business strategy that
is ideal for small business owners. 

The holding company operations consist of overseeing what the company owns. It can even hire and
fire an employee, if necessary.  Although the holding company does not manage its day to day
operations, the owner should still understand how these companies operate to evaluate the
performance of the business and prospects on an on going basis.