What is a Holding Company?
A holding company is a legal entity that retains a controlling interest in one or more companies termed subsidiaries. Also known as a parent company, a holding company serves as asset protection and helps to limit liability risks.
Definition and Function of Holding Companies
- A holding company owns other companies.
- The company controlled by the parent company is an operating company or subsidiary.
- A holding company can manage investments, provide financial services, and hold real estate.
Berkshire-Hathaway as an Example
- Berkshire-Hathaway, founded by Warren Buffett, is an example of a successful holding company.
- It holds subsidiaries across industries worldwide.
Operating Company vs. Holding Company
Key Differences
- A holding company oversees operations but operates subsidiaries.
- The subsidiary is the company controlled by the parent holding company.
- The holding company manages investments, provides financial services, and holds real estate.
Structuring Business and Liability
- Business owners form a holding company and subsidiaries to structure expanding businesses.
- The holding company protects assets from subsidiary liabilities.
- The subsidiary incurs all business liabilities.
Financial Considerations
- A holding company obtains lower interest rates on loans than subsidiaries.
- Subsidiaries engage in operations requiring licensing.
- Through stock ownership, the holding company influences subsidiary policies and management but is not involved in daily operations.