Holding Company — is a juridical entity that doesn’t carry out operations or business activities and only holds the assets. Instead, the company controls other juridical entities. These entities are named subsidiaries. The holding company may also be called a parent company.
Examples of famous holding companies are Bank of America (USA), BNP Paribas (France), and Mitsubishi UFJ Financial Group, Inc. (Japan). The stocks and assets of holding companies attract investors and traders because they are highly profitable. The trading resources monitor the movement of the holding company’s rates as the rates of the currencies.
Work of Holding Company
There are two methods of how the entity can be turned into a holding company. The first one is to purchase the share of voting stocks in other entities and then, give the control over activities back. The second one is to form a new enterprise from ground zero and keep the part of shares.
The interaction between the head company and associated entities is named a parent-subsidiary relationship. The main entity can influence its management decisions but doesn’t intervene in the daily activities. The head office creates the strategy for the whole entity and coordinates the collective actions. Also, it defines the finance capital investments and development of new products.
Profitability of Holding Company
The holding companies are very profitable enterprises. Here are the traits that make the business owners aim to create a parent company with subsidiaries.
Advantages of Holding Companies:
Control of investible funds. The parent company can oversee the subordinates easily. If it purchases some amount of money from the subsidiary, it automatically receives control over it. In such a way, the owner of one business can control multiple firms without spending too much money.
Independent entities. Even if the holding company receives control over other entities, they are legally independent. So in case of judicature or debt recovery, the holding company won’t pay the debts of subsidiaries.
Possibility to manage several companies. The holding company takes all the key decisions. It can merge, amalgamate or bankrupt them. Also, it can appoint the senior executives from the subsidiaries or move staff from the closed entities to the active ones.
Opportunity to receive profit from numerous entities. The holding company fights competitors by uniting the efforts of subsidiaries. Every subsidiary creates a product in one field. The consumer may think that these are different companies that compete with each other. However, these are just the parts of one entity. Consumers can buy the product of any subsidiary, but the profit from a sale will come to one entity.