Within a holding company structure, there are two kinds of companies; the holding company (sometimes a parent company) and the subsidiary (often an operating company). While both companies share some similarities, there are a number of differences between them. In this article, we explore the difference between holding companies and subsidiaries.
What is a holding company?
A holding company is one that holds more than 50% of the equity of another business, giving it the power to manage its activities. This company type is a parent company, limited liability company, or limited partnership that holds a sizable percentage of voting shares in another company. The structure of the shareholding gives the Holding Company authority over the management and policy decisions of the subsidiary.
Thus, the activities of a holding company revolve around holding equity stock in and managing the affairs of other companies. Generally, a holding company is one that exists with the principal aim of holding equity in other companies. Asides from this activity, the holding company is generally inactive. On the other hand, a parent company is a broader term that refers to a company that owns controlling stake in a subsidiary company. However, this parent company not be a holding company in the strict sense as it may have business undertakings of its own that it carries on daily.
What is a subsidiary?
Where a company is owned, controlled, or managed by another company, such a company is a subsidiary company. The company in a controlling capacity will often own at least 50% of the subsidiary company, which gives it controlling rights over the subsidiary.
The holding company and the subsidiary are distinct entities with separate legal personalities, but the holding company will often exercise some level of influence over the subsidiary. Subsidiary companies, on the other hand, are a company that operates under the control of another entity, known as a holding company or the parent company. The parent company has control over half of the stocks of the subsidiary company.
A subsidiary may be of any of the following types:
- Wholly Owned Subsidiaries: This is 100% owned by the parent company.
- Partly Owned Subsidiaries: Here, the parent company owns most of the stock of the subsidiary and therefore has controlling interest.
- Joint Venture Subsidiaries: This type of subsidiary consists of two or more companies, with each one owning equal parts of the subsidiary company.
Holding Company vs. Subsidiary Company: Difference between holding companies and subsidiaries
Some of the differences between holding companies and subsidiaries are as follows:
|Concerned with holding stock in other companies||Often engaged in day-to-day business|
|Owns 50% or more of another company’s stock||Majority of shares are held and controlled by a holding company|
|Holding companies can exercise control and influence over subsidiaries||Subsidiaries cannot exercise control over holding company|
|Assets of a holding company are not attributable to subsidiaries||Assets of subsidiaries become attributable to holding company|
|Debts of holding companies may be recovered against its assets and stake in subsidiary||Debts of subsidiaries cannot be enforced against assets of holding company|
Although both holding companies and subsidiaries possess similar registration requirements and procedures, they have certain differences that distinguish them. Whichever company structure you are looking to set up, there’s a better way. Click here to get started.