When investing in securities issued by corporations, you may have come across a term called a holding company. While you might wonder what it is, you would be surprised to know that most successful companies in the world are holding companies. A holding company is a parent corporation that holds various businesses under it. Such a company does not do anything by itself, but instead, it is designed to hold investments in the form of stocks, bonds, mutual funds, gold, silver, real estate, trademark, patents, licenses, copyrights, or anything of value. A holding company holds enough investment in other entities to manage and control them.
How does a Holding Company Function?
A holding company does not operate like a regular business. It is a parent company, which does not trade in goods and services itself, but owns and controls powers in other companies that do. To understand it better, let us say that you and your friend decide to invest together. You incorporate a new firm as a holding company and issue a million shares for $10 each, raising $10 million fresh cash. As stockholders, you elect a board of directors, who in turn elects one of you as a CEO.
As a holding company, you then invest the money raised from shares in a business, or in assets like bonds, shares, gold, silver or money market funds. The balance sheet of this company would only show assets in the form of different investments made. As the owner of the holding firm, you show up at the office each day, but do not actually have a day to day role of revenue generation and cost management. Each of your subsidiaries is looked after by its own management team, who runs the business. Your job is overseeing, financial support, setting risk management practices, and putting right people in the right places. You will watch over the other companies, support them to achieve the set targets and increase profits while reducing risks.
Why Choose a Holding Company?
A holding company is perfect for entrepreneurs looking to branch out to new business prospects that don’t fit in within their existing companies. It is also great for business owners who want to compartmentalize different departments, services or products. Actually, anyone looking to lower their financial risk by investing in several ventures can opt for a holding company. One of the major benefits of a holding company is that the holding company itself is protected from losses. Even when one of the companies they hold, goes bankrupt, the holding company only experiences capital loss, i.e., the investment they made in the firm. They will not have to incur any debts held by the bankrupt firm. For example, Berkshire Hathaway holds Burlington Northern Santa Fe railroad, but none of their debts are guaranteed by Berkshire Hathaway.
You can find several real world examples of a holding company like Johnson & Johnson, Berkshire Hathaway, General Electric, and Procter & Gamble. Efficient financial and risk management is vital for successfully running a holding company. Consulting a financial and bookkeeping agency would prove beneficial if you are heading a holding company or wanting to start one.