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Adam Farren

A holding company is a parent company that owns enough voting stock in a subsidiary to dictate policy and make management decisions. This is generally done through influence of the company's board of directors.

This doesn't mean that the holding company owns all of the subsidiary's stock, or even a majority of it. However, holding companies that control 80% or more of the subsidiary's voting stock gain the benefits of tax consolidation, which include tax-free dividends for the parent company and the ability to share operating losses.

Advantages of Holding Companies

Acquiring a controlling interest in a subsidiary as a holding company has certain advantages over a merger:

• The ability to control operations with a small percentage of ownership and, thus, smaller up-front investment
• Holding companies can take risks through subsidiaries, and limit this risk to the subsidiary alone rather than placing the parent company on the line
• Expansion can happen through simple stock purchases in the public market, which avoids the difficult step of gaining approval from the subsidiary's board of directors

Disadvantages of Holding Companies

The holding company model has the following disadvantages:

• If less than 80% of the subsidiary is owned by the parent, the holding company pays multiple taxes on the federal, state, and local levels
• A holding company can be forced to dissolve more easily than a single merged operation
• A holding company may expand through the use of leverage or debt, building a complex corporate structure that can include unrealized values, and creating a risk if interest rates on debt or the valuation of the assets posted as collateral for loans change dramatically.