Holding Company

HOLDING COMPANY

Definition A holding company is a company that owns part, all, or a majority of other companies' outst ou tstand anding ing sto stock. ck. It us usual ually ly ref refers ers to a com compan pany y wh which ich do does es no nott pr produ oduce ce goo goods ds or services itself; rather its only purpose owns shares of other companies. Holding companies allow the reduction of risk for the owners and can allow the ownership and control of a number of different companies. In the U.S., 80% or more of voting stock must be owned before tax consolidation benefits such as tax-free dividends can be claimed. A company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors also called parent company. Corporation that owns enough voting stock in another corporation to influence its board of  directors dire ctors and ther therefor efore e to control its poli policies cies and man managemen agement. t. A holding company need not own a majority of the shares of its subsidiaries or be engaged in similar activities. However, to gain the benefits of tax consolidation, which include tax-free dividends to the parent and the ability to share operating losses, the holding company must own 80% or more of the subsidiary's voting stock. Among the advantages of a holding company over a Merger as an approach to expansion are the ability to control sizeable operations with fractional ownership and commensur commensurately ately small investment; the somewhat theoretical ability to take risks through subsidiaries with liab li abil ilit ity y li limi mited ted to th the e su subs bsid idia iary ry co corp rpor orati ation on;; an and d th the e ab abili ility ty to ex expa pand nd th thro roug ugh h unobtrusive purchases of stock, in contrast to having to obtain the approval of another company's shareholders. Among the disadvantages of a holding company are partial multiple taxation when less than 80% of a subsidiary is owned, plus other special state and local taxes; the risk of  forced Divestiture (it is easier to force dissolution of a holding company than to separate merged operations); and the risks of negative leverage effects in excessive Pyramiding. The fol The follow lowing ing typ types es of ho holdi lding ng co comp mpani anies es are defined defined in sp speci ecial al wa ways ys an and d su subje bject ct to particular legislation: public utility holding company (see Public Utility Holding Company Act), Bank Holding Company , Financial Holding Company, railroad holding company, and air transport holding company.

Advantages of holding company: •

Easy formation: form formation ation of hold holding ing com company pany is comparably comparably easy from any other business orga business organizati nization. on. Witho Without ut givi giving ng imp importan ortance ce to oth other er shar sharehold eholders, ers, one can format a company by buying maximum shares.

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management system act by the holding company. •

Huge capital: as it is a large company holding company can invest huge capital. If a subsidiary company face shortage of money, it can be easily solve by taking money from other subsidiary company.

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Separate entity of subsidiary companies: as subsidiary subsidiary com company pany runs und under er a central management system there’s no chance of eliminating their separated entity.

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Advantages of large scale business:

it can be easily transferred to a large

scale business as a huge capital and proper management is available in this business. •

Reducing business risk:

it can reduce business risk. As a holding company

involves different types of business, risk is allocated to the companies. For example if  a company falls in loss in a year it can be equalized by another company. •

Reducing operating costs:

subsidiary company has no power to make a decision.

So there is no chance of extra management fee. •

Production and marketing control:

holding company can reduce the competition

in market, as there’s a number of subsidiary company under there. •

Advantages of Joint Stock Company: it can also get the benefit of Joint Stock Company.

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Stability: though it can be easily turn into a large company its stability is going higher and higher.

Disadvantages •

Complexities in management: there are some complexities in management system when the organization expands its scope they are facing a problem with control management system.

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Irregularities in management: for the purpose of business under the holding company a subsidiary company often exchange money to each other. There is a chance of facing some sort of problems and irregularities.

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Over capitalization: in a huge company there have sufficient capital. But many times the company can not invest all its capital. On the other hand subsidiary company cannot utilize the capital. So the company earns a little profit.

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Responsibility and authority: there are some problems about the responsibility and authority between holding and subsidiary company.

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Monopoly effect: holding company reduced competition in market. So there’s seen a monopoly effect in the market.

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Economic discrimination: holding company harms the regular activities of micro institution. It accumulated all the money by amplifying in the market. So there is seen an economic discrimination over the market.