A big ship sails in the ocean but when it comes near island or city than it stops and passengers or goods are sent on small boats, in case of corporate world holding company which is similar to big ship form small subsidiary companies which are similar to small boats. Holding company refers to that company which holds majority shares or stocks of another company so as to have control over the operations and management of the company and hence all the important decision and policies are decided by the holding company. In order to understand this concept more one should look at the advantages and disadvantages of holding company –
Advantages of Holding Company
Protection from Losses and Bankruptcy
The biggest advantage of holding company is that in the event of loss by the subsidiary company or subsidiary company being bankrupt, the holding company will not be liable and the creditors of the company cannot claim money from the assets of holding company. In simple words when small boat capsizes in the sea the big ship does not get affected significantly, in the same way when subsidiary company sinks it will result in a capital loss for the holding company but it will not impact the performance of holding company in a major way.
Helpful in Doing Multiple Business
Another benefit of holding company is that if the company wants to do multiple businesses than it can form subsidiaries according to business and hence each business will be different from each other and company can manage the different business through different companies in a better way rather than managing the different business through one company only.
Easy to Form and Exit
It is easy to form a holding company as its purpose is to control another company rather than produce goods or services itself and also it can exit any time by selling its stake in the subsidiaries. Hence ease of entry and exit lure many companies to become a holding corporation.
Disadvantages of Holding Company
Exploitation of Subsidiary Companies
The biggest disadvantage of holding company is that it exploits subsidiary companies because all important decisions are taken by the holding corporation without much responsibility and accountability resulting in employees and top management of subsidiary companies being at the mercy of holding corporation. In simple words, it is similar to the captain of a big ship putting 20 people in the small boat with a capacity of 10 people and then expecting it to reach safely on the shores.
Minority Shareholders are at Loss
Another limitation of holding company is that minority shareholder of the subsidiary company who will be at a loss as it is the holding corporation which takes all the decisions without the consent of the minority shareholders. Hence minority shareholders are like those 20 people on the boat who despite knowing that they are at risk cannot say anything, in case of ship their life is at risk and in case of minority shareholders, it is the money which is at risk.
Tax Evasion and Manipulation of Accounts
Another demerit of holding company is that many companies form subsidiaries not for doing any business rather for tax evasion by manipulating the books of the accounts in such a way that tax liability of both subsidiary and holding corporation is reduced leading to loss of revenue of the government of the country.
As one can see from the pros and cons of holding company that whether you are a shareholder, employee or creditor of holding company and subsidiary company you should be aware of above pros and cons because it directly or indirectly affects you.