Are you an entrepreneur thinking of expanding your business and increasing revenue?. To become a global powerhouse you can take many routes. The traditional route is to excel in your core industry with a strategic plan.
But there is more. McKinsey’s article has revealed that a company’s 20% revenue comes when it expands into new sectors. It is often called a holding and subsidiary company in company law language. It further states that this acquisition cannot be reckless.
In this article, we will help you:
- Understand what holding and subsidiary companies are.
- Understand the difference between them (subsidiary company vs holding company).
- Know a holding company and subsidiary company example from the real world.
What Is a Subsidiary Company?
A subsidiary is a company owned and controlled by a bigger company known as the parent or holding company.
The ownership of a subsidiary company is established through voting shares and other methods. Some subsidiary companies are owned 100% by a holding company and are known as wholly owned subsidiaries. The subsidiaries that are not fully owned are called partially owned subsidiaries.
What Is a Holding Company?
A holding company focuses on owning and managing subsidiaries in other companies. These companies are often called portfolio companies or subsidiaries.
Holding companies generate higher revenue by having subsidiary companies. They receive dividends from their subsidiaries or can earn benefits from selling shares of these companies over the time increase in value. Holding companies can also save money by combining certain operations across their different subsidiaries.
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Difference Between Subsidiary company and Holding company
With such great benefits, it is time to understand the difference between a subsidiary company and holding company. This information can help small business owners, startup founders, and entrepreneurs understand the nuances and make better decisions.
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1. Managing the Team
Team management is an important aspect of any corporate structure of any size or volume. This is largely due to the fact that it is the human resource that drives growth in any organization. So, let’s understand how things work in a holding company vs subsidiary company.
| Company Type | Subsidiary Company | Holding Company |
| Introduction | As a subsidiary, the company can have its own dedicated team for various functions like management or HR. This helps the subsidiary with agility to market shifts and helps in quick decision-making. | The holding company, on the other hand, takes a more overarching approach to management. It provides strategic direction and influences key decisions across its entire portfolio of subsidiaries. This centralized approach maintains consistency and optimizes resource allocation across multiple business units. |
| Example | Take the example of Instagram, it is a subsidiary of Meta but it has the autonomy to have different teams. These teams handle various tasks like developing new features for the app and engaging with the IG user base. | Here the example of Berkshire Hathaway would be highly insightful. Its subsidiary list has some famous names on it like Dairy Queen and BNSF Railway. The holding company provides strategic direction to all its subsidiaries. |
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2. Managing Control
Be it a small business or a start up, taking the right decision is a time sensitive step for both holding and subsidiary companies. And as mentioned a holding company has major voting shares in its subsidiaries then how do they maintain the flow of decisions?
| Company Type | Subsidiary Company | Holding Company |
| Introduction | While operating under the holding company’s umbrella a subsidiary retains a degree of autonomy in day-to-day decision-making. It has the flexibility to adapt to its specific market conditions and customer needs. | Yes, the holding company wields significant control over its subsidiaries often through majority ownership of voting shares. |
| Example | YouTube operates as a subsidiary of Alphabet Inc. It maintains a degree of autonomy in its content creation and management decisions. However, Alphabet still exerts influence through its majority ownership and strategic guidance. | The Tata Group is a conglomerate holding company in India. It has many subsidiaries like Tata Motors and Tata Consultancy Services. The strategies of the overall group are done by the holding company. |
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3. Managing Liability
Liability is any company’s debts or financial obligations that it has to fulfill to other companies. Liability extends from company loans to lawsuits and even deferred revenue. It is also a major attribute while understanding holding vs subsidiary company.
| Company Type | Subsidiary Company | Holding Company |
| Introduction | One of the primary advantages of a subsidiary structure is limited liability. It means that the holding company’s financial liability is typically confined to the subsidiary’s assets, so safeguarding the parent company’s assets from the subsidiary’s operational risk. | The holding company, on the other hand, assumes full financial responsibility for its own debts and obligations. Its creditors can seek repayment from the holding company’s assets. |
| Example | If a product liability lawsuit arises against a Johnson & Johnson subsidiary, the financial responsibility is typically limited to the assets of that subsidiary. This protects Johnson & Johnson’s overall assets from being used to settle claims against the subsidiary. | For instance, if a holding company like Berkshire Hathaway faces legal challenges or financial difficulties, it’s directly responsible for its own debts and obligations. |
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4. Managing Financial Reporting
Financial reporting is proof of transparency to its stakeholders. It shows compliance and makes ways to acquire further capital.
| Company Type | Subsidiary Company | Holding Company |
| Introduction | Usually, a subsidiary maintains its own financial records and prepares separate financial statements. This provides transparency into its performance and allows it to track revenue, expenses, and profitability. | The holding company prepares consolidated financial statements, combining the financial data of all its subsidiaries. |
| Example | Coca-Cola’s subsidiary in India, Hindustan Coca-Cola Beverages Private Limited (HCCBPL), prepares its own financial statements. This reflects its revenue, expenses, and profitability. | As an example, we can see it in Alphabet Inc.’s financial reporting. It consolidates the financial data of its various subsidiaries like YouTube and Waymo, into its financial reports. This allows investors and stakeholders to assess the overall financial health and performance of the entire group. |
5. Managing Operations
Operations include R&D, supply chain management, finance and reporting, and more.
| Company Type | Subsidiary Company | Holding Company |
| Introduction | A subsidiary enjoys a significant degree of operational independence. It has the freedom to make day-to-day decisions that best suit its specific market and customer base. | The holding company might choose to centralize certain functions, such as finance, HR, or IT. It is majorly done to achieve economies of scale and streamline operations across its subsidiaries. |
| Example | Pixar Animation Studios, a subsidiary of The Walt Disney Company, operates independently in creating and producing animated films. | Unilever, a consumer goods giant, centralizes certain functions like research and development, supply chain management, and marketing across its numerous subsidiaries, including Dove, Ben & Jerry’s, and Lipton. |
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Therefore, we can conclude that a holding company controls another company (subsidiary) by owning its shares. The subsidiary acts independently but follows the main company’s instructions. The holding company controls investments, while the subsidiary is responsible for commercial activities.
Final Words
Understanding the difference between a holding company and a subsidiary company is important. As we explored in the blog, these structures provide distinct advantages for both the subsidiary company and the holding company. These advantages come as shared responsibilities and protection against legal matters. Overall, the growth potential is huge compared to operating as a company with no subsidiaries.
FAQs
- What are the advantages and disadvantages of a Holding company?
- Advantages of a Holding Company
- The assets of a holding company are protected in case of a subsidiary company’s bankruptcy and debts.
- Holding companies can save on taxes by relocating to locations with less taxes while continuing to operate in their original location.
- Disadvantages of a Holding Company
- It gets difficult for the investors and creditors of holding companies to check its financial strength.
- There is a chance for the directors to hide losses by moving it to subsidiary companies.
- How do holding companies make money?
These companies receive dividends from their subsidiaries or can earn benefits from selling shares of these companies as their value increases. Holding companies can also save money by combining certain operations across their different subsidiaries.
For example, Unilever, a consumer goods behemoth, has many subsidiaries. Some of the famous ones on the list are Knorr, Dove, and Lipton. So, Unilever can save costs on bulk raw material purchases through negotiations. This way, sourcing raw materials becomes sustainable and saves funds for Unilever.
- Can a subsidiary company invest in a holding company?
Generally, the subsidiaries are legally restricted from investing in their holding company. This has been put in place to avoid conflict of interest. But yes, exceptions can be entirely based on regulations and industry compliances. A subsidiary should consult a professional before deciding to invest in a holding company.