Difference Between a Holding Company and a Subsidiary Company?

There are some key differences between a holding company and a subsidiary company.

Let’s take a look.

What is a holding company?

A holding company is a separate parent company created to own a controlling interest in subsidiary companies. A holding company doesn’t trade itself; its main purpose is to form a corporate group. They can sometimes be called a Parent Company.

The following image demonstrates a typical example of a corporate group structure:

What is a subsidiary company?

A subsidiary is a company that is owned or controlled by a parent or holding company.

Typically, the parent company will own more than 50% of the subsidiary company. This gives the parent organisation the controlling share of the subsidiary. In some cases, control can be achieved simply by being the majority shareholder.

What are the advantages of a holding company?

Risk management

The first advantage of a holding company is to effectively manage risk.

If a company undertakes multiple trades or has separate investments such as property, stripping these out into separate subsidiary companies under the common control of a holding company may be beneficial.

A group structure minimises the risk to the trade of the subsidiaries if one part of the group underperforms or becomes insolvent.

Asset protection

Because a holding company can hold valuable business assets including trading or investment property, plant and machinery, intellectual property, and excess cash for investments, subsidiaries take on the daily operations of the business and its trading responsibilities.

Tax benefits and shared costs

Dividends can pass between a subsidiary and holding company without incurring tax charges. Where a company owns more than 10% of the shares in another company and sells those shares, there is usually no tax to pay on any gains.

Because admin and central services functions can be utilised by different businesses, they can sit beneath a holding company which makes charges to the subsidiaries. This means that the costs can be shared amongst them.

What are the advantages of a subsidiary company?

As separate legal entities, parent companies can limit financial liabilities and keep businesses apart. A subsidiary company can also be a straightforward way to enter new international markets.

Benefits of a subsidiary company include:

• Limited financial liability for the wider holding corporation, containing potential losses within the subsidiary company.
• The potential for favourable tax rates in a separate setting to the parent company.
• Keeping a specific brand or product as its own legal entity to maintain independence and make selling straightforward.
• Maintaining an acquired company’s independence whilst exerting managerial control.

What is an associate company?

An associate company is a corporation in which a parent company possesses an ownership stake. Usually, the parent company owns only a minority stake of the associate company, as opposed to a subsidiary company, in which a majority stake is owned.

Associate company relationships often occur within joint ventures. For example, associate companies could exist between several different partners that bring different elements to the business, such as financial, technology, and production facilities. Together, they can form a new company, which is an associate of all three without being the affiliate of any of them.

What is the difference between an associate company and a subsidiary?

An associate company is one where a parent company owns a minority stake.

In an associate company, the parent does not consolidate the financial statements of the associate company. In comparison, a subsidiary is a company with a parent company that owns a majority share. In this case, the parent company will often consolidate the financial statements of the subsidiary.

Final words

Holding companies can be powerful tools for generating profits and protecting assets.

They can help manage risk, reduce taxes and increase leverage. However, this is a complex area of business. For advice on company structures, please get in touch for independent business legal advice.