Accounting for Holding Company
Holding company is a company that does not operate on its own but control over other companies. The holding company has controlling interest in other companies which are known as the subsidiaries. While holidng company is also known as the parent company. Even they have the power to influence, the holding company will not interfere with each subsidiary’s daily operation. It will oversee the internal policy and management decisions. It simply appoint the top management or advisory team to manage each company if necessary.
Holding company does not operate on its own. It does not produce goods or services to generates its own revenue. The main objective of the holding company is to hold the assets. The assets can other companies’ shares, bonds, partnerships, real estate, or the whole subsidiary. Each company under the parent company works independently from each other.
A holding company is mostly a limited liability company that protects itself from responsibility for a subsidiary’s bankruptcy. If one of the subsidiaries goes bankrupt, the holding company will not take any responsibility over its liability.
Holding Company Feature
- The aim of a holding company is to manage the other companies
- It does not produce goods or services in daily operation.
- It is a centralized control of all entity include subsidiary, associate, and partnership
How Holding Company Make Money
The holding company can make money with the following method:
- The holding company will receive the dividend from the subsidiary and associates
- It also own some bond, so it will receive the interest income from them.
- The holding company may offer some consultant service to each subsidiary and it is also a source of income.
- The holding company usually trades the other stocks for profit which is how they make money.
For example, Berkshire Hathaway is one of the big holding company in US which control more than one hundred private and public companies in the world. It has a total asset of more than $ 800 billion in 2020 and generates revenue of $ 200 million per year.
Advantage of Holding Company
- Good control: Holding company is a controlling company that oversees other companies that it has a controlling interest. It become a centralize for controlling purpose and check each company performance.
- Low controlling cost: the holding company will be able to control multiple entities at a lower cost. One holding company can control many subsidiaries, associates, and assets. It will be high cost if we set up one company to control one entity.
- Independent: Many entities are under the holding company and they work independently. If one of them has any legal issue, it will not impact the group or parent company.
- Liability Protection: The company can protect each subsidiary’s liability by separate them into independent entities. When any subsidiary bankrupt, it will not impact the other subsidiaries or holding company. If all operations are placed under one company, it will impact to all business.
- Lower cost of debt: A holing company or any subsidiary that has strong credit rating will be able to obtain loan at a lower rate. The company will obtain the loan at lower cost and distribute to the start up a subsidiary.
- Tax: Holding company will prepare consolidate tax return of all entities below it. So when one subsidiary loses, it will be offset with the other and reduce the taxable amount. Moreover, it can use the transfer pricing to reduce the total tax amount in the group.
Disadvantage of Holding Company
- Complexity: the structure of the holding company is hard to structure and control. It controls sudsidiray with different control percentages, associates, and assets. The method of controlling each entity is not the same which is so confucsing to manage.
- Management issue: For sure, the management of the holding company will not be the expert in all subsidiaries. So it will be hard for them to oversee their policy and performance. Moreover, the management needs to deal with the subsidiary’s minority interest which leads to conflict between groups.
- High cost for each entity: each entity needs to follow the procedures from holding company which may not be applicable for all of them. They have to comply as it allows the holding to consolidate and compare across the group.