Advantages & Disadvantages of Holding Companies

A holding company is a firm that owns bonds or stocks in other companies. A holding company usually has controlling shares, which is a minimum of 51 percent of that company's stock. This gives the firm control of the management and direction of the company. This is usually decided by an elected board of directors. Holding companies have significant advantages and disadvantages depending on the goals and structure of your company.
• Advantage:
a. Reduced Risk
• A holding company's main purpose is to own shares in a company, not to make business decisions. This is an advantage because you can have control of a business with only a fraction of the company shares. This can be as low as 10 percent of the stock. This provides an opportunity to earn money from a large business with less risk than sole ownership because the risk is spread among the shareholders in the holding company.

b.Isolated Risk
• There are usually several companies in a holding firm and they are separated legally from one being liable to another. For example, in the event that one of the companies in a holding firm has significant losses in revenue or has a lawsuit brought against it, another firm in the holding company and its assets are protected because it is a separate entity within the holding firm. However, holding companies have controlling shares and can make an executive decision to save the company if it's in the best interest of the firm. This is often decided by the board of directors.

Disadvantage:
a. Partial Multiple Taxation
• If a holding company owns less than 80 percent of the stock in a company, it will have to pay partial multiple taxations on dividends. A company and its holding firm are not recognized as a single entity by the tax agencies. Therefore, taxes must be paid before dividends are made to the stockholders. This is due to all the cost and revenue not being aggregated as a single company and is therefore taxed as separate entities.

b. Forced Divestment
• If an antitrust case is brought against your company; the holding company can easily separate itself by selling its controlling shares in your company therefore giving up ownership. In this case, a divestment is usually requested by the government to make businesses compete fairly. However, if a company doesn't fit in the firm's core business or the holding firm wants to liquidate its assets, your company can still be forced into divestment even if it is performing well.