What is a Holding Company?

A holding company is a corporate entity that controls a number of subsidiary entities. The level of ownership required to exercise control over a subsidiary varies, but does not usually have to be 100%. The managers of the holding company oversee the subsidiaries, but are not directly involved in their operation; local management teams control each subsidiary.

Advantages of a Holding Company

The holding company concept is useful for running a conglomerate, where subsidiaries are assembled that offset each others' risk profiles, and where cash flows can be apportioned among the subsidiaries based on need, as well as management's judgment regarding which subsidiaries represent the best investment opportunity. Holding companies are also useful for limiting the legal liability of each individual subsidiary, so that the bankruptcy of one subsidiary will not affect the other subsidiaries or the holding company. A further advantage is that a holding company can loan funds at a low rate of interest to it subsidiaries, which lowers their cost of capital.