What is a Parent Company?

A parent company is a company that retains control over one or more other entities through its ownership of a majority of their voting stock. These other entities are considered to be subsidiaries of the parent company. A parent company can be designated as such either by acquiring other businesses, or by spinning off its own operations into separate legal entities that it still controls. Parent companies can exercise varying degrees of control over their subsidiaries, depending on the management philosophy of a parent company’s management team.

Types of Parent Companies

There are two main types of parent companies, which are as follows:

Conglomerate. This is an entity that operates in multiple industries through a large number of disparate subsidiaries. There is frequently no obvious linkage between these subsidiaries. An advantage of this approach is the high degree of diversification, which allows the overall entity to minimize its risk profile. Another advantage is that a conglomerate may obtain volume pricing in numerous areas, such as advertising and the purchasing of goods, thereby allowing it to reduce costs.
Holding company. This is an entity that has a controlling interest in multiple subsidiaries, but which does not actively control their operations. Its intent is to provide support as needed, such as financing and advice, but generally to let local managers run their subsidiaries as they see fit. This approach can result in higher profitability levels among the subsidiaries.

Parent Company Financial Statements

The general purpose financial statements of the parent company are considered to be those that include the consolidated results and financial positions of its subsidiaries. This calls for the use of consolidation accounting, which eliminates inter-company transactions among the subsidiaries. The elimination of inter-company transactions prevents sales between subsidiaries from being counted as revenue in a firm’s consolidated financial statements.