Holding company: Meaning, types, advantages & disadvantages

A holding company naturally lives for one objective, which is governing or overseeing different companies. Properties such as patents, real estate, inventories, and different investments may be possessed by holding companies. 

Holding companies are financial institutions that possess a controlling interest in different companies, which are termed subsidiaries or subsidiaries. The holding company plays a strong supervisory role to the subsidiary companies and has a controlling share in all of the varying companies.

What is a holding company?

A holding company is a limited liability company established to manage a group of other companies under its ownership. Generally, no product is fabricated by the holding company, and neither does it offer services or any other enterprise functions. Holding companies rather possess controlling shares in varying companies all lumped together to its holding. 

A holding company does not directly take part in the day-to-day operations of its subsidiaries, even though a holding company holds a majority of shares in the company. A holding company is usually referred to as a parent company or umbrella company most of the time.

Types of holding companies

There are various classifications of holding companies depending on their functionality. Some may be engaged in different activities while others live solely to possess one subsidiary. Described below are the various classification of holding companies:

1. Mixed holding company

Also known as a holding-operating company, a mixed holding company undertakes its own business while still having subsidiary companies under its control.

2. Pure holding company 

The pure holding company doesn’t engage in other business concerns but is established solely to control or hold the subsidiary companies.

3. Intermediate holding company

The intermediate holding company is a company being held by a senior holding company. For instance, AJD Ltd is the holding company to JDD Ltd, JDD Ltd is a holding company to XYS Ltd, FDG Ltd and REB Ltd; JDD Ltd is an intermediate holding company.

Advantages of a Holding Company 

1. Holding companies appreciate the advantage of safeguarding from casualties. If a subsidiary company runs at a loss, the holding companies may encounter a decrease in their net worth and losses of funds. Nonetheless, the grantees of the bankrupted company cannot track down the holding company lawfully for compensation. 

Hence, a parent company may design itself as a holding company, as a technique for investment safeguarding, while producing subsidiaries for its strings of industry. E.g, a particular subsidiary may possess the parent holding’s real estate and brand name, and a different subsidiary may possess its trademarks. 

2. Holding companies are somewhat effortless to produce or alter. If a particular governance possesses increased industry tariff, the holding company can easily move to another setting that is more tariff friendly while business functions still go on in the original locale. One can simply take advantage of geographical discrepancies in tax administration. 

3. The deficit penalty of one subsidiary would not affect the others, if a holding company is accurately set up; it would not affect the others if one subsidiary were to assert bankruptcy. Holding companies aid their subsidiaries by reducing the expense of operating finances using their resources. 

Disadvantages  of a Holding Company 

1. Holding companies can manipulate their subsidiaries by mandating them to elect specified managers or mandating them to purchase commodities from one another at expensive market prices, they can as well force subsidiaries to trade commodities at low market prices with one another. 

2. Holding companies can manipulate their subsidiaries to sack a huge unit of the crew or haul their investment for marketable acquisitions in some cases, these techniques can be: increased holding companies’ overall numbers at the cost of the subsidiaries and it can as well be called vulture capitalism.

3. It may be hard to get a clear image of the general monetary status of the holding companies, for grantees and shareholders. Unscrupulous managers can also conceal their casualties by shifting deficits amid their subsidiaries. 

Examples of a holding company 

In Nigeria today, there exists hundreds of holding companies in the market. One such example is the Stanbic IBTC Bank Group made up of Stanbic IBTC Bank, Stanbic IBTC Trustees, and Stanbic IBTC Insurance as subsidiaries. Others include the First Bank Group, Chikason Group, FCMB Group, and so on.

How to establish a holding company 

To register a holding company two options are available to you, the first being registering a holding company in Nigeria or registering a holding company outside Nigeria. 

In Nigeria, the Corporate Affairs Commission (CAC) is the principal body charged with the responsibility of registering holding companies in Nigeria. To register as a holding company, the parent company must submit the following to the CAC:

a. An application for consent to be a holding company;

b. List of at least 2 subsidiary companies;

c. Statement by the directors of the holding company showing that the proposed holding company has acquired more than half of the nominal value of the shares in the subsidiary companies; and

d. Updated annual returns of the subsidiary companies. 

Conclusion

A holding company is a kind of enterprise commodity which has the sole objective of being the owner of a different company. Most holding companies are big corporations with controlling interests in numerous various companies, some are established solely to govern one subsidiary.

Holding companies can be utilized to lower taxation responsibilities or safeguard proprietors from casualties.