Q:

What are the advantages and disadvantages of holding companies?

A:

Quick Answer

The advantages of a holding company are protection from losses, limited legal liability and the potential to limit tax liability, according to Investopedia. Disadvantages include limited knowledge of subsidiary operations and industries, conflicts of interest among shareholders and owning unprofitable assets and lines of business, explains Shaa Hudson for the Houston Chronicle.

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Full Answer

A holding company exists for the sole purpose of owning other companies, notes Investopedia. In the case of a corporate conglomerate, the holding company owns a controlling interest in a variety of corporations by holding enough voting shares of the stock to control management and its policies. This results in the advantage of the holding company controlling and profiting from the companies it owns without being liable for their debts. Holding companies can also limit their tax liability by strategically placing certain subsidiaries in locations with lower tax rates.

The challenges faced by holding companies include management's limited knowledge of the day-to-day operations of the controlled companies and a frequent lack of understanding of the controlled companies industries, according to Hudson. Holding companies also frequently end up owning unprofitable assets or lines of business contained in their subsidiary corporations. When a company is acquired by a holding company, its management must contend with reporting to a new board of directors while still being required to act in the best interests of the subsidiaries' shareholders. Often, the best interests for the holding companies' shareholders come into conflict with the best interests of the subsidiaries' shareholders.

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