Are you looking for an easy to understand comparison between holding company vs subsidiary company. Then you are at the right place. This guide will clear all your doubts as we will compare both type of companies on various parameters and understand about their significance in business.
What is a holding company?
A company that contains one or more subsidiary companies is called a holding Company (Broadly referred to as a parent company). A holding company can control other entities by acquiring their shares. The holding company gains authorship over the subsidiary company by buying most shares. The establishment of a holding company in India faces complicated legalities comparatively. Based on its objectives and scope of operation, the company can be registered as LLP, OPC, Private Limited Company, or Public Limited Company.
Under certain circumstances, the holding company can only have a controlling interest in its subsidiaries through shareholding. It limits them from engaging in activities like trading and management. Since the parent entity has limited liability, it is not liable to address the liabilities owed by the subsidiary. On the other hand, the holding company can monitor its subsidiary’s management affairs. The significant decisions vest with the parent company.
What is a subsidiary company?
An establishment created by holding the parent company is known as a subsidiary or a separate legal entity. It is either related to the parent entity or exists in a particular field. A business that opts for diversification in business strategy often uses subsidiaries. The objective is to create and invest in subsidiaries with different areas of interest than setting up multiple industries. The core business remains unaffected by the operation of subsidiaries.
Starting a subsidiary is a good option when companies want to explore new markets or industries without losing control over their core business. The board of directors may consider establishing a subsidiary for the above-stated reason. A subsidiary provides a platform for its parent company to gain knowledge on operating in new markets and industries without involvement in any risk.
Difference between a holding company and subsidiary company
The Holding Company can exercise full authority over its subsidiaries. It can control the affairs of its subsidiaries.
A subsidiary company relies on the parent Company for all its major decisions.
The Holding Company is vested with the power to hire or fire board members, directors, and other management personnel.
A subsidiary has no supervisory power over its operations. The holding company financially controls the Subsidiaries.
A Holding Company possesses more than half of the subsidiary’s stock, thereby controlling its operations.
Its parent Company owns 50% shares of the subsidiary. Therefore, it has very little control over its operations.
Enormous capital and limited market competition are the two significant benefits of having a subsidiary. Holding Company creates subsidiaries for these reasons.
A Subsidiary Company prevents its parent company from business uncertainty and safeguards against losses. Subsidiaries reduce the risk factors for its parent company.
A holding company runs its owned subsidiaries and has the authority to nominate and dismiss board members, directors, and other key management and staff.
The operations of a subsidiary have minimal or no influence over those of the parent company. The parent company eventually maintains financial control over even independently operating subsidiaries.
A subsidiary administered by a parent company is diversified and has minimal regulatory compliances but calculated risks.
Subsidiaries hold unique legal status than the holding company. It operates in a different regime.
Holding Companies may invest in subsidiaries for reasons such as diversifying investment, minimizing risk, taking advantage of shared loss and tax consolidation.
If a subsidiary becomes a subsidiary of another parent company, all of its subsidiaries become subsidiaries of the prime parent company.
A holding company controls the subsidiary and regulates its market competition and other related activities.
A subsidiary company seeks shelter under the parent company to prevent itself from unfair competition and uncertainties arising during the business.
The parent and subsidiary companies operate in different administrations for different objectives. The subsidiary company plays a crucial role despite its lack of ownership and control as it is responsible for regular business undertakings. Apart from operation-related tasks, the holding company controls and makes significant decisions regarding its subsidiary. The parent and the subsidiary company have separate identities. Though the subsidiary comes under the control of its parent company, it is solely responsible for its activities, such as insolvency and loan repayments. Establishing subsidiaries will diminish the parent company’s risk factors and ensure the business’s novelty.