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What Is a Holding Company? - Definition & Advantages

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  • 0:00 Holding Company Defined
  • 1:09 Advantages
  • 2:35 Lesson Summary
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Lesson Transcript
Instructor: Jessica Schubert

Jessica is a practicing attorney and has taught law and has a J.D. and LL.M.

After completing this lesson, you will understand what constitutes a holding company. In addition, you will review the advantages of a holding company and have an overall understanding of these advantages.

Holding Company Defined

Imagine that your friend owns a landscaping business. He makes a substantial amount of money and he asks if you would like to own a portion of the company. You decide that you would like to be a part of the business, but indirectly. You also do not want to subject yourself to any personal liability or losses your friend's landscaping business might suffer from. Therefore, you establish a holding company that owns stock in your friend's landscaping business.

A holding company is a business organization that owns so much stock in another company that it controls the other company. The holding company can consist of a partnership, a limited liability company or other form. The hallmark is simply that the holding company can control the management and policies of the other company.

Some holding companies are designed to own property. Other holding companies seek to gain a profit from the other company but without being directly involved in the manufacture or production of the goods or services made. One specific type of holding company is known as the wholly owned subsidiary. In a wholly owned subsidiary, a holding company will own all of the stock of the company.

Advantages

One reason why holding companies are formed is to protect the holding company from losses of the other company. When a company enters bankruptcy, which is a legal process that allows a person with no funds to eliminate or reduce their debt, the holding company's assets are protected against creditors. There will be a loss to the holding company in that the underlying company's value will diminish, but there will be no loss of the holding company's assets. Let's say that your friend's landscaping business begins to falter and eventually your friend is forced to file for bankruptcy. That's obviously a bad thing, but you don't have to worry. You might have a loss on paper in the decreased value of your friend's landscaping business, but your own assets are protected.

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