Inside Holding Companies — The Entities That Own Popular Businesses [+ Expert Tips]

Most people are unaware that they’re doing business with a holding company when they bank, buy a jacket, or sign up for a health club membership. I know firsthand because that was me.

Until I launched into the world of business reporting, I never considered the underpinnings of a company offering the service or goods I wanted. Back then, I was looking for a good price and a good value — and sometimes, perhaps shamelessly, for bragging rights about my latest purchase.

Since then, I’ve learned about holding companies, or businesses that own smaller operations. In this post, I’ll share everything I know about holding companies, including important definitions and how these business entities make money. Let’s dive in.

Table of Contents

What is a holding company?

“A holding company is a parent company, usually a corporation or LLC, whose purpose is to buy and control the ownership interests of other companies,” according to the National Association of Secretaries of State (NASS).

The holding company doesn’t conduct any active business itself. Instead, it owns controlling interests in other companies, called subsidiaries, which may sell and manufacture goods and services. Holding companies are also referred to as “holdcos” or “umbrella companies.”

In many ways, the name “holding company” is self-explanatory in that it is “a company that exists to hold other business interests,” said Crystal Stranger, senior tax director and CEO of the tax consultancy OpticTax.com. By owning a majority of a subsidiary’s voting stock, the holding company can control that business’ policies and operations.

Business leaders can start a holding company by launching a new subsidiary and retaining a portion or all of its shares. Leaders can also create a holdco by buying the voting stock or shares in an existing company, according to the accounting firm Lauterbach & Borschow.

The holding company may choose to own different percentages of a subsidiary to maintain control, wrote NASS. These companies, whose management oversees how the subsidiaries are run, may have a smaller share if there are several owners. Their leaders can elect corporate directors and make major policy decisions, like deciding to merge or dissolve an operating company.

Alphabet, Inc. is one holding company you’ve probably interacted with. This holding company has a controlling share of Google and YouTube. Every time I search for and then watch a Bruno Mars video online, I’m interacting with a holding company.

Holding Companies vs. LLCs

A holding company can either be a corporation or an LLC, which stands for a limited liability corporation.

A corporate holding company pays taxes at the corporate level (21% of taxable income, which includes revenue minus expenses). These operations take advantage of losses from some of their ventures to balance out gains from newer companies, depending on the overall structure, said Stranger.

An LLC is a “pass-through entity,” so the ownership of an LLC holding company is, for tax purposes, the same as owning these companies individually, said Stranger.

Purpose of a Holding Company

Holding companies allows you to unify several businesses under one umbrella. This unity can help business leaders advance a common mission. For example, owning both the company that creates a product and the one that brings the offering to stores can improve a business’ operations.

Beyond that, a holding company can make major decisions through its single controlling entity that can apply to all the businesses or subsidiaries. That means policies across the board will be standardized and consistent under the same umbrella.

There are also risk mitigation benefits. Each subsidiary’s liabilities are generally contained within that entity, which protects other parts of the holding company. This benefit makes holding companies an effective way for business owners and managers to guard their assets and act as a “liability shield,” according to NASS.

Holding companies may also enjoy financial benefits from taxes and other areas. This umbrella structure helps businesses raise capital and manage investments across subsidiaries, too.

Types of Holding Companies

Not every holding company has the same structure. There are four common types, which I describe below.

Pure Holding Companies

“A pure holding company is one that only has passive investments in other entities,” Stranger told me. Britannica Money explained it as “a corporation that owns enough voting stock in one or more other companies to exercise control over them.”

You probably haven’t heard of the Dutch-Belgian holding company Ahold Delhaize, but, more than likely, you know at least a few of its subsidiaries. The holding company owns grocery store chains Stop & Shop, Food Lion, Hannaford, and Peapod Online Shopping Company.

Mixed Holding Companies

A pure holding company only owns shares in subsidiaries. Meanwhile, a mixed holding company engages in its own business operations while simultaneously maintaining controlling interests in its subsidiaries.

These types of holding companies generate revenue both from their own business activities and from their subsidiaries’ earnings.

Nestle is one example of a mixed-holding company. A Swiss multinational food and drink processing conglomerate, Nestle owns subsidiaries like Gerber, KitKat, and Toll House. Nestle also owns and runs its manufacturing operations.

Financial Holding Company

Financial holding companies (FHCs) exclusively own financial assets, such as banks, insurance companies, and other financial services providers. In the U.S., FHCs must meet specific capital and management requirements that are usually more strict than other types of holding companies.

JPMorgan Chase & Co. is one prominent financial holding company. JPMorgan Chase Bank provides commercial banking services. That’s where I might open a bank account. J.P. Morgan Securities specializes in investment banking. Meanwhile, Chase Insurance Agency provides insurance coverage, as the name suggests.

Personal Holding Company

A personal holding company (PHC) is made up of a small or related ownership group, which are investors who own the holding company, that must meet special tax regulations to avoid a 20% penalty tax. In these companies, “more than 50% of the value of its outstanding stock is owned (directly or indirectly) by five or fewer individuals and which receives at least 60% of its adjusted ordinary gross income from passive sources,” according to Henssler Financial.

One example is Walton Enterprises LLC, the personal holding company for the Walton family who founded Walmart. This PHC owns a significant stake in Walmart and other family investments.

How do holding companies make money?

“Holding companies make money through their investments and the profit centers of underlying businesses,” said Stranger. These profit centers can involve selling goods and services, selling or renting real estate, providing financial services, and leasing or selling intellectual property rights.

NASS wrote that a pure holding company can generate funds to make investments by selling equity interests in itself or its subsidiaries. These companies can also borrow from payments they receive from subsidiaries. A mixed holding company can also earn revenue from its own business operations.

Pros and Cons of Holding Companies

“The choice to form a holding company can be life-changing for a founder who wants to scale several different ventures,” said Neal K. Shah, founder of the holding company CY MultiHealth, which owns CareYaya Health Technologies and Counterforce Health, both AI technology companies in the healthcare arena.

However, Shah notes that holding companies require “a sustained period of thoughtful decision-making.”

Below, I’ll cover the pros and cons.

The Benefits of Holdcos

A holding company’s appeal lies in its structure. Leaders can unify operations while offering liability protection. Each business is independent legally, meaning that each subsidiary has its own debts and obligations, according to Lauterbach & Borschow. This helps minimize risk.

Further, losses from one venture can balance out gains from other subsidiaries under the same holding company. When one venture is faltering, the holding company may still be able to come out ahead overall when other entities are thriving. That scenario can be especially common when the holding company owns businesses serving different industries.

Holdcos Challenges

Even with their benefits, running a holding company comes with challenges. If the holding company owns subsidiaries in diverse fields and different locales, parent companies need expertise in multiple areas to deal with distinct environments, according to the accounting firm Condley and Company LLP. The holdco’s management team must carefully balance the parent company’s strategic objectives with the rights and expectations of minority shareholders.

Diverse business types and regulations reinforce the importance of a holding company’s structure. For example, a holding company will need tax and legal professionals who can sort through the requirements of different localities and states. You may even need to navigate international law if you are operating outside of more than one country.

As a result, “the formation and compliance costs [of holding companies] can be significant, especially if the holding company controls multiple subsidiaries,” according to Condley and Company LLP.

Holding Companies in the Real World

While researching this blog, I learned that my own bank is part of a huge financial holding company. Some of my favorite vendors and even a former employer are also subsidiaries of a large holdcos. These companies are a large part of the business world today. So next time you make a purchase, you might want to look up who really owns the company you’re buying from.