Overview: Parent Company
A Parent Company is a type of corporate entity that has the ownership of another company. If the parent company owns more than 50 percent of another company’s voting shares, it automatically owns the business operations of that company and can directly influence its functioning. The company that a parent company owns is called it’s Subsidiary Company. The parent business exerts control over its divisions, affecting their strategic choices, financial management, and general course of action. A parent company has the right to access the assets of its subsidiary company.
Through this article, we will be covering the operation and formation of parent companies.
How Does A Parent Company Work?
The Parent Company that has acquired a Subsidiary Company can either have a hands-on approach or a hands-off approach. If the Parent Company wants to be involved in the business operations and assets of the Subsidiary Company, it can adopt a hands-on approach allowing it to have more influence and control over it. If, however, the Parent Company wants the Subsidiary Company to manage its business operations, it adopts a hands-off approach and does not interfere in their daily functionings.
A Parent Company can be benefitted from its Subsidiary Company in a lot of ways. It can access the assets of the Subsidiary Company and also obtain tax benefits from its ownership. A Parent Company will not be subjected to any taxes or debts against the Subsidiary Company because they are both separate legal entities. If the Parent Company owns less than 100 percent shares of the Subsidiary Company, it is reflected as a minority interest in the financial report of the Parent Company. Thus, it is free from any tax against the Subsidiary Company. A Parent Company also invests in a Subsidiary Company to improve its broaden its primary business operations, remove any competition and increase its profitable income.
How to become a Parent Company?
There are two ways to become a Parent Company, either by acquisition, merger, or a spin-off. The acquisition means that the Parent Company acquires a small business by buying more than its 50 percent of shares. They usually do so to eliminate any competition, reduce taxes, obtain more assets and lower their debts and liabilities. Another way of becoming a Parent Company is by the way of a spin-off. A spin-off is created when a company sells new shares of its already established business to create a new company. It can spin off any of its existing products or services to create a new brand or company that would act as its Subsidiary Company.
Examples Of Parent Company
The most famous example of a Parent Company is Facebook, now known as Meta. It became a Parent Company by acquiring Instagram and Whatsapp. Instagram and Whatsapp are the Subsidiary Companies of Facebook. Another example of a Parent Company is the merchandising brand called GAP. GAP is a Parent Company of the Old Navy and the Banana Republic. Berkshire Hathaway, a multinational company owned by Warren Buffet, is also a Parent Company to many different types of companies that are its subsidiaries.
Parent Company vs Holding Company
A parent company and a Holding Company appear to be quite similar but are different in some ways.
- Firstly, a parent company has direct influence over the controls and operations of its subsidiary. A holding company does not have any control or influence over its subsidiaries and is mostly inactive in its subsidiaries’ business operations.
- A parent company has the ownership of all its subsidiaries and invests in such companies to expand its growth or improve its business operations. A holding company simply buys any outstanding shares of its subsidiary companies and only manages some of the legalities and tax obligations. A holding company is a separate legal entity from its subsidiaries.
A parent company can be defined as a type of company that acquires ownership of its subsidiary company either by acquisition or a spin-off. It does so to improve its business operations, get tax relaxations, develop or grow any existing products differently, and create more capital by accessing its subsidiary’s assets. Some examples of parent companies are Facebook acquiring Instagram and Whatsapp, Berkshire Hathaway, and GAP.
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A single firm that owns a majority stake in another organization or group of businesses is known as a parent company.
Parent corporations are created through acquisition, merger, spin-off, or carving out of subsidiaries.
In the business sector, a subsidiary is a business that is a part of another business, sometimes known as the parent business or a holding corporation.
- While holding corporations are set up, primarily for controlling a collection of subsidiaries, parent businesses run their own activities.
- A parent company has ownership of all its subsidiaries and invests in such companies to expand its growth or improve its business operations. A holding company simply buys any outstanding shares of its subsidiary companies and only manages some of the legalities and tax obligations.