Holding Company vs Subsidiary Company

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Holding Company vs Subsidiary Company

A holding company is a type of business organization that is established with the purpose of owning several smaller entities. These smaller entities are known as subsidiaries. In this blog post, we will discuss Holding Company vs Subsidiary Company.

What is a Holding Company?

A holding corporation is essentially a parent organization that controls a subsidiary. To put it simply, a holding entity is a controlling business entity. It is also known as the parent company. The purpose of forming this kind of corporation is to own and manage assets rather than conduct day-to-day operations.

A holding corporation controls one or several businesses by owning at least 50% or more of their shares, allowing it to oversee their activities and make strategic decisions. However, it does not have direct involvement in their operational tasks.

Features of a Holding Company

The features of a holding business entity are as follows:

• A holding corporation’s primary feature is owning controlling shares (50% or more) in other businesses. This high percentage of equity ownership allows it control over the subsidiaries’ policies, operations, board membership and management.

• It can centralize major decisions through ownership of controlling stakes in businesses. Despite having varied actions, it guarantees the coordination and uniformity of essential functions. High-level planning, resource pooling, and capital allocation are all centrally managed by this entity.

• The holding-entity is the parent organization. Its subsidiaries are the operating entities in which it has stakes. This establishes a hierarchical structure in which subsidiaries are supervised by the parent organization. This organization has the authority to control how subsidiaries are governed.

• Limited liability is a key feature for owners of holding-entities. If one daughter company makes losses, the parent organization or other subsidiaries do not have to pay the price. It helps to separate the financial risk between subsidiaries and protects owners.
  
  

If you're interested to register a holding company, understanding the registration process is essential. To know the complete process, Read this article.

What is a Subsidiary Company?

A subsidiary is a business in which the holding/parent organization has control in two ways: by influencing the composition of its Board of Directors and by owning or controlling more than half of its total share capital, either alone or along with its other subsidiaries. 

A business entity is considered to have control over the Board of Directors if it has the power to appoint or remove all or most of the directors. Subsidiaries are also known as daughter companies.

Features of a Subsidiary Company

The subsidiaries in India have the following features:

• A parent entity owns most of a subsidiary’s shares. This means it has control over how the subsidiary operates and makes decisions.

• Even though a subsidiary-entity is controlled by the parent entity, it is still considered a separate legal entity. Because of this reason, the subsidiaries have to sign contracts, own assets, and take responsibility for their own debts and obligations.

• Subsidiaries have their own financial statements, but these are usually combined with the parent corporation’s financials to give a full picture of the entire business group or conglomerate’s financial situation.

• While the parent organization is in charge, the subsidiaries often have some independence of their own, especially when it comes to their day-to-day operations and making management-related decisions.

Holding Company vs Subsidiary Company: Key Differences

The first difference between holding company vs subsidiary company is that a holding business is a parent company that ‘controls’ the subsidiary whereas the subsidiary is a business that gets ‘controlled’. 

On one hand, the holding-business entity has the authority to hire or fire the board’s members, directors and other management personnel. On the other hand, subsidiaries have little supervisory power over operations. Even subsidiaries that operate independently may get financially controlled by the parent corporations. The holding-business entity exercises its ownership rights over its subsidiaries. To arrive at major business decisions, the subsidiaries have to be dependent on them. 

Another key difference is that a holding corporation can invest in multiple subsidiaries as part of its investment strategy. This approach helps in the minimization of risks and may also offer certain tax benefits under Income Tax Act. In contrast, when a company becomes a subsidiary of a holding-company, all of its own subsidiaries automatically fall under the same holding corporation.

A holding corporation takes charge of the subsidiaries and regulates the market competition for them. To protect themselves from unfair competition in the market and uncertainties that may arise during the course of regular business, the subsidiaries find shelter under holding corporations. 

Conclusion

While a holding corporation ‘owns’ the subsidiary, the subsidiary gets ‘owned’ by the holding corporation. This shows that the holding business dominates the subsidiary. Since a holding business takes care of the subsidiaries, it is also known as the ‘parent organization’. The subsidiaries are also known as ‘daughter companies’ since they are overseen by the holding entities. 

Do you want to register an entity in India? If so, connect with Registrationwala’s company registration consultants as soon as possible!

Frequently Asked Questions (FAQs)

Q1. What is a wholly owned subsidiary?

A. A wholly owned subsidiary is a business that is 100% owned by another corporation.

Q2. Can subsidiaries hold shares in holding businesses?

A. No, a subsidiary business is prohibited from holding shares in a holding business under Section 19 of Companies Act 2013.

Q3. What is the relationship between holding companies and subsidiary companies?

A. The relationship between holding companies and subsidiary companies lies in the fact that the former owns a controlling interest in the latter, which operates independently but under the control and authority of the holding-business entity.

Q4. How many shares must a corporation hold to be regarded as a ‘holding company’ in India?

A. According to the Companies Act 2013, in India, a corporation needs to hold at least 50% of the shares of another business before it can be regarded as a holding company.

Q5. Can subsidiaries influence or dictate a holding corporation's decisions?

A. No, subsidiaries generally cannot influence or dictate a holding business's decisions. However, a holding business can influence or dictate the decisions of subsidiaries that it owns. 

Note: This post was originally published in 2022 and has been updated on March 04, 2025, to provide you with the most current and accurate information.

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