Parent Company
A business entity that has control over other companies
A parent company is a business entity that has control over other companies. These companies are also known as subsidiaries, and they can be wholly or partially owned.
These corporations are created mainly by mergers and acquisitions or spin-offs.
They either acquire a smaller firm by getting enough stock voting rights (50% or more) or carry out a spin-off. A spin-off is a creation of an independent company from a larger business entity.
To become a parent company, a corporation should own 50% or more of the outstanding voting shares of another business. A wholly-owned enterprise is one where the parent company owns 100% of the subsidiary's stock.
Corporations aim to become parent companies to gain access to new assets and tax benefits. They also acquire smaller companies to dampen the competition in the market and bring new employees on board. This increases the firm's resources and ideas.
The two most common types of parent companies are conglomerates and limited liability corporations. They aim to actively manage their own ventures and take care of the overall operations within their subsidiaries.
Relationship between a Parent company and its Subsidiaries
Parent companies and their subsidiaries can be horizontally integrated. Walt Disney and Pixar animation studies or Facebook and Instagram are a few examples. This means they control their subsidiaries along its products or supply chain.
They can also be vertically integrated like Apple. This means taking direct ownership of various stages of its own production process. For example, Apple controlled its products' manufacturing and distribution rather than relying on external suppliers.
They can either have hands-on or hands-off control over the subsidiary due to its voting rights in shareholder meetings.
Hands-on control means the new business owners now have direct influence over the other business operations. Hands-off control means the subsidiary's manager can take over most day-to-day business operations.
The parent company, along with its subsidiaries, has to produce consolidated financial statements.
This combines the financial statements of each company together due to the company partaking in 50% of the voting stock. This provides a clearer picture of all the companies together at once.
The Difference between a Parent Company and a Holding Company
A subsidiary is owned or controlled by a parent or a holding company. While they might seem identical, they can vary in different ways. The difference depends on their influence and interactions with their subsidiaries.
Parent companies most often support their subsidiaries through their business activities. They have a direct say over the operations of its subsidiaries and focus on their acquisitions to help them.
They can also be conglomerates. A conglomerate can be a company that owns and controls a wide range of companies that can be seemingly unrelated. This helps the business units to benefit from each other's resources and cross-branding.
DID YOU KNOW:
Disney is the biggest media conglomerate because of its wide use of diverse media outlets. These include cable shows, movies, music, and even publishing.
On the other hand, holding companies have little interaction with their subsidiaries. They only act as a shell. A shell is an inactive business operation. It allows them to hold the outstanding stock of their subsidiaries and gain access to new assets and tax benefits.
They are usually set up specifically to group several subsidiaries together. They have no intention of producing goods or services. They only aim to provide control to their subsidiary companies.
Benefits of Being a Parent Company
There are numerous benefits to organizing a corporation as a parent company. As mentioned, corporations aim to become parent companies to gain access to new assets and tax benefits.
Let's dive into some more detail about the benefits that arise with becoming a parent company:
1. The parent company is not liable for whatever happens to the subsidiary. Even if the subsidiary is sued and owes a lot of money or files for bankruptcy protection, the parent company isn't affected.
2. They can own assets and other shares in other small companies. This can practically range to anything. They can own intellectual property such as copyright, trademarks, and physical properties.
3. They gain new and bright employees to help with their business operations.
4. It's easier to sell businesses if they are wholly owned rather than selling assets piece by piece.
5. It helps investors leverage their financial strength. They can invest 50% or more of the other company's stocks rather than 100% to take control over their business operations. This allows more room for other acquisitions.
6. It can also help reduce taxes that must be paid on money received from subsidiaries by basing itself in a low tax rate state or country. This would help save money from taxes.
Summary
A parent company is mostly created by mergers and acquisitions or spin-offs
It is a corporation that has control over other small companies
It can be horizontally integrated or vertically integrated.
It can either have hands-on or hands-off control over the subsidiary due to its voting rights in shareholder meetings.
Corporations aim to become parent companies mostly to gain access to new assets and tax benefits.
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