Holding companies enjoy the benefit of protection from losses. If a subsidiary company goes bankrupt, the holding company may experience a capital loss and a decline in net worth. However, the bankrupt company’s creditors cannot legally pursue the holding company for remuneration.
Consequently, as an asset protection strategy, a parent corporation might structure itself as a holding company, while creating subsidiaries for each of its business lines. For example, one subsidiary may own the parent corporation’s brand name and trademarks, while another subsidiary may own its real estate.
Holding companies are also relatively easy to create or change. This makes it easy to take advantage of geographical differences in taxation regimes: If a certain jurisdiction has high business taxes, the holding company can simply relocate to a more business-friendly environment while continuing operations in the original location.
There are some disadvantages to owning subsidiaries through a holding company. For investors and creditors, it may be difficult to find an accurate picture of the overall financial health of the holding company. It is also possible for unethical directors to hide their losses by moving debt among their subsidiaries.
Holding companies can also exploit their subsidiaries, by forcing them to appoint chosen directors or forcing the subsidiaries to buy products from one another at higher-than-market prices. They may also force subsidiaries to sell products to one another at below-market prices.
In some cases, holding companies can even force their subsidiaries to lay off a large section of the workforce or plunder their acquisitions for saleable assets. Known as vulture capitalism, these strategies can have the effect of inflating the holding company’s overall numbers at the expense of the subsidiary.
Holding companies fall into different categories, depending on their business operations. Some only exist to hold a single subsidiary, while others may be engaged in other business operations. The different types of holding companies are explained below:
A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity.
Each of the participants in a JV is responsible for profits, losses, and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests.
Although a JV is a partnership in the colloquial sense of the word, it can be formed using any legal structure: Corporations, partnerships, limited liability companies (LLCs), and other business entities can all be employed.
Despite the fact that the purpose of a JV is typically for production or research, one can also be formed for a continuing purpose. JVs can combine large and small companies to take on one or several projects and deals.
Here are the four main reasons why companies form JVs.
A JV can take advantage of the combined resources of both companies to achieve the goal of the venture. One company might have a well-established manufacturing process, while the other company might have superior distribution channels.
By using economies of scale, both companies in the JV can leverage their production at a lower per-unit cost than they would separately. This is particularly appropriate with technology advances that are costly to implement. Other cost savings as a result of a JV can include sharing advertising or labor costs.
Two companies or parties forming a JV might each have different backgrounds, skill sets, or expertise. When these are combined through a JV, each company can benefit from the other’s talent.
Another common use of JVs is to partner with a local business to enter a foreign market. A company that wants to expand its distribution network to new countries can enter into a JV agreement to supply products to a local business, thus benefiting from an already existing distribution network. Some countries have restrictions on foreigners entering their market, making a JV with a local entity almost the only way to do business in the country.
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