What is a holding company?

Should you have a holding company? What does that mean exaclty? How can it benefit you and your business? We answer these questions in this weeks blog.

The term holding company has been tossed around for years and can be seen in almost every industry. One of the best-known holding companies is Berkshire Hathaway. This holding company, founded by the well-known Warren Buffett, owns subsidiaries from many industries including insurance (GEICO), food service (Dairy Queen) and manufacturing (Fruit of the Loom). Holding companies are a sector of their own. They do not fit into one specific industry, as they can own companies of many different industries. In fact, the main purpose of a holding company is to own various companies that wouldn’t normally be connected. The IRS frowns on the combination and tracking of more than one major type of business service under one company or tax ID number (there are definitely expectations to this, because after all, this is the IRS and for every rule there are exceptions). I digress. But this is why the IRS mandates the business activity code (also known as a Principal Business Code – PBC) on a tax return. This six digit number describes the industry you are in and where your company generates the majority of its revenue. 

To be crystal clear, a holding company is an amassed entity or financial organization that owns multiple otherwise unconnected businesses. Most businesses you think of are organized as operating companies. This means they sell tangible goods, manufacture items, or provide services as their primary means to revenue. Holding companies don’t typically operate. Holding companies own those various unrelated operating businesses under one umbrella to limit risk, take different tax positions, and various other reasons I’ll get into in another article. But the primary purpose of a holding company is to own other companies.

Another term that is bounced around quite often is parent company. What is a parent company and how does it differ from a holding company? Well, simply put, they are one in the same. A holding company is a parent company. By definition, a parent company is a company that holds the majority of shares in another company. Sound familiar? Yeah because that’s exactly what a holding company is. So why 2 different terms? Well there is one slight difference. This difference is that a parent company usually has a primary operating business purpose of its own. Think Facebook or Amazon. A holding company usually doesn’t have a primary operating business purpose other than to hold or own shares of other companies. However, there is nothing stopping a holding company from having a business purpose of its own outside of simply holding shares in other companies. So essentially, a holding company is a parent company and vice versa. 

So now that you know what a holding/parent company is, here are some examples of some of the most well known holding/parent companies out there:

  1. Alphabet Inc. – This is the holding company for Google, YouTube, and Nest among others. 

  2. Facebook – Facebook being the parent company and having a primary operating business purpose of the well known social media platform also owns WhatsApp and Instagram. 

  3. Amazon – Also a parent company which owns, of course the giant e-commerce platform we all know, love, and spend far too much money on, Amazon but Zappos and Whole Foods as well.

I hope this article gave you insight and clarity of what the heck a holding company is. In the next article, I will give you the inside scoop on what the benefits of having a holding company are. 

Until next time, stay curious!

Nikki Bushaw, CPA