As businesses grow and build revenue, it is expected that many will expand to an extent where they may start overseeing other companies and organizations. But how does this work in practice? By and large, the answer lies with holding companies.
Holding companies are often referred to as ‘umbrella’ businesses or brands, and while they may oversee several different entities, they typically don’t have much of a hand in manufacture or production. That certainly doesn’t prevent holding firms from becoming big successes. Patrick James of Trico Group, for example, has made huge strides in overseeing brands with growth potential in the automotive industry. Trico, in itself, has grown from a wiper manufacturer brand into a private holding firm under the name of First Brands Group LLC.
Exploring the dynamics of a holding company structure can offer strategic advantages, and considering a Singapore holding can be particularly advantageous. The business-friendly environment and robust legal framework in Singapore make it an attractive jurisdiction for establishing a holding company and maximizing the benefits of subsidiary structures.
Regardless of notable success stories, what are the over-arching benefits of running a holding company and what are the transferable benefits for subsidiaries, or the companies overseen by such an organization?
Holding companies in brief
A holding company is a large organization that oversees and controls smaller brands and businesses. It’s also known as a parent company in some cases, and the child companies and businesses owned are referred to as subsidiaries.
Holding companies have considerable power and control over assets, policies and stock. They won’t be involved directly in manufacture or service, but they have direct influence over management choices, property and trademarks.
This means that a holding company can effectively choose who leads their subsidiaries and make informed decisions over management policy. A holding company will also enjoy a wealth of protection should any of its child companies face bankruptcy or fold altogether.
Subsidiary building is actually more common than many realize. A famous example we’re all likely to know well is Google, which is technically a subsidiary of Alphabet, the parent company that emerged during a restructure in 2015. Meanwhile, Meta, formerly known as Facebook, oversees the Facebook social platform, Instagram, Oculus (its VR acquisition) and WhatsApp.
It’s easy to see the benefits for those in charge at the holding company, but when it comes to subsidiaries, are there other transferable perks and protections?
Benefits for subsidiaries
While it may sound as though holding companies ‘hold all the cards’, there’s a wealth of added protection for subsidiary organizations overseen by a holding umbrella. The most obvious benefits lie in the protection of assets. As holding companies maintain possession of properties, assets and stocks belonging to individual subsidiaries, businesses under the umbrella can effectively rely on their parents to safeguard these critical pieces.
This safeguarding means that subsidiaries can, to a large extent, receive protection against various forms of liability. Joining with a holding company effectively means that a smaller firm can expect robust insurance against unforeseen circumstances that would otherwise be debilitating.
Companies aligned as subsidiaries may also find that they are in favorable positions when it comes to funding, financing and business support. Given the added protection of a holding company, lenders and financiers often have greater confidence that their money will be returned.
There are additional benefits for multiple subsidiaries. If one subsidiary company folds or faces bankruptcy, the holding setup means that no other businesses under the same umbrella may experience the same hardship.
Multiple subsidiaries may also stake ‘ownership’ over several assets and elements technically provided by the holding company. While the holding firm may effectively possess stock and property, for example, its subsidiaries can lay ownership over separate elements as the holding firm agrees.
Holding companies may also choose to create subsidiaries to help extend their brand, and to create separate entities, and grow in diverse industries and niches.
Potential drawbacks of the holding company model
As much as there are benefits to the holding company and subsidiary model, there are also drawbacks to consider. From the viewpoint of the holding company, any legal issues that arise at the subsidiary level may lead to attached liability for the parent. Effectively, this means that the holding company would need to pay for any legal costs and effectively shoulder blame in some compliance breaches.
This reputation attachment has a ripple effect for the subsidiary too. If the reputation of the child affects that of the parent, then it also works the other way around. As such, setting up a holding and subsidiary model comes with some risks of attachment that require careful planning.
Whether you’re opening a business for the first time, or are considering setting up with a holding company model in the near future, it always makes prudent sense to understand the pros and cons of using an umbrella. As it stands, there are huge benefits for everyone involved — but plan ahead for the risks!