written by khatabook | November 24, 2022

Guide on How to Become a Parent Company - Definition & Features

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Table of Content


The parent company may be a holding company, which means that it owns shares of other companies and does not operate them directly. A parent company may also be an operating company, which means that it owns and operates other companies. A parent company may use its subsidiaries to protect its core business from risk. For example, a parent company that owns a chain of restaurants may create a subsidiary that owns the real estate where the restaurants are located. This way, if the restaurants go out of business, the parent company can still sell the real estate and recoup some of its losses.

A parent company may also use its subsidiaries for tax advantages. For example, a parent company that is based in one country may create a subsidiary in another country with lower taxes. This way, the parent company can minimise its tax liability. A parent company may also use its subsidiaries to expand its business into new markets. For example, a parent company that manufactures cars may create a subsidiary that sells cars in a new country. This way, the parent company can enter the new market without having to set up a new manufacturing plant.

Did you know that National Geographic was sold in 2015 by its nonprofit parent organisation to 21st Century Fox, a for-profit company controlled by Rupert Murdoch

Parent Company Meaning

A parent company is a company that owns another company. The parent company is also known as the holding company. The parent company may be a publicly traded company, a privately held company, or a subsidiary of another company. The parent company may also be an investment company.

Some features of Parent Company:

  • The parent company may own a controlling interest in the subsidiary or it may own a non-controlling interest. The parent company may also have a minority interest in the subsidiary. The parent company may also be a silent partner in the subsidiary.
  • The subsidiary may be a wholly owned subsidiary or it may be a partially owned subsidiary. The subsidiary may also be a joint venture.
  • The parent company has a fiduciary duty to the subsidiary. The parent company must act in the best interests of the subsidiary. The parent company must also disclose any material information about the subsidiary to the shareholders of the parent company.
  • The parent company may exercise control over the subsidiary through the board of directors of the subsidiary. The parent company may also appoint the executive officers of the subsidiary.
  • The parent company may be liable for the actions of the subsidiary. The parent company may also be held responsible for the debts of the subsidiary.
  • The parent company may be required to file consolidated financial statements. The consolidated financial statements include the financial statements of the parent company and the subsidiary.
  • The parent company may elect to file consolidated tax returns. The consolidated tax returns include the tax returns of the parent company and the subsidiary.

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Types Of Parent Company

Holding Company

A holding company is a company which does not conduct its business operations, ventures and related activities for itself. Apart from that, it exist for the aim of owning assets.

Subsidiary Company

A subsidiary company is owned or controlled by the parent company. Usually it has 50% of the subsidiary company and gives the parent company the controlling share for the subsidiary. 

Affiliated Company

These companies are affiliated when one company is a minority shareholder of another. In most of the cases, the parent company would own less than 50% interest in the affiliated company. Two companies might be affiliated and might also be affiliated if they are controlled through a separate third party.

Sister Company

Sister companies are multiple businesses which similar parent companies own. For example if an organisation owns several cereal companies, each of the cereal companies is a sister to the others.

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How does a Parent Company work?

A Parent Company is a holding company that owns shares in other companies, which are known as subsidiary companies. The parent company may be responsible for managing the subsidiaries, but it is not legally liable for its debts or actions. The parent company may also provide financial and other support to the subsidiaries.

The relationship between a parent company and its subsidiaries depends on the ownership structure. If the parent company owns all of the shares in the subsidiary, it is known as a wholly owned subsidiary. If the parent company owns less than 100% of the shares, it is known as a minority-owned subsidiary.

The parent company may use its subsidiaries to diversify its business risk, enter new markets, or access new technology. The parent company may also use the subsidiaries to manage its cash flow or to avoid taxes.

The parent company has several options for managing its subsidiaries, including:

  • Appointing a board of directors for each subsidiary
  • Setting up a holding company to manage the subsidiaries
  • Creating a joint venture with another company to share ownership and management of the subsidiaries
  • Selling some or all of the shares in the subsidiaries

How to Become a Parent Company?

There are many ways to become a parent company. The most common is through acquiring another company or merging with another company. There are also ways to create a subsidiary company or to form a joint venture. Each of these has different benefits and drawbacks, so it's important to understand the pros and cons of each before deciding which route to take.

Acquiring a Company

Acquiring another company is often the quickest way to become a parent company. This can be done through a hostile takeover, where the parent company buys out the other company's shareholders against their will. This can be a risky proposition, as it can lead to bad blood between the companies and can be expensive. A more friendly approach is to negotiate a merger, where both companies agree to combine their operations. This can be a win-win for both companies, as it can create synergies and efficiencies that wouldn't be possible if they remained separate.

Creating Subsidiary

Creating a subsidiary company is another way to become a parent company. This is when the parent company creates a new company that is wholly owned and controlled by the parent company. The subsidiary company is a separate legal entity, but the parent company has complete control over it. This can be a good way to enter a new market or to protect valuable intellectual property. The downside is that the parent company is on the hook for the subsidiary's debts and liabilities.

Also Read: A Guide on Company Registration Process

Forming Joint Ventures

Forming a joint venture is another option for becoming a parent company. This is when two or more companies come together to create a new company. The joint venture is a separate legal entity, but the participating companies share ownership and control. This can be a good way to pool resources and expertise and to spread the risk of a new venture. The downside is that the participating companies can have a hard time agreeing on how to run the joint venture, and there is the potential for conflict.

Conclusion

In business, a parent company is a company that owns another company. It is the larger company and the smaller company is the subsidiary. The parent company controls the subsidiary and its operations. It can also be a holding company or a conglomerate. You must know that a holding company is a company that owns shares in another company. Whereas a conglomerate is a company that owns a group of companies. The parent company has a controlling interest in the subsidiary. Therefore, It can own all of the subsidiary's shares or just a majority of the shares. The parent company can also have a minority interest in the subsidiary. Moreover, the parent company can also choose to sell the subsidiary or spin it off.

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FAQs

Q: Is it possible for a subsidiary to have two parent companies?

Ans:

Subsidiary firms, like all other businesses, can raise cash by issuing and selling shares. Other corporations, like people, have the ability to acquire these shares. As a result, numerous firms may end up owning shares in a single subsidiary company.

Q: How do parent firms generate revenue?

Ans:

It can create money directly through subsidiaries or indirectly through ownership of larger assets. The holding company will get dividends from its subsidiaries and may benefit from centralizing services for the larger business group. They also earn from the sale of assets and subsidiaries.

Q: What are the types of parent companies?

Ans:

There are four types of parent companies: holding companies, subsidiary companies, affiliate companies, and sister companies.

Q: What are the benefits of having a parent company?

Ans:

The benefits of having a parent company are that the parent company can provide financial and managerial support to its subsidiary companies. The parent company can also help its subsidiary companies to expand into new markets and to develop new products.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.