If you’re one to surf the net and flip through loads of books about business, you’re likely to come across the term “holding company” somewhere down the line. The term itself isn’t really descriptive and you might be surprised to find out that there’s a whole world out there that revolves completely around the idea of holding companies. In fact, you might say that our entire economy depends on the functionality of the big holding companies. In this article, I will teach you about what a holding company is, what they do, and everything else you need to know about them before you start up your own business.
What Is A Holding Company
If you look it up, you’ll read that a holding company is the legal holding of an organization. But what does that really mean? Basically, when you start up a new company, you realize that things get really, really expensive when you have to pay for the building, the things that you’re selling, the shelves, the staff, the utilities, the….you get the idea. Well that’s where a holding company comes in. A holding company pays for all that stuff in exchange for the controlling stock of your company. Because of this, holding companies get to make all the big decisions for a lot of different companies while racking in loads of money at the same time. Holding companies hardly ever sell a product themselves, instead they just control a wide variety of other companies. The companies that a holding company owns doesn’t necessarily have to be related to each other at all and may include insurance companies, soda companies, cigarette companies, alcohol companies, oil companies, and any other type of company you can think of.
Holding companies are basically corporations, in that you have one major company that controls all of these smaller companies. Holding companies may even own many of the brand names for the same product. For example, Phillip Morris Inc. owns dozens of different cigarette brands, alcohol brands, cheese, meat sauces, oil companies, and loads of other types of products and services. It just goes to show that whether you choose A1 Steak Sauce or Bullseye, your money still ends up in the same pocket at the end of the day.
Types of Special Holding Companies
While there are many different types of holding companies that specialize in different things, some types of holding companies have special regulations and rules that effect how they do business. It’s important to know these types of holding companies when you’re starting a new business so that you can plan out how you’re going to interact with them (if at all) and how you setup your company to work around these regulations. The following are the main types of holding companies.
Public Utility Holding Company
The Public Utility Holding Company Act of 1935 set a limitation on utility holding companies that made it so that no single holding company could control all of the utility companies that a customer has access to. After the Act, holding companies were limited to one state or a specific geographic area so they could be regulated by the government(s) in that area. This way, one holding company can’t just set a standard fee among all of their utility companies and force the consumers to pay up just because they have no other options.
Bank Holding Company
As banks get larger and branch out, they often reform into a bank holding company because it gives them more authority on stock exchange, borrowing money, and assuming debts of their shareholders on a tax-free basis, along with a few other important upgrades. By becoming a bank holding company, however, they have to answer to the Federal Reserve Board of Governors, pay extra administrative fees, and if they have more than 300 shareholders then they also have to register with the Securities and Exchange Commission.
Financial Holding Company
A financial holding company is similar to a bank holding company but it isn’t quite the same thing. While a bank holding company deals with loans and stock, a financial holding company deals more in financial activities in general such as insurance and credit consultation. When a bank holding company makes 85% or more of its profit from financial services, it can choose to become a financial holding company which is governed by a whole other set of rules. When a bank holding company becomes a financial holding company, however, it is forced to sell any commercial businesses that it owns within ten years.
Railroad Holding Company
A railroad holding company is just a large collection of different railroad companies that join up under one leadership to control a giant amount of railroads. The problem was that in the case of Northern Securities Co. vs United States, a bunch of railroad companies got together to form a monopoly so that they could control interstate commerce by railroad. After that, the Supreme Court decided to break the Northern Securities Co. into several companies and establish laws, similar to the laws mentioned in the public utilities holding company paragraph above, to limit the amount of control a holding company can have and to prevent a monopoly.
Hopefully by reading this article you now have a more in-depth insight on the inner workings of the holding company industry. I wish you all the luck with your business and that you prosper in everything you do. I hope that the next time you drive down the road and try to decide whether to make a left at Burger King or a right at McDonald’s, you stop and think to yourself whether they’re owned by the same holding company or not. Because essentially, it’s the holding companies that run our economy and when they fail, we all pay the price.