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What do Warren Buffett, Sam Walton, and Walt Disney have in common besides lots of money? They're the founders of companies that turned into holding companies -- businesses that own a collection of businesses. Here, we'll explain what holding companies do, the types of holding companies, and their advantages and disadvantages and provide an example of a holding company at work.
Simply put, a holding company is a business that owns other businesses. It doesn't produce goods, provide services, or do anything other than own its subsidiaries.
The subsidiaries owned by the holding company are called operating companies, and they can conduct just about any kind of business you can imagine. They generally have their own management to handle day-to-day operations, but the larger decisions are usually left to the holding company.
Holding companies originated in the mid-19th century when laws governing corporations were loosened, but provisions remained that prevented companies from doing business across state lines.
John D. Rockefeller's Standard Oil Co. took advantage of the looser regulations to create a trust that governed his activities in multiple states. New Jersey passed a law in 1889 that allowed companies based in the Garden State to do business in other jurisdictions, leading to the creation of hundreds of holding companies.
According to the Bureau of Economic Analysis, more than half a company's total income must come from equity investments to be considered a holding company. In other words, a holding company's subsidiaries -- whether wholly or majority-owned -- must provide more than half of the parent company's income.
There are four basic types of holding companies:
Obviously, there are advantages to being a holding company; otherwise, there wouldn't be so many. Here are some of the better-known advantages enjoyed by holding companies:
Here are three major disadvantages to holding companies:
Fabled investment house Goldman Sachs (GS +1.74%) became a bank holding company in the wake of the 2007-2009 financial crisis because of concerns that its business model had become a major risk to the global economy.
The switch exposed Goldman to greater regulation but also gave it access to the Federal Reserve System's lending facilities, which were used during the crisis to keep the global economy from collapsing.
Goldman, which is incorporated in Delaware, currently has more than 50 subsidiaries in Brazil, the Netherlands, the U.K., the Cayman Islands, Jersey, Hong Kong, Germany, Japan, Singapore, Luxembourg, Ireland, and the British Virgin Islands.
