Learn

Language:

Parent Company: What You Need to Know 

By Jeannine Mancini

Published on 10 Apr 2023 5 min read

A parent company is like the big boss behind the scenes, pulling the strings and making sure everything runs smoothly. But what exactly is a parent company, and why should entrepreneurs care? Well, think of it this way: if you’re building a business, the parent company is like the wise old owl in the tree, with decades of experience and a vast network of resources to draw from. Understanding how parent companies work and what they can offer can give entrepreneurs a leg up in the competitive world of business, helping them grow faster, smarter, and more efficiently. 

What Is a Parent Company?

A parent company is simply a company that owns another company, known as a subsidiary. Think of it like a family tree – the parent company is the trunk, and the subsidiaries are the branches. The parent company typically has a controlling interest in the subsidiary, meaning it owns more than 50% of its stock or assets, and has the power to make decisions that affect the subsidiary’s operations. This arrangement allows the parent company to expand its reach and diversify its holdings, while still maintaining a degree of control over its subsidiaries. 

Difference Between a Parent Company and a Holding Company

The main difference between a parent company and a holding company lies in their level of involvement with their subsidiaries. While a parent company has a more hands-on approach, making decisions that affect the subsidiary’s operations, a holding company is more of a passive investor, focusing on strategic planning and oversight.

For entrepreneurs looking to start a new business, understanding the difference between a parent company and a holding company can be critical when seeking investment or partnership opportunities. Depending on the business goals and objectives, either structure may be a viable option, but it’s important to consider the level of control and involvement desired before making a decision.

How Does a Parent Company Work

A parent company typically has the majority of voting stock in the subsidiary, meaning it can control the operations, strategic decisions, and financial policies of the subsidiary. Parent companies are responsible for providing resources to their subsidiaries such as capital investments, technology transfer, and human resource development. They also set administrative policies that must be followed by their subsidiaries and provide access to larger markets than those available to an independent organization. 

The financial structure of a parent company is complex, with each subsidiary having its own legal identity but also being part of a larger corporate family. The parent company may own all or only part of a subsidiary’s shares and may monitor its performance or delegate some authority to the subsidiary’s management team. For example, the parent company may decide how much money should be invested in R&D activities, which markets should be targeted for expansion, and how products should be priced in different countries. 

Parent companies play an important role in ensuring that their subsidiaries adhere to business standards and remain profitable while still managing risks across multiple entities. They are also responsible for holding board meetings where significant decisions related to the operation of their subsidiaries are discussed and approved. This type of oversight helps protect investors from potential losses caused by mismanagement within a single entity.

Types of Parent Companies

When it comes to parent companies, there are a variety of structures and types to consider, but two of the most common are conglomerates and LLCs.

Conglomerates

Conglomerates are business entities that consist of multiple distinct organizations, often operating in different industries. Examples include The Walt Disney Company, which comprises subsidiaries such as ESPN, Marvel Entertainment, ABC, and Pixar Animation Studios. 

LLCs

Limited Liability Companies (LLCs) are a type of legal structure that combines features from both corporations and partnerships. LLCs provide owners with limited liability protection while allowing profits to pass directly to their members without taxation of the entity itself. An example of an LLC is Google LLC, which owns the internet search engine Google Inc., as well as video hosting service YouTube, the mobile operating system Android, and many other companies.

How to Become a Parent Company

A parent company can be created in two ways – through acquisition and spinoff. 

Acquisitions

An acquisition takes place when a larger company purchases a smaller company and that smaller company will then become a subsidiary of the larger one. This method allows the larger organization to diversify its product offerings while also gaining access to the smaller firm’s customer base, technologies, and resources. There are many benefits to this including being able to leverage existing infrastructure, increase brand equity, access new talent and technology, and strengthen market position. However, it can also be risky as there may be cultural differences that need to be addressed or unexpected costs that arise during the process. 

Spinoffs

The second method is through spin-off which occurs when an existing company decides to split off into two separate organizations to better focus on specific goals or industries. This method can be beneficial for both companies as it allows them to specialize in their respective areas of expertise. It also allows them to pursue different strategies without having conflicting goals or resources within the same organization. The main downside is that it requires significant investment from both sides for it to succeed due to the additional overhead associated with launching a new venture. 

Examples of Parent Companies

Example 1: Apple Inc. is one of the world’s most popular parent companies. Founded in 1976, Apple has become a global leader in technology, offering products like iPhones, iPads, and Mac computers to customers around the world. In 2019, Apple became the first U.S. company to exceed $1 trillion in market value. The company has a strong history of innovation, introducing features like Siri and iCloud which have revolutionized the way people interact with technology. Apple also invests heavily in research and development to ensure their products are at the cutting edge of technology for their customers. 

Example 2: Alphabet Inc., formerly Google Inc., is another globally-recognized parent company that has had an enormous impact on the tech industry since it was founded in 1998. As one of the largest internet companies in the world, Alphabet specializes in search engine services such as Google Search, as well as web applications such as Gmail and Google Maps. Alphabet is also committed to research and development activities, investing billions into artificial intelligence and machine learning projects each year. 

Example 3: Microsoft Corporation is a leading parent company best known for its Windows operating system and Office productivity suite software products. Established more than four decades ago, Microsoft has been creating groundbreaking innovations ever since its inception including Xbox gaming consoles and Surface tablets. Recently Microsoft has been investing heavily in cloud computing solutions such as Azure which allow businesses to access powerful computing infrastructure from any location around the world.

doola Can Help You Manage 

As the saying goes, “The apple doesn’t fall far from the tree.” The same can be said for parent companies and their subsidiaries. Just like a family tree, each branch represents a unique entity, yet they all share a common ancestor.

If you’re thinking of starting your own parent company or already have some subsidiaries in your portfolio, it’s key to keep a close eye on every branch of your family tree to ensure that they’re all flourishing. doola can take this burden off your shoulders by providing you with expert bookkeeping services. 

FAQs