What is a parent company?

Different types of parent company structures

The main purpose of a parent company is to give it the right to manage and oversee its subsidiaries. A subsidiary is a business that is controlled or owned by another company. Forming a parent company might offer strategic and competitive advantages, including financial management and operational efficiencies.

There are different types of parent company structures:

Holding company

A holding company differs from a parent company because it does not trade or have a direct role in how its subsidiaries operate. Instead, it has a controlling interest in its subsidiaries, providing support, resources, and guidance. Holding companies are often used to control the shares of one or more subsidiaries, and to spread the level of risk. They can be formed to group multiple subsidiaries together with their own identities, such as a collection of brands.

Operating parent company

An operating parent company might choose to start or acquire a subsidiary as a way of separating different aspects of the business. They usually have their own existing brand, products or services. Their subsidiaries might offer the parent company more resources or greater efficiencies to improve the way they trade or operate as a whole. The subsidiaries might also offer them a solution if they are concerned about competition laws.

Conglomerate

A conglomerate is a multi-industry parent company, consisting of several business entities that may be unrelated. Each separate business might operate in a different sector. Conglomerates are often formed through a merger or acquisition, due to a strategic benefit such as increased market power, economies of scale, and risk management.

Vertically integrated parent company

Vertical integration occurs when one business acquires another business with the aim of streamlining their operations at a particular stage of the production process. This might involve a merger or acquisition of a supplier, distributor or a retail location to gain greater control over its supply chain. Vertical integration can be used to improve cost efficiencies.

Horizontally integrated parent company

When one business acquires another business of the same value chain in its industry, this is known as horizontal integration. A value chain refers to the range of activities needed to produce a product or deliver a service. Horizontal integration can enable companies to reduce competition, grow in size and revenue, expand into new markets, and to diversify.

Examples of parent companies

Two of the largest parent companies in the world can be seen in the technology sector. In 2015, Alphabet was formed to streamline operations and to increase accountability for shareholders. It currently owns Google, YouTube, Fitbit, Waze, Looker, Nest and DoubleClick. Meta Platforms, Inc. was created after original company, Facebook, started to make high-value acquisitions. It owns Instagram, WhatsApp, Threads and Messenger.

Examples of conglomerates include Procter & Gamble, which owns various consumer brands, and Johnson & Johnson, who control multinational pharmaceutical, medical devices and consumer goods subsidiaries.

In the UK, examples of parent companies include Jaguar Land Rover, which owns four automobile brands – Jaguar, Range Rover, Defender and Discovery. The BT Group plc is another example of a British parent company. Their subsidiaries include BT (fixed-line and broadband), EE (mobile operator), Plusnet (internet and broadband) and Openreach (network infrastructure).

Benefits of forming a parent company

There can be several benefits to forming a parent company. Depending on how the organisation is structured, trades and operates, there could be improved efficiencies and cost reductions. Creating a parent company can offer businesses greater control of their supply chain in terms of manufacturing, distribution and retail locations.

Tax benefits such as capital gains tax exemption can be available to parent companies. There might also be other forms of tax relief available, such as deducted interest on loans to finance subsidiary companies and deferral of taxes on profits.

Forming a parent company might enable you to offer shares and investments without affecting your stock value. As each subsidiary is its own legal entity, any losses incurred would not be transferred to the parent company. However, the parent company would hold the assets for each subsidiary company. Therefore, if the subsidiary was facing any losses, their assets would be protected.

Strategic alignment and synergy

A parent company might divide its organisation into smaller business entities or acquire specific subsidiaries to provide an overall strategic benefit. There might be operational advantages due to a synergy between different business lines. Creating subsidiary companies might provide opportunities to enter new markets and launch new brands.

Risk diversification

Diversifying through a group of businesses can be an effective strategy for minimising risk. As an example, an underperforming subsidiary can be shut down without the need to close the parent company. Risk can be spread and managed effectively across all subsidiaries.

Access to capital and resources

A subsidiary can get easier access to capital funding, while owning subsidiaries enables flexibility in the form of pooled resources. Marketing and financial expertise can be shared, while physical assets can move between the parent company and the subsidiary. Sharing knowledge, insights and resources can lead to overall cost savings for the group.

Operational efficiencies

By dividing an organisation into smaller, well-managed subsidiaries, this can enhance business efficiencies. Streamlining and sharing processes can provide a more efficient process framework. A common example is when one subsidiary focuses on business-to-business sales, while another subsidiary focuses on consumer sales.

Brand management and reputation

A parent company can expand its reach into global markets through the brand reputation of acquired subsidiaries. New brands can be developed more easily, and new products and services can be marketed to new audiences more effectively. Similarly, failing brands can be closed, which enables companies to focus on the subsidiary brands that are thriving.

Challenges and downsides of parent company structures

There can be challenges for a parent company managing a group of subsidiary companies, especially if they are based overseas. It’s important that each subsidiary complies with the laws and regulations of each respective country. From staffing to accountancy and legal fees, it can be time-consuming and costly to set up and run individual subsidiaries.

Shared control of multiple businesses can have an impact on decision-making when agreement is needed from every shareholder. Ownership of a subsidiary company can become complex legally in terms of intellectual property, assets, and compliance risks.

When to consider becoming a parent company?

When a business is looking for new opportunities in different markets, then becoming a parent company could be worthwhile. When a company acquires another company with a strong brand identity and positive reputation, the existing customer base can be retained. Creating a parent company can be useful for launching new business products or services, exploring other markets, and risk management without impacting the parent company’s reputation.

How to form a parent company?

A parent company needs to be structured accurately to reflect its purpose if it’s to operate efficiently. In the UK, the process starts by registering a company with Companies House. You would then need to set up the correct legal structure to allow you to use the business as a parent company.

There are certain legal documents that will need to be drafted, which includes a company constitution, shareholders agreement, directors service agreement, and a directors resolution.

Director responsibilities and implications

A board of directors would need to be appointed, and an organisational structure would need to be agreed. Reporting lines and the responsibilities of each director need to be established to ensure accountability.

Governance and oversight across the group

A parent company holds most of the shares of its subsidiary to control and influence decisions, which is usually over 51%. This gives the parent company majority voting rights and a controlling interest. When a parent company acquires a smaller company with the goal of eliminating competition, then UK competition laws will need to be observed.

Financial reporting and consolidation

Financial reporting of the parent company and its subsidiaries would usually be combined into a single set of consolidated financial statements. This needs to include an income statement, cash flow statements, and a balance sheet. Consolidation will enable a comprehensive view of the group’s financial performance and position to stakeholders.

Legal and regulatory compliance

A parent company and its subsidiaries are considered as separate legal entities. Therefore, each subsidiary’s business operations should comply with relevant legislation applicable to their respective industries.

Usually, each subsidiary is responsible for their own liabilities, which includes any debts they incur. However, when a parent company is directly involved in the subsidiary’s decision-making process and fails to act on an issue, then they could become liable.

Risk management

Risks to both the parent company and its subsidiaries need to be identified and addressed. Governing documents should be prepared to handle various scenarios and to ensure the parent company and its subsidiaries are protected and compliant with relevant legislation.

Fiduciary duties

Fiduciary duties enables companies to regulate the conduct of their directors. Every director has a statutory duty, and directors need to demonstrate a relationship of trust between the company and its stakeholders. A breach of a director’s fiduciary duty, such as allegations of wrongdoing, could affect the reputation of the parent company and its subsidiaries.

IoD Code of Conduct for Directors

Directors must uphold company standards by maintaining a level of care, acting cautiously, and ensuring risk management. They should use their professional skills accordingly and avoid any breach of their fiduciary duties.

As a guide to ethical leadership for directors, please see the IoD Code of Conduct for Directors.