What Is a Parent Company?

What Is a Parent Company?

Let me explain what a parent company is. It's an entity that holds a controlling interest in one or more other companies, which allows it to exert control over their operations. You might also hear it called a holding company, but remember, parent companies can be hands-on or hands-off depending on how much managerial control they give to subsidiary managers. Either way, they always keep a certain level of active control.

How a Parent Company Works

Companies form subsidiaries through methods like mergers, acquisitions, or by setting them up for specific objectives. As the parent, you could be running a conglomerate with diverse, unrelated businesses, like General Electric, where units benefit from cross-branding. Keep in mind, this differs from a pure holding or shell company, which exists just to own subsidiaries passively, often for tax reasons—parent companies conduct their own business operations.

Your parent company and subsidiaries might integrate horizontally, like Gap Inc. owning Old Navy and Banana Republic, all at the same level. Or they could be vertically integrated, owning companies at different supply chain stages, such as AT&T acquiring Time Warner to control film production, broadcasting, and telecom infrastructure.

Becoming a Parent Company

The main ways to become a parent company are by acquiring smaller companies or creating new ones. Larger firms often buy out smaller ones to reduce competition, expand operations, cut costs, or gain synergies. Take Meta, formerly Facebook, which acquired Instagram to boost user engagement; they've kept Instagram's team autonomous, including its founders and CEO.

If you're looking to streamline, you might spin off less productive or unrelated subsidiaries. For example, spin off a mature unit that's not growing to focus on higher-potential areas. Or if a business has different priorities, spin it off to operate independently and possibly sell it.

Special Considerations

Since parent companies own more than 50% of a subsidiary's voting stock, you have to produce consolidated financial statements that combine everything into one set, eliminating overlaps like intercompany transfers or loans. This gives a full picture of the group's health, not just standalone positions. If ownership is less than 100%, record a minority interest on the balance sheet for the unowned portion.

Do Parent Companies Always Maintain Active Control of Their Subsidiaries?

Yes, they do, whether hands-on or hands-off. It depends on the managerial control given to subsidiary managers, but active control is always there.

What Forms of Integration Do Parent Companies and Their Subsidiaries Take?

They can be horizontally integrated, operating at the same value chain level in the same industry, offering similar goods or services. Alternatively, vertically integrated, at different production or supply chain stages.

How Do Companies Become Parent Companies?

Primarily by acquiring smaller companies or creating them from scratch.

The Bottom Line

In essence, a parent company has at least 50% controlling interest in another company, controlling its operations. This often happens through acquisitions or mergers, and you must account for subsidiaries properly on financial statements and for taxes. Subsidiaries operate with some autonomy but under parent oversight.