What is a Parent Company?

A parent company is one that owns or controls another company, known as the subsidiary. The parent company is able to direct the business practices of the subsidiary because it controls the voting, thus making determinations like who should sit on the board of the subsidiary. It is not uncommon for a single parent corporation or company to control a large number of subsidiaries.

There are several ways in which a parent company can create a subsidiary. One method is a takeover, in which the company acquires at least 51% of the stock in another company. This majority share ensures that the parent controls the subsidiary company. It is also possible to buy another company outright or to create a new company which is owned by the parent entity. When a parent corporation owns a subsidiary completely and there are no minority shareholders, the subsidiary is known as a wholly owned subsidiary.

Sometimes a parent company is structured as a holding company. Holding companies are created specifically to hold subsidiaries and do not produce any products or provide services. People own shares in the holding company, but not any of the companies it controls, making it easier to control the subsidiaries and to do things like selling or spinning off subsidiary properties. Holding companies may be created for the purpose of protecting investors and also for allowing multiple companies to be controlled under the ownership of a parent, rather than merging with each other.

Each subsidiary is its own legal entity. They are autonomous, with their own boards and corporate structures. These companies may have different missions and entirely different purposes; parent companies may control companies in a wide range of industries, from breakfast cereals to utilities. Individual subsidiaries can be sold, broken up into smaller divisions, and closed without affecting other subsidiaries of the parent company.

Companies large and small all over the world are controlled by parent companies. Many people are surprised to learn how consolidated many industries are; although they appear diverse, the seemingly large numbers of companies in some industries are actually controlled by only a handful of parent corporations. It is also not uncommon for parent companies to control companies which produce similar products and services so that they can cover several different areas of the market of interest.