Holding and Operating Companies

Around 25 years ago (I feel old), I was a teaching assistant at UC-Davis.  I was nominated for the best teaching assistant twice, but never won the prize.  That was fine with me.  I did my best, whether rewarded or not.

My love of teaching is what drives me to write this blog.  I like to think that I am a good teacher, much as I know that I am not perfect at it.

A reader asked me to explain the difference between holding and operating companies.  I will do that here, realizing that I am summarizing a complex subject.

The nature of a holding company is to be a financing vehicle.  The holding company owns (holds) other operating companies, and receives dividends from them.  The holding company pays interest on its debts, and dividends to shareholders, if any.  A holding  company is a means of controlling a number of operating companies with somewhat disparate goals.  Certain common functions are centralized, like accounting, finance, human resources, etc.

Now the operating companies are typically at the lower level of the holding company structure, and there may be holding companies  held by holding companies, before getting to the operating companies below.

Typically the owners of stocks and bonds own securities from holding companies.  There are operating company bonds, and sometimes stocks trade where the holding company does not own 100%.  Those are unusual.

Holding companies exist to organize operating businesses into a coherent whole.  It may not always succeed, but that is the goal.