In this article we will discuss about the advantages and disadvantages of holding company.
The advantages of holding company are in brief:
(1) A holding company is a legal personality and it is very easy to form a holding company because we simply have to purchase the controlling interest of other companies.
(2) Each member of the group has to prepare separate accounts and as such the results of operations and financial position of each constituent part can be easily ascertained.
(3) It is a very flexible form of combination as when a company wants to shift its control over other companies, it has simply sell the shares of that company.
(4) Since separate entities of subsidiaries are maintained, their losses may be carried forward for income tax purposes.
(5) The failure of a product of a subsidiary company will not affect the holding company.
(6) Holding company has centralised control without affecting the individuality of the constituent company and administration can be decentralised.
(7) A holding company is not required to bear any loss of subsidiary companies.
(8) Subsidiary company enjoys separate identity, reputation and goodwill.
The disadvantages of holding company are:
(1) The device provides possibilities for fraudulent promotion and management.
(2) Holding company gets substantial power over the subsidiary company without having corresponding responsibility towards it.
(3) Intercompany loans and inter-locking of capital under holding device is another disadvantages of holding companies.
(4) The shareholders of the holding companies may not be aware of the true financial position of the subsidiary companies.
(5) Subsidiary companies are forced to appoint persons as directors and officers- at unduly higher remuneration.
(6) There is the danger of oppression of minority shareholders.
(7) Holding company may exploit the subsidiary companies because of substantial power.