Parent Company

What Is a Parent Company?

A parent company is a company that has a controlling interest in another company, giving it control of its operations. Parent companies can be either hands-on or hands-off owners of its subsidiaries, contingent upon the amount of managerial control given to subsidiary managers, yet will continuously keep a certain level of active control.

How a Parent Company Works

Parent companies can be conglomerates, comprised of a number of various, apparently unrelated businesses, similar to General Electric (GE), whose different business units are able to benefit from cross-marking. A parent company, in any case, is unique in relation to a holding company. Parent companies conduct their own business operations, not at all like holding or shell companies which are set up explicitly to latently own a group of auxiliaries — frequently for tax purposes.

Parent companies and their auxiliaries might be horizontally integrated, like Gap Inc, which claims the Old Navy and Banana Republic auxiliaries. Or on the other hand they might be vertically integrated, by possessing several companies at various stages along the production or the supply chain. For example, AT&T's acquisition of Time Warner implied that it became owner of both the film production business and broadcasters that sold those productions to crowds, notwithstanding its telecommunications networks that gave the media infrastructure.

Becoming a Parent Company

The two most common ways companies become parent companies are either through the acquisitions of more modest companies or through spin-offs.

Bigger companies frequently buy out more modest companies to lighten competition, widen their operations, reduce overhead, or to gain cooperative energies. For instance, Meta (META), formerly Facebook, acquired Instagram to increase overall client engagement and reinforce its own platform, while Instagram benefits from having an extra platform on which to publicize and more users. Meta, in any case, has not applied too much control, keeping an autonomous team in place, including its original founders and CEO.

Businesses that need to streamline their operations frequently spin off less productive or unrelated subsidiary businesses. For example, a company could veer off one of its mature business units that are not developing, so it can zero in on a product or service with better growth possibilities. Then again, on the off chance that a part of the business is changed course and has different strategic needs from the parent company, it very well might be veered off so it can open value as an independent activity — and maybe be put available to be purchased.

Special Considerations

Since parent companies own over half of the voting stock in a subsidiary, they need to create consolidated financial statements that join the parent and subsidiary financial statements into one bigger set of financial statements — and which take out all possible covers, for example, between company transfers, payments, and loans.

These combined financial statements give an image of the overall wellbeing of the whole group of companies instead of one company's standalone position. Assuming that the ownership stake of the parent company is under 100%, a minority interest is recorded on the balance sheet to account for the portion of the subsidiary that isn't owned by the parent company.

Features

• Parent companies are shaped when they spin-off or cut out auxiliaries, or through an acquisition or merger.
• Parent companies must account for their auxiliaries properly on their financial statements and for tax purposes.
• A parent company is a single company that has a controlling interest in another company or companies.