What are some of the advantages of holding companies? Identify a disadvantage.

Explanation

Advantages of holding company are-

The holding company can exercise control over subsidiary companies through fractional ownership.If the holding company buys enough stock, it can also gain working control of the subsidiary company's operations.
There is an isolation of risk in subsidiaries because all the subsidiaries are separate legal entities; therefore, the risk arising from one subsidiary does not expose another subsidiary to that risk. So, if the holding company guarantees the debt of one of its subsidiaries, other subsidiaries are unaffected.

The disadvantage of a holding company is the multiple taxations of dividends. The dividends received to the holding company's shareholders are taxed, which have already been taxed when dividends are received from the subsidiary companies. If the company owns less than 20% shares of the subsidiary, it may deduct 70% of the dividends and is taxed on the remaining 30% of the dividends received. If it owns more than 20% but less than 80% of the stock, it can deduct 80% of the dividends received and tax the remaining 20% of the dividend received. If it owns more than 80% of the stock, it is not taxed on the dividends by filing the IRS's consolidated returns.

Verified Answer

Advantages of holding company are-

The holding company can exercise control over subsidiary companies through fractional ownership.
Isolation of risk in subsidiaries is possible because all the subsidiaries are separate legal entities; therefore, the risk arising from one subsidiary does not expose another subsidiary to that risk.

Disadvantage of a holding company is multiple taxation of dividends. This is a case where dividends received to the holding company's shareholders are taxed, which have already been taxed when dividends are received from the subsidiary companies.