Holdco is an abbreviation for a holding company, which is a firm that exercises control over one or more additional firms. The Holdco accomplishes this through the acquisition of stock that is sufficient to control or influence the voting by shareholders. The holding company earns money by collecting the dividends from the shares of firms in which it owns a controlling interest.
Key Insights
- Holdco Definition: A Holdco is a company designed to control other investments, such as stocks, bonds, and other firms with valuable assets.
- Revenue Generation: A Holdco profits by collecting dividends from the companies in which it owns a significant share.
- Cost-Efficiency and Complexity: Establishing a holding company is often a more economical and legally intricate option compared to mergers or consolidations.
The Functions and Benefits of a Holdco
Holdcos are companies created to own other entities of value, often through acquiring a controlling amount of stock. Beyond just acquiring the stock, their primary way of earning revenue is through the dividends from these shares.
One primary advantage of forming a holding company is that it is often less costly and legally complex than mergers or consolidations, offering an attractive way to manage multiple companies. Another crucial aspect is risk management. A Holdco serves to limit liability and shield assets from potential legal actions that operating companies might face.
Real-World Examples of Holdcos
In Real Estate:
Holdcos often populate the real estate sector. For instance, an investor aiming to limit personal liability might set up a Holdco to own properties while another operating company handles operations. The operating company would lease properties from the Holdco, thus providing a layer of liability protection.
In Banking:
Prominent financial institutions in the United States use Holdcos. Examples include JPMorgan Chase and Citigroup, both functioning as Holdcos to manage their vast array of assets and subsidiaries.
Special Considerations for Holdcos
IRS Regulations:
The Internal Revenue Service (IRS) considers a company a personal holding company if it meets both the Income Test and the Stock Ownership Test.
- Income Test: 60% or more of the corporation’s adjusted ordinary gross income comes from rents, royalties, dividends, interest, and annuities for the tax year.
- Stock Ownership Test: During the last six months of the tax year, more than 50% of the corporation’s outstanding stock value is owned directly or indirectly by five or fewer individuals.
Related Terms: parent company, subsidiary, merger, acquisition.
References
- Internal Revenue Service. “FAQs: Entities 5, Closely Held Corporations”.
