What Is a Holdco?
Let me explain what a holdco is—it's short for 'holding company,' a firm that takes control over one or more other firms. You achieve this by acquiring enough stock to control or influence shareholder voting. As the holdco, you earn money by collecting dividends from the shares in companies where you hold a controlling interest.
Key Takeaways
Holdco stands for holding company, which controls investments like stocks, bonds, other firms, or anything valuable. You make money as a holdco by gathering dividends from shares in companies you control. Remember, setting up a holdco can be cheaper but legally more complicated than a merger or consolidation.
Understanding a Holdco
Holdcos are businesses that own other valuable entities, typically by buying enough stock to control or influence shareholder votes. You earn from dividends on those controlling shares. Establishing a holding company is often less expensive and more legally intricate than merging or consolidating, which makes it a solid option for taking control of another company. You might also hear it called a parent company. The core role of a holdco is to 'hold' assets, and it can be owned by one person, a company, or a group. The primary goal here is to limit liability.
Example of Holdcos
You can use holdcos for various purposes, but they're especially common in real estate. Say you're an investor wanting to minimize personal liability from legal issues—you might set up a holdco to own the real estate, and then have an operating company handle the day-to-day. The operating company leases the property or assets from the holdco. That way, if the operating company gets sued, the assets stay somewhat protected through the holdco.
Outside real estate, other U.S. companies use holdcos too. Banks like JPMorgan Chase and Citigroup are holdcos. Utilities used to rely on them, but it's not as common now.
Special Considerations
The IRS defines a company as a personal holding company if it passes both the Income Test and the Stock Ownership Test. For the Income Test, at least 60% of the corporation's adjusted ordinary gross income for the tax year must come from rent, royalties, dividends, interest, and annuities. The Stock Ownership Test means that during the last six months of the tax year, five or fewer individuals must own more than 50% of the corporation's outstanding stock value, directly or indirectly.
