A holdco, contraction of holding company, is a company created to own a controlling share in another company. The controlling share allows it to make changes to the board of directors and to dominate votes held by the shareholders; in some cases, a holdco holds all the stock in another company, in which case the company is considered a wholly owned subsidiary of the holdco. Holding companies are established to reduce risks for the owners of companies, and some may control a large portfolio of companies as an investment strategy.
Holdcos make their profits from dividend payments and other stockholder benefits provided by the companies they control. In some regions, like the United States, if a holdco controls more than 80% of the voting stock, this income is tax-free, a benefit considered when deciding how much stock the company should purchase. When the company takes a loss, it is a tax writeoff. Holdcos can also sell stock in themselves, creating capital they can use to buy stock in more companies.
For company owners, setting up a holdco can distribute risks associated with ownership. There can also be tax benefits and other potential accounting benefits, depending on how the company is set up and administrated. Company accountants and lawyers assist with the process of developing and creating the company and determining how much stock it should hold. In the case of a holdco involved in buying shares in multiple companies, the board makes decisions about which companies to invest in, and how heavily to invest.
Many holdcos have the word “holding” or “holdings” in their names, to make their purpose clear. Shares in such companies, when they are available for sale, can be more expensive than shares in regular companies. Berkshire Hathaway, a holding company based in the United States with a highly diverse portfolio, for example, is infamous for having very expensive shares. Investors in such companies can include institutions, as well as very wealthy individual investors.
When a holdco is publicly traded, it must disclose information about its operations and finances. This information can be found in shareholder disclosures and other publications. When such companies are held privately, they can maintain confidentiality about their operations, as they are not regulated by agencies involved in monitoring investments and related financial activity. This can also provide some benefits to people establishing such companies, as they may want to retain privacy in their financial activities.
