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Holding company

A holding company is a company that owns the outstanding stock of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies to form a corporate group. However, in many jurisdictions around the world, holding companies are usually called parent companies, which, besides holding stock in other companies, can conduct trade and other business activities themselves. Holding companies reduce risk for the shareholders, and can permit the ownership and control of a number of different companies.

Holding companies are also created to hold assets, such as intellectual property or trade secrets, that are protected from the operation company. That creates a smaller risk when it comes to litigation.

In the United States, 80% of stock, in voting and value, must be owned before tax consolidation benefits such as tax-free dividends can be claimed.[1] That is, if Company A owns 80% or more of the stock of Company B, Company A will not pay taxes on dividends paid by Company B to its stockholders, as the payment of dividends from B to A is essentially transferring cash from one company to the other. Any other shareholders of Company B will pay the usual taxes on dividends, as they are legitimate and ordinary dividends to these shareholders.

Sometimes, a company intended to be a pure holding company identifies itself as such by adding "Holding" or "Holdings" to its name.

United States

Banking

After the financial crisis of 2007–08, many U.S. investment banks converted to holding companies. According to the Federal Financial Institutions Examination Council's (FFIEC) website, JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Groups, Inc. were the five largest bank holding companies in the finance sector, as of 31 December 2013, based on total assets.[2]

Utilities

The Public Utility Holding Company Act of 1935 in the United States caused many energy companies to divest their subsidiary businesses. Between 1938 and 1958 the number of holding companies declined from 216 to 18.[3] An energy law passed in 2005 removed the 1935 requirements, and has led to mergers and holding company formation among power marketing and power brokering companies.[4]

Broadcasting

In US broadcasting, many major media conglomerates have purchased smaller broadcasters outright, but have not changed the broadcast licenses to reflect this, resulting in stations that are (for example) still licensed to Jacor and Citicasters, effectively making them such as subsidiary companies of their owner iHeartMedia. This is sometimes done on a per-market basis. For example, in Atlanta both WNNX and later WWWQ are licensed to "WNNX LiCo, Inc." (LiCo meaning "license company"), both owned by Susquehanna Radio (which was later sold to Cumulus Media). In determining caps to prevent excessive concentration of media ownership, all of these are attributed to the parent company, as are leased stations, as a matter of broadcast regulation.

Personal holding company

In the United States, a personal holding company is defined in section 542 of the Internal Revenue Code. A corporation is a personal holding company if both of the following requirements are met:[5]

  • Gross income test: At least 60% of the corporation's adjusted ordinary gross income is from dividends, interest, rent, and royalties.
  • Stock ownership test: More than 50% in value of the corporation's outstanding stock is owned by five or fewer individuals.

United Kingdom

Company law

In the United Kingdom, the term "Holding Company" is defined by the Companies Act 2006 at section 1159.[6] It defines a Holding Company as a Company that holds a majority of the voting rights in another company, OR is a member of another company and has the right to appoint or remove a majority of its board of directors, OR is a member of another company and controls alone, pursuant to an agreement with other members, a majority of the voting rights in that company.

Parent company

A parent company is a company that owns enough voting stock in another firm (subsidiary) to control management and operations by influencing or electing its board of directors. A parent company could simply be a company that wholly owns another company, which is then known as a "wholly owned subsidiary".

When an existing company establishes a new company and keeps majority shares with itself, and invites other companies to buy minority shares, it is called a parent company.

See also

References

  1. ^ I.R.C. § 1504(a); I.R.C. § 243(a)(3).
  2. ^ "Holding Companies with Assets Greater Than $10 Billion". National Information Center. June 30, 2014. Retrieved 2014-11-28.
  3. ^ Hirsh, Richard. "Emergence of Electrical Utilities in America". Archived from the original on 2012-09-01.
  4. ^ "Public vs. Private Power : from FDR to Today". PBS.org. Retrieved 2014-11-28.
  5. ^ Cuiffo, Donna-Marie (1993-08-01). "Our Greatest Hits / The Personal Holding Company Trap: Federal Taxation". The CPA Journal. The New York State Society of CPAs. Retrieved 2017-12-06.
  6. ^ "Companies Act 2006 - s.1159". legislation.gov.uk. Retrieved 2020-01-09.

External links


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