Holding Company

What does a Holding Company do?

1.    A holding company is an entity that holds outstanding stock in multiple corporations.

2.    Holding companiesdo not produce goods or services, but simply hold an interest in another company’s work. As a result, a holding company owns shares of other company’s stock or equity.
3.    Since a holding company purchases a share in another corporation or entitythey offer a reduction of risk for the companies whose stock is being held. The purchased stock, offers stability to the underlying entity. In turn, the holding company benefits from partial ownership and control of a basket of companies because it awards them the ability to reduce risk through diversity—the holding company’s assets are spread throughout multiple industries or sectors.

Forms of Holding Companies

1.    A personal holding company is defined and regulated by the United States’ Internal Revenue Code. The Internal Revenue Codeoffers a primary classification system where two definitions are present for holding companies. To be considered a holding company, the entity in question must meet bothdefinitions.
2.    The requirements or definitions are as follows: The Company must pass the Personal Holding Company Income Test, which requires the entity to possess at least 60% of the corporation’s adjusted ordinary gross income for the tax year based on dividends, rent, royalties, and interest.
3.    Additionally, the entity must meet the Stock Ownership Requirement, which states that at any time during the last half of the tax year, more than 50% of the corporation’s outstanding stock is directly or indirectly owned by five or fewer individuals.
4.    In contrast, a public holding company (the other classification for a holding company) possesses different characteristics.A public holding companypossesses shares of subsidiaries which distribute public goods such as electricity or gas to retail consumers.
5.    Public holding companies are regulated by the Public Utility Holding Company Act of 1935, which is a piece of legislation that regulates utilities by either limiting their business operations to a single state or through the enforcement of divestitures. Both regulations force a public holding company to operate as a single integrated system to serve a limited geographical region.

Regulation of Holding Companies

1.    Holding companies are commonly chastised by the public because they have the ability to utilize their vast resources to dominate particular markets.
2.    To prevent monopolies from forming, federal regulations arose in the late 20th century to impede  the development of anticompetitive business models. As a result, the United States Federal Government has the ability to block potential mergers and the acquisition of majority stock purchase by holding companies. The laws that regulate holding companies are meant to uphold the competitive model that the United States operates under.