What is an LLC Holding Company? (Benefits & Structure Guide)
You could consider adding a holding company to your management team if you have multiple LLCs or subsidiaries. A holding company can take care of the management and business interests of all companies under its supervision.
As part of a team of business consultants with over a decade of practice, I gained relevant experience managing LLCs. I conducted extensive research to provide detailed information about a holding company.
We will dissect an array of topics, ranging from what a holding company is to how it is formed and look at some of its pros and cons.
Quick Summary
- A holding company is a parent company, usually an LLC, that purchases and fully controls the interests of another company.
- People opt for holding companies to control and protect their assets.
- According to a report by Wolters Kluwer, a holding company can own 100% of the subsidiary or just enough stock or membership interests to control the subsidiary.
- Before deciding to form one, I always like to look at the different types, including pure, mixed, immediate, and intermediate holding companies.
What is a Holding Company?
A holding company is a separate legal business entity that owns a controlling interest in another company, known as a "subsidiary.".
In an LLC holding company, ownership of the LLC subsidiary companies is transferred from the individual members to the Limited Liability Company.
As suggested by Wolters Kluwer, having control of the ownership means the holding company has enough membership interests (which could be 51% or less, depending on the number of owners) to secure the owners' vote [1].
This process makes it easier for business owners to transfer their multiple businesses from one generation to the next.
A holding company structure entails subsidiary companies assuming responsibility for manufacturing, selling, or conducting business activities.
Typically, each subsidiary operates with its own management structure overseeing daily operations, indicating that the holding company's management primarily supervises the subsidiaries' functioning.
The holding company's management has the authority to appoint and dismiss corporate directors or LLC managers. It is also empowered to make significant policy decisions, such as determining mergers or dissolutions.
3 Types of Holding Companies
The three types of holding companies include the following:
- Pure Holding Company: These companies seldom produce or sell any products or services; they focus on keeping the subsidiary companies' stock or membership interests.
- Mixed Holding Company: These companies own and control subsidiaries and have their own business operations.
- Immediate and Intermediate Holding Company: These companies are owned by other holding companies or larger businesses.
In the diverse landscape of American business structures, Limited Liability Companies (LLCs) represent a substantial portion, with, according to IRS statistics, an estimated count of 21.6 million across the nation. This compares to the significantly fewer 1.7 million C-Corporations and the comparably numerous 23 million sole proprietorships, illustrating a strong preference for the LLC model among entrepreneurs for its operational flexibility and legal protections [2].
3 Ways To Create and Operate an LLC Holding Company
If you want to start a holding company for your LLC, it is easy. You can do it in several ways:
1. Make the Parent Company a C Corporation
You may make the parent company a "C" corporation and establish the subsidiary as one.
This is one way to do it if you have a single-member LLC.
2. Fill LLC Articles of Organization
Another method is that if you have multiple members in your LLC, you can create the structure by filing LLC articles of organization with the Secretary of State for your state.
You'll then create an LLC operating agreement and get your LLC registered agent.
This is the best way to keep things organized and separate for your businesses.
3. Use and LLC You Already Have
The third and final way is to have an LLC that a holding company owns. In this case, the company would be the parent company and hold all of the assets of the LLC. This can be helpful if you want to limit the liability of the owner of the LLC.
It is essential to consult with an attorney who specializes in this area to find the best solution for your specific situation.
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Advantages of Holding Companies
You should consider setting up a holding company for your business for many reasons. Some of the benefits are:
1. Asset Control and Protection
A holding company owns the business assets of an operating company; they are protected from any legal action taken against the subsidiary.
This is because the holding company is a separate legal entity and is not responsible for the actions of the individual businesses, hence separating the business assets from any other assets.
These companies can also own real estate, intellectual property, and other assets, providing additional protection.
2. Liability Shield
In such a company structure, the holding company is a separate legal entity from the operating company, so it will not be held personally responsible for any of its decisions or obligations.
This creates a separation between the firm's numerous businesses, which helps safeguard each one's assets against being wiped out by a single liability claim.
For instance, directors of a holding company might implement a strategy for restructuring debt that is advantageous for all affiliated operating entities. Additionally, a holding company can facilitate its subsidiaries in securing more advantageous financing conditions than they might achieve independently.
3. On-Going Business
When a new owner takes control of a subsidiary company in a holding company structure, the business of that operating company is assumed by the holding company.
This means that you may quickly shift all your current enterprises in the operating company from one generation to the next and keep running as usual because they can be integrated without having to restart them separately.
4. Taxation Is Different
Every company aims to decrease costs as much as possible, and tax is no exception. All operating firms run as separate companies with separate tax obligations from one another within the business structure.
This lowers your overall tax burden, making it more cost-effective in the long run.
"For instance, structuring a holding company could lead to reduced tax rates, or there might be opportunities to form a holding company in a foreign country benefiting from lower corporate taxes. Nonetheless, regulations introduced in 2016 concerning the shift of taxes or profits to overseas locations have curtailed the advantages previously available from such arrangements."
-Jon Morgan, Co-Founder & Chief Editor of Venture Smarter
5. Flexibility
In a holding company structure, the business owners have much more flexibility in dealing with multiple operating companies as one business entity.
6. Control
The owner of the holding company has much more control over the operating company and its subsidiary businesses.
If you want to diversify your business or change direction, it is much easier to take that action with a management team consisting of only one person.
7. Day-To-Day Business Operations
Similar to any business, when it comes to making decisions, you must remember that the owner of the holding company has complete control over all subsidiaries and the operating company.
If an individual wants to change the business or realize new opportunities, they must do so through the leading company.
Disadvantages of Holding Companies
The disadvantages of holding companies include the following:
1. Increased Costs
The cost of setting up and maintaining a holding company is higher than the cost of setting up and running an LLC.
This is because more legal documents and filings need to be done to keep everything organized and compliant with the law.
2. More Paperwork
The paperwork involved in holding companies is more time-consuming than running separate LLCs.
Additional documents, including the Articles of Incorporation, Operating Agreement and minutes for all subsidiary companies, Board of Directors Meetings, Annual Reports, and more, are required.
3. Separate Tax Returns
A Holding Company has to file tax returns for each subsidiary business. This can be time-consuming and complex, especially if multiple companies are under one LLC.
4. Owner Control
The owner of the holding company has complete control over all operating companies. If they are unhappy with how a particular business is being run, they have the power to make changes.
5. Outside Owners
A holding company can not be run by a single outside owner either. If the owner decides to sell their stake in the company, they must give the holding company the first right of refusal.
Suppose you are a business owner looking for some of the benefits of this business structure, minus its drawbacks. In that case, a Series LLC might be the perfect solution for your operating companies.
The Series LLC and Holding Company
The LLC series is a new kind of company that provides some of the benefits of a parent company without any drawbacks.
According to an article published in Score Foundation, a series LLC is an LLC with limited liability (LLC) that enables you to establish separate "series" or sub-companies under one umbrella [3].
This may be useful if you want to manage your business more efficiently and keep it well organized.
Holding companies are attracted to series LLCs since they can own all of the individual series under their umbrella.
To uphold the liability protection for each series, avoiding commingling their assets and setting up distinct bank accounts is essential. Consider managing each series of your series LLC as an independent business entity.
FAQs
What Is the Difference Between an LLC and a Holding Company?
The difference between an LLC and a holding company is that a holding company doesn’t perform any business independently, whereas a full LLC company takes on the responsibility of running and managing multiple businesses.
How is an LLC Holding Company Taxed?
An LLC holding company is taxed like an LLC would be, meaning it's taxed as a pass-through entity. This reduces your liability and allows you to retain more control over your business.
Can an LLC Holding Company Own Multiple Subsidiaries?
Yes, an LLC holding company can own multiple subsidiary companies. The parent or holding company can have ownership interests in various subsidiary companies, allowing it to control and oversee its separate business operations.
References:
- https://www.nass.org/sites/default/files/2023-07/issue-paper-CT-Corp-NASS-summer23.pdf
- https://www.irs.gov/statistics/soi-tax-stats-partnership-statistics-by-entity-type
- https://www.score.org/resource/article/defining-series-llc
Hello, thanks for this info on LLC’s. For future reference…can a multi member LLC contain a Trust for a minor for their share of the LLC’s assets. Example: Lets say a minor is a member of the LLC, at 1%. Can that 1% be distributed into a Trust with terms that only pass to that member upon the age of 25?
Yes, a multi-member LLC can have a trust as a member to hold a share for a minor. This 1% share can be placed in a trust with terms specifying that it only passes to the minor when they reach the age of 25. You’ll need to establish the trust with these specific terms and ensure compliance with both LLC and trust laws.