You must have come across the term "holding company before" but did you really know what it is?
If you have multiple LLCs or subsidiaries, you could consider adding a holding company to your management team. It is also a very popular term in the business world and in this article, you will get to know all about it.
What is a Holding Company?
A holding company is a separate legal entity that owns a controlling interest in another company, known as a "subsidiary". In an LLC Holding Company entity, ownership of the LLC subsidiary companies is transferred from the individual members to the Limited Liability Company.
This process makes it easier for business owners to transfer their businesses from one generation to the next.
Advantages of Holding Companies:
There are many reasons why you should consider setting up a holding company for your business. 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, which can provide additional asset protection.
2.) Liability Shield: In an LLC Holding 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 numerous businesses in the firm, which helps to safeguard each one's personal assets against being wiped out by a single liability claim.
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 easily shift all of your current enterprises in the operating company from one generation to the next and keep running as usual because they can be integrated together without having to restart them separately.
4.) Taxation Is Different: The aim of every company is to decrease costs as much as possible, and tax is no exception. All of the operating firms run as separate companies with their own tax obligations from one another within the business structure. This lowers your overall tax burden, making it more cost-effective in the long run.
5.) Flexibility: In a holding company structure, the owners of the business have much more flexibility in terms of dealing with multiple operating companies as one entity.
6.) Control: The owner of the holding company has much more control over all the operating company and its subsidiary businesses. If you are looking to diversify your business or change direction, it is much easier to take that action with a management team that consists of only one person.
7.) Day-To-Day Business Operations: Similar for any business, but 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 make a change in the business or realize new opportunities then they must do so through the main company.
Just as there are advantages, there are also a few potential disadvantages you should be aware of.
Disadvantages of Holding Companies
1.) Increased Costs: The cost of setting up and maintaining a holding company is bigger than the cost of setting up and running an LLC.
This is because there are more legal documents and filings that need to be done in order to keep everything organized and in compliance with the law.
2.) More Paperwork: The paperwork involved in holding companies is more time-consuming than running separate LLCs.
Additional documents are required including the Articles of Incorporation, Operating Agreement and minutes for all subsidiary companies, Board of Directors Meetings, Annual Reports, and more.
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 there are multiple businesses involved under one LLC.
4.) Owner Control: The owner of the holding company has complete control over all operating companies. If they are not happy with the way a particular business is being run, they have the power to make changes.
5.) Outside Owners: A Holding Company can also 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.
If you are a business owner looking for some of the benefits of this business structure minus some of the disadvantages then a Series LLC might be the perfect solution.
The Series LLC
The LLC series is a new kind of company that provides some of the benefits of this business entity without any drawbacks.
A series LLC is an LLC with limited liability (LLC) that enables you to establish separate "series" or sub-companies under one umbrella.
This may be useful if you want to manage your business more efficiently and keep it well-organized.
Related Article: Can an LLC Own Another LLC
3 Ways To Create and Operate an LLC Holding Company
If you want to start a company for your LLC, it is easy. You can do it in several ways.
You may choose to make the parent company a "C" corporation and establish the subsidiary as one too. If you have a single-member LLC, this is one way to do it.
Another method is that if you have multiple members with your LLC then you can create the structure by filing articles of organization with the Secretary of State for your state, followed by creating an LLC operating agreement, and getting your company a registered agent.
This is the best way to keep things organized and separate for your businesses.
The third and final way is to have an LLC that is owned by a holding company. In this case, the company would be the parent company and would own all of the assets of the LLC. This can be helpful if you want to limit the liability of the owner of the LLC.
As you can see, there are various ways to create and operate a holding company using an LLC.
It is important to consult with an attorney who specializes in this area to find the best solution for your specific situation.
FAQs
What Is the Difference Between an LLC and a Holding Company?
A holding company is a type of company that is used to own other businesses. LLCs are a type of holding company, but there are also other types such as "C" corporations and limited partnerships.
Why Would I Set Up a Holding Company?
There are a number of reasons why you might want to set up a holding company.
Some of the most common reasons include asset protection, liability protection, and tax advantages.
How is an LLC Holding Company Taxed?
An LLC holding company is taxed in the same way that an LLC would be, which means that it is taxed as a pass-through entity.
This reduces your liability and allows you to retain more control over your business.
Can an LLC Be a Holding Company...
An LLC holding company can offer you the best of both worlds.
It allows for pass-through taxation and offers liability protection and asset protection benefits as well.
While there are some disadvantages to using a series LLC, including the fact that it is still relatively new and untested in many courts across the country. However, Series LLC may be the perfect solution for your business.
