If you have multiple LLCs or subsidiaries, you could consider adding a holding company to your management team. A holding company manages, controls, and protects the 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 about the topic and conducted extensive research to provide you with 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 advantages.
Quick Summary
- A holding company is an LLC that purchases and fully controls the interests of another company.
- People opt for holding companies to control and protect their assets.
- The cost of setting up and controlling a holding company is higher when compared to setting up an LLC company.
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 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 multiple 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 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 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 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 of the operating firms run as separate companies with their 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 business entity.
6. Control
The owner of the holding company has much more control over 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 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 make a change in the business or realize new opportunities, then they must do so through the main 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 bigger than the cost of setting up and running an LLC.
This is because some more legal documents and filings need to be done 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 for your operating companies.
The Series LLC
The LLC series is a new kind of company that provides some of the benefits of a parent company 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 [1].
This may be useful if you want to manage your business more efficiently and keep it well-organized.
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.
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 LLC articles of organization with the Secretary of State for your state, followed by creating an LLC operating agreement and getting your LLC 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.
Explore our article to discover whether one LLC can own another LLC.
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 sort of business on its own, whereas a full LLC company takes the responsibility of running and managing multiple businesses.
Why Would I Set Up a Holding Company?
You should set up a holding company because it helps control the stocks of other companies. Other 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 Holding Company Own Multiple Subsidiaries?
Yes, an LLC holding company can own multiple subsidiary companies. The parent company, or holding company, can have ownership interests in various subsidiary companies, allowing it to control and oversee its separate business operations.
Can an LLC Be a Holding Company?
An LLC can be a holding company. However, it is essential to understand the different types of LLCs to perfectly understand everything about limited liability companies.
Through LLCs, you will understand their taxation process, and understand the liability protection it offers, including asset protection.
It may be advantageous to establish a holding company for individuals with multiple LLCs to separate the assets and liabilities of each business entity.
References:
- https://www.scre.org/resource/article/defining-series-llc
