Understanding a Holding Company
A holding company is essentially a parent company that does not conduct any business activities. Instead, the holding company exists to own a controlling share of one or more companies along with major company assets such as office buildings, factories, machinery, intellectual property, investment securities, and other equipment and supplies.
A subsidiary owned by a holding company is known as an operating company. This company is responsible for the day-to-day operations of the business. An operating company will hire employees, sell products, and provide services to customers. Often, operating companies will lease equipment or facilities from the holding company to perform their functions.
Do You Own Multiple Businesses?
Anyone can form a holding company to control their business assets. However, those who own multiple businesses will often find this structure even more beneficial than those with a single venture. This is because multiple businesses increase the potential for liability and losses. A holding company offers a way to organize your businesses under one umbrella while also providing a layer of financial and legal liability protection to each individual business and to you as the owner.
Advantages of Having a Holding Company
Asset protection is perhaps the most significant advantage of a holding company structure. By keeping the bulk of your business’s assets at the holding company level, you can effectively shield these assets from the liabilities of your operating company. This means that if the operating company is sued or goes bankrupt, the majority of your business’s assets will be protected within the holding company.
As a holding company grows, it can act as a source of financial strength for its subsidiaries. With a holding company’s backing and guarantee, a subsidiary company may be able to get better interest rates on debt financing than it could on its own.
A holding company allows a business to organize and brand its different business lines. This can be helpful with creating better name recognition, targeting marketing efforts, and strengthening relationships with customers.
If there are multiple companies nested under a holding company, it may be possible to file a single consolidated tax return, which can result in a lower tax liability overall. Additionally, a subsidiary company can generally pay dividends to its holding company tax-free. This allows the business owners to defer paying taxes on the profits until they decide to withdraw the money from the holding company.
Disadvantages of Having a Holding Company
Additional Paperwork and Complexity
Setting up a holding company means creating an additional company from the ground up. Among other things, this means one more company worth of paperwork to do and bank accounts to open. This takes time and increases expenses.
Chance of Error
With the added paperwork and the need to keep various accounts, assets, and transactions completely separate, there is an increased chance for clerical or other errors. This can put your company’s limited liability protection at risk. It is important to make sure that you are following all relevant policies and procedures correctly to avoid losing the protections created by your holding company.
How Do I Start a Holding Company?
Starting an LLC holding company includes many of the same steps as starting a typical LLC business. The main difference is making sure that the bulk of your business’s assets wind up under the control of the holding company. The following steps outline the general process.
- Choose a registered agent and file articles of organization with your state. You may also want to consider looking into the tax advantages of registering your LLC in a different state than your own.
- Open a new bank account for the holding company.
- Fund the holding company and transfer any existing assets from the operating company to the holding company. All holding company and operating company assets must be kept separate to ensure your limited liability protection remains intact.
Example of a Holding Company Structure
Holding companies are often called “umbrella” companies because they protect the subsidiary companies underneath them. For example, a bicycle helmet business may consist of a holding company that owns the factory, machinery, and any patents for the helmets (as well as shares of the operating company), while the operating company pays to use the factory to produce the helmets and hire employees to sell them. Since the operating company doesn’t actually own any of the business’s assets, if it were to be sued by a customer who sustained a head injury in a bike crash, the holding company’s assets would be protected in the event of a court-ordered payment or a settlement.
Ultimately, the answer to whether or not your LLC should have a holding company depends on its own unique characteristics and circumstances. As you can see, a holding company can provide your business with an extra layer of liability protection, but can also add some complexity and responsibilities. Along with taking a close look at your LLC’s finances, operations, and goals, it can be beneficial to consult with qualified tax and legal professionals before making your decision.