Do You Own Multiple Businesses?
Many small business owners have several businesses. If you are in that situation, you may want to consider setting up a holding company as an overall entity. The reason for doing that would be to keep the liability of the businesses separate, and manage them together.
What is a Holding Company?
A holding company is a company (usually a corporation) that owns a controlling interest in one or more companies, called subsidiaries. A holding company might be called an “umbrella” company or a parent company. The holding company doesn’t do anything except manage the companies under its umbrella.
A holding company can own subsidiary companies that hold:
- Shares of stock in a corporation
- Securities, like stocks, bonds, and mutual funds
- Intangible assets like patents and copyrights
- Real estate
- Vehicles or equipment
- In other words, anything that has value
Each type of asset could be set up as a separate business. For example, you could form one business to hold real estate, and another to hold a fleet of delivery vehicles.
What are the Types of Holding Companies?
A holding company holds part of another company’s stock.
A parent holding company owns enough stock (usually 51%) to control election to the board of directors.
A holding company is considered a personal holding company (PHC) under IRS rules if it meets two tests:
- An Income Test: At least 60% of the company’s adjusted ordinary gross income for the tax year is from dividends, rent, interest, and royalties
- A Stock Ownership Test: If five or fewer individuals own a majority of the company’s stock at some point during the latter half of the tax year
A PHC may be subject to a special PHC tax if at least 60% of its adjusted ordinary gross income for the tax year is PhC income. Schedule PH for the corporate tax return is used to determine if this tax must be paid.
Do I Need a Holding Company?
If your multiple businesses are very small with few assets (like an online business), it seems a lot of expense and trouble to form a holding company. Another possibility is to form just one company and then to have several “projects” within that LLC. You could then file a fictitious name (“doing business as”) designation for each of these projects.
The advantage of a holding company over separate companies is that losses in one company can be used to offset profits in another, while still keeping the liabilities separate.
How Do I Start a Holding Company?
Before you start a holding company, you’ll have to decide what type of company legal structure you want. The two most common types of companies are LLCs and corporations. Starting a holding company as an LLC or a corporation is a fairly painless task, but you should get the help of an attorney to make sure you do it correctly.
As you set up your holding company, you will need to find a board of directors to manage the holding company and oversee the subsidiaries. These people should be familiar with the holding company concept.
Are There Restrictions on LLC’s Owning Corporations?
Different business legal entities can own each other, but there are restrictions. From the standpoint of a state, there are usually no restrictions – an LLC can own a C corporation, for example. The restrictions come from the IRS. If an LLC is an owner of a corporation, the LLC must elect C corporation tax status.
An LLC cannot own an S corporation because only individuals and certain trusts and estates can own this type of corporation.
A sole proprietorship is not eligible to own another company because it isn’t registered with a state and its tax status is limited.
This article on Who Can Own a Business has more detailed information on what kinds of companies or individuals can own businesses.
Is a Holding Company Liable for Acts of a Subsidiary?
In general, the liability of a holding company for one subsidiary’s actions relates to the degree of control the holding company has over the operations of the subsidiary. In United States v. Bestfoods, in 1998, the Supreme Court held unanimously that a holding company isn’t liable for acts of a subsidiary if the parent didn’t actively participate in, and have control over, the actions of the subsidiary, but there are exceptions, and state laws govern these issues.
The most important exception is if the corporate veil is pierced, meaning that the action was outside the normal activities of a business (fraud or negligence, for example). In this case, the owners of both the subsidiary and the holding company could be sued.
More important, if you set up the individual companies within your holding company correctly, the liability for debts won’t affect all the others. For example, if one subsidiary is set up to own real estate, and it goes bankrupt, the other companies should not be affected by the bankruptcy.
What about Taxes for Holding Companies?
The individual business entities each file their own tax report and the reports. Each business files a tax return, and the losses and gains of each business are added up and placed on the holding company’s tax return. So a loss by one entity can be used to offset a profit by another on the holding company’s tax return.
This is a complex issue, with liability and taxes to consider. Before you form a holding company, talk to an attorney and a CPA who are familiar with the laws and accounting for holding companies. Discuss your current situation and future plans to make sure everything you do is according to all federal and state laws and regulations
What Is a Holding Company?
A holding company is a business entity—usually a corporation or limited liability company (LLC). Typically, a holding company doesn’t manufacture anything, sell any products or services, or conduct any other business operations. Rather, holding companies hold the controlling stock in other companies.
Although a holding company owns the assets of other companies, it often maintains only oversight capacities. So while it may oversee the company’s management decisions, it does not actively participate in running a business’s day-to-day operations of these subsidiaries.
A holding company is also sometimes called an “umbrella” or parent company.
- A holding company is a type of financial organization that owns a controlling interest in other companies, which are called subsidiaries.
- The parent corporation can control the subsidiary’s policies and oversee management decisions but doesn’t run day-to-day operations.
- Holding companies are protected from losses accrued by subsidiaries—so if a subsidiary goes bankrupt, its creditors can’t go after the holding company.
Understanding Holding Companies
A holding company typically exists for the sole purpose of controlling other companies. Holding companies may also own property, such as real estate, patents, trademarks, stocks, and other assets.
Businesses that are completely owned by a holding company are referred to as “wholly-owned subsidiaries.” Although a holding company can hire and fire managers of the companies it owns, those managers are ultimately responsible for their own operations.
Benefits of Holding Companies
Holding companies enjoy the benefit of protection from losses. If a subsidiary company goes bankrupt, the holding company may experience a capital loss and a decline in net worth. However, the bankrupt company’s creditors cannot legally pursue the holding company for remuneration.
Consequently, as an asset protection strategy, a parent corporation might structure itself as a holding company, while creating subsidiaries for each of its business lines. For example, one subsidiary may own the parent corporation’s brand name and trademarks, while another subsidiary may own its real estate.
This tactic serves to limit the financial and legal liability exposure of the holding company (and of its various subsidiaries). It may also depress a corporation’s overall tax liability by strategically basing certain parts of its business in jurisdictions that have lower tax rates.
If a holding company is set up correctly, the debt liability of one subsidiary won’t impact any others; if one subsidiary were to declare bankruptcy, it would not impact the others.
Holding companies can also serve the purpose of protecting an individual’s personal assets. With a holding company, those assets are technically held by the corporation, and not by the person, who is consequently shielded from debt liabilities, lawsuits, and other risks.
Holding companies support their subsidiaries by using their resources to lower the cost of much-needed operating capital. Using a downstream guarantee, the parent company can make a pledge on a loan on behalf of the subsidiary. Ultimately, this can help companies obtain lower-interest-rate debt financing than they otherwise would be able to source on their own. Once backed by the financial strength of the holding company, the subsidiary company’s risk of defaulting on its debt drops considerably.
Example of a Holding Company
An example of a well-known holding company is Berkshire Hathaway, which owns assets in more than one hundred public and private companies, including Dairy Queen, Clayton Homes, Duracell, GEICO, Fruit of the Loom, RC Wiley Home Furnishings and Marmon Group. Berkshire likewise boasts minor holdings in The Coca-Cola Company, Goldman Sachs, IBM, American Express, Apple, Delta Airlines, and Kinder Morgan.
- What Is an Independent Subsidiary?
- Can an LLC Buy the Rights to Another Company?
- Subsidiary vs. Joint Ventures
- What Do Companies Call Consolidated Income Statements?
- Is the Owner of a Corporation Considered a Shareholder?
- What Factors Are Used to Determine if the Equity Method of Accounting Is Appropriate?
Successful entrepreneurs with multiple small businesses are typically concerned with limiting liability, streamlining management and retaining ownership control over each entity. Using a holding company can sometimes be the solution to all three concerns. The company works as an umbrella to give you centralized control over your endeavors while maintaining the liability firewall between each business.
A holding company is a corporation or limited liability company that holds a controlling ownership interest in other companies or the assets that those companies use. Typically, a holding company simply holds equity interests or assets, rather than actively engaging in business, such as selling goods or services. Another name for a holding company is a parent, and the companies under it are called operating companies or subsidiaries.
Entrepreneurs who want to open multiple small businesses can use a holding company to centralize control. The entrepreneur can set up the holding company and designate himself as the sole owner. Each business can be set up separately with the holding company as the owner. In this way, the holding company is the central repository of the equity interests in those companies, and the entrepreneur can select executive management for each company while retaining the ability to direct each entity.
Using a holding company also enables you to raise money and create partnerships for each individual entity without losing overarching control of the business conglomerate. An equity investor can invest in one of the companies under the holding company without interfering with any of the others. If you had simply created a single company with multiple divisions or projects, an investor would take an interest in your whole business empire instead of just a single project that is set up as its own business.
One of the best uses of a holding company for small-business owners is to further limit liability. Creditors of a corporation or an LLC can go after anything that the entity owns. If you’re in a high-risk business, you can use a holding company to own all of the assets that your business needs to operate, such as real property, vehicles and equipment. The holding company leases those assets to the operating company, so if the operating company gets sued, it owns very little that can be used to satisfy a judgment. The operating company can easily be closed and declared bankrupt, and you can set up another business that leases the exact same assets from the holding company.
Creating an interlocking ownership structure for multiple small businesses using a holding company is a sophisticated endeavor with significant tax consequences that are tied to your legal structure choices and tax elections. For example, special personal holding company tax rules apply to corporations but not necessarily LLCs that are used as holding companies. Consult with qualified legal and tax professionals before setting up your businesses.
- Do Limited Liability Partnerships Have Subsidiaries?
- What Advantages Are Offered If I Open a Business As a Corporation?
- The Advantages of Having a Closed Corporation Company
- About Consolidating Businesses
- Can an LLC Own Stock in a C Corporation?
A holding company is a business entity that has no operations and does not conduct any activities. It owns assets. These assets could be shares of other companies, hedge funds, real estate, trademarks, patents or units in partnerships. Grouping companies together under a holding company gives them advantages they would not have when operating as separate entities.
Limitation of Risks
Subsidiaries are protected from problems occurring in other companies. A plaintiff who wins a judgement against one subsidiary cannot attach the assets of the other companies. The holding company would also not be liable if it had not guaranteed the debts of the subsidiary.
If a subsidiary takes a risk and fails or goes into bankruptcy, the loss will not affect the holding company. It can simply sell its shares in the failed subsidiary.
Consolidation Tax Advantages
If the holding company files a consolidated tax return, the losses incurred in a subsidiary can be offset against the profits of the other subsidiaries. The net result is a lower tax bill for all the companies as a group.
Generally, subsidiaries can pay dividends to the holding company without creating a tax liability. After the holding company receives the cash, disbursements could be allocated to the stockholders of the holding company or to better investment opportunities in the other subsidiaries.
Special Skills Add Value
The holding company may have special skills and know-how that could be used to further advantage in other subsidiaries to increase their value. One subsidiary could have customer relationships that would benefit the related companies by expanding their sales.
The combined financial strength of the group might be used to obtain more favorable financing terms than if the subsidiaries were standing on their own. Subsidiaries in the same industry could combine their buying power to extract better prices from vendors and better credit terms.
Pooling together the fiscal resources of the holding company and its subsidiaries will enable the company to take on large-scale projects.
More Control With Less Capital
Creating a holding company allows the firm to control more businesses with smaller amounts of capital. A holding company could obtain control of a company by acquiring 51 percent of its stock. In some cases, it could be possible to assume control by purchasing only 25 percent of a company when ownership is diverse, and this purchase would make the holding company the largest shareholder.
Not having to purchase 100 percent of a corporation enables a small business owner to control more companies with smaller investments.
Setting up a holding company is an excellent way for a small business owner to diversify his operations without taking unnecessary risks. Combining the resources of a holding company and its subsidiaries creates synergies in purchasing power, financing terms and the ability to invest in larger projects.
When considering the best state to form a holding company, it’s important to examine the laws in each jurisdiction. 3 min read
Updated July 1, 2020:
When considering the best state to form a holding company, it’s important to examine the laws in each jurisdiction. Some business owners prefer to start a company in their home state, while others choose a business-friendly state with specific tax advantages, such as Delaware.
What Is a Holding Company?
This type of company, often a corporation, owns a controlling share percentage in another company, which is known as a subsidiary. Sometimes a holding company is called a parent or umbrella company. Holding companies can be created to hold assets, property, or stock. The subsidiaries are only administrative entities and do not own the assets in question.
When forming a holding company, you need to understand regulations about what types of businesses can own other businesses. These rules are established by the IRS. An LLC can own a C corporation if it elects corporate tax status, but may not own an S corporation. A sole proprietorship cannot own another company.
If you would prefer not to create multiple businesses, you can set up a single limited liability company (LLC) and then set up a doing business as (DBA) name for each separate project that needs its own identity. This is a good option if your business is small and has few assets.
You can easily start an LLC in most states. Check out the office of the Secretary of State where you live to learn more about the requirements.
Where Should I Form My Holding Company?
Many small business owners ask themselves about the least expensive and most advantageous location for their business entity. Experts say that the most business-friendly states in the U.S. have some or all of the following benefits:
- Advantageous business statutes and laws,
- Low tax filing fees,
- Low or no income tax for businesses,
- Low or no sales tax,
- Regulations and taxes for franchises.
You may also want to consider whether you want to live and work in the state in question. While you can certainly establish a foreign entity, this typically carries higher fees and more extensive filing requirements. Keep in mind that unless you establish a physical office in the state, you’ll still be subject to taxes and requirements in the state where you are located. If you’re open to moving your holding company, consider the following states:
South Dakota has the benefits of legal protection from business liabilities, limited filing requirements, no corporate or personal income tax, and no capital gains tax. In addition, the state boasts plenty of open space, limited crime, and an affordable cost of living.
Wyoming businesses pay no personal or corporate income tax and the state offers tax exemptions to businesses that purchase raw materials for manufacturing. Groceries and gas are also free from state sales tax, and no capital gains tax is enforced, which makes it a popular location for debt collection and real estate investment businesses.
Nevada does not enforce individual or corporate income tax and does not tax corporate dividends. The state has established one of the nation’s best business court systems, which minimizes the time and cost involved in litigation. Businesses can exchange stock for real estate, personal property, services, or capital. You’ll also enjoy access to both natural beauty and the bright lights of Vegas.
Florida does not charge individual income tax and does not charge state taxes to S corporations. The state also has a sophisticated online service system for businesses, which makes online filing a breeze. Business to business software sales are also tax-exempt. If you love warm weather and lots to do, Florida could be the place for you.
What Is a Series LLC?
The series LLC is a popular type of holding company among real estate investors, particularly those who own multiple properties in several different states. This structure is a single umbrella limited liability company that contains multiple subsidiary LLCs, each for a separate property. Only certain states allow the formation of a series LLCs, and most require you to establish a registered agent in each state where you own property. Currently, this type of business entity can be formed in:
If you need help with the best state to form a holding company, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
a company that owns a controlling portion of the stock of other companies for the purpose of controlling and managing their operations.
There are two types of holding company: the pure holding company, which confines its functions to the holding of interests in other companies, and the mixed holding company, which in addition carries on its own operations in such areas as industry, trade, transportation, and finance. The holding company is an integral part of the holding system. Holding companies head trusts and large concerns in all capitalist countries; some monopolies, primarily multinational monopolies, are headed by a system of holding companies. The British and Dutch petroleum monopoly Royal Dutch-Shell, for example, is controlled by two holding companies: the British firm Shell Transport and Trading and the Dutch firm Royal Dutch Petroleum. These two corporations own shares in two other holding companies: Shell UK, Ltd., in Great Britain and Shell Petroleum N. V. in the Netherlands, which together own or hold shares in more than 500 companies, either directly or through their subsidiaries. Unilever, a British and Dutch trust that manufactures food products, soap, and perfume, has a similar complex structure.
Holding companies, which may simultaneously comprise such firms as industrial concerns, commercial banks, and insurance companies, represent one of the organizational forms of the financial oligarchy. An example of such an organizational structure is provided by two banks of the Federal Republic of Germany—Deutsche Bank and Dresdner Bank—and the Belgian bank Société Générale de Belgique, which head financial groups of the same names. On the average, each of these banks owns shares in and controls the operations of 150 companies, including finance, investment, insurance, commercial, industrial, and transportation companies and companies in the service sector.
Trusts and large concerns make extensive use of holding companies in their internal organizational structure; by this means they control and direct groups of subsidiaries, which are classified by a distinguishing feature, such as location, economic sector, or commercial activity. For example, Exxon, the largest petroleum monopoly in the capitalist world, includes approximately ten holding companies, which head subsidiaries operating in such areas as Africa and the Middle East. Monopolies often create such holding companies in countries with low tax rates in an effort to maximize profits.
The development of holding companies marks an intensification in the concentration of production and capital, since it fosters the subordination of small and medium-sized companies to large corporations.
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LLCs are formed to protect assets and limit liability. Forming a single LLC protects the owners (members) from personal liability for debts and obligations of the LLC. As long as the LLC is properly formed (including a solid operating agreement) and managed, creditors of the LLC can only look to the LLC’s assets to satisfy claims against the LLC. Creditors cannot require the members to pay LLC debts from personal assets.
If an LLC owns a single asset, one LLC is often enough to provide liability protection. But what if the LLC owns multiple assets? Most experienced real estate investors own multiple properties. Holding these properties in a single LLC opens them all up to liability. If a lawsuit arises in connection with one property, a successful judgment creditor can look to the other properties to satisfy the debt.
When an LLC owns multiple assets, liability protection can be enhanced by separating those assets into different “containers” of liability. Separation of assets helps isolate liability, so that a creditor with a claim against one asset cannot also look to the other assets to satisfy the claim. The holding company structure is the traditional way to segregate assets into separate containers.
The Holding Company Structure
The holding company structure helps confine liability for each asset to the asset. Here’s how it works:
- One LLC is organized to serve as the parent holding company.
- The business owners hold all interests in the parent LLC.
- Separate subsidiary LLCs are formed to hold title to each high-risk asset (such as rental property) or business line.
- The parent holding company owns the subsidiary LLCs.
- High-risk assets are transferred into the subsidiary LLCs.
In the above example, the real estate investor owns three properties (one commercial and two residential rental properties). The investor forms four LLCs—one to serve as the parent LLC and three to serve as subsidiary LLCs—and places the real estate into subsidiary LLCs. If a lawsuit arises against a subsidiary LLC, the plaintiffs can only look to the assets of the LLC. For example, if Property 1, LLC, is successfully sued, the creditor can only look to the commercial property to satisfy the judgment. The creditor cannot look to the two residential properties that are owned by separate LLCs.
The holding company structure has been around a while and is fairly common in real estate transactions. Compared to series LLCs (discussed below), the protection offered by the holding company structure is relatively certain and applies in all states. As long as each LLC is properly formed and operated, the legal protection offered by the holding company structure is well-settled.
Comparison to Series LLCs
Series LLCs are a relatively new form of LLC designed to provide similar protection to the holding company structure, but without requiring the formation of multiple LLCs. Instead of forming a parent LLC and multiple subsidiary LLCs, real estate investors can form a single series LLC and establish multiple series of assets within the LLC.
The goal of a series LLC is to separate assets so that the debts and obligations of one asset cannot infect other assets of the same company. Each series of a series LLC serves as liability container. Liabilities of one series are generally limited to the assets held by that series.
Series LLC Structure
You can read more about series LLCs in our discussion of Series LLCs.
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Q. I’m interested in setting up a holding company under an already-established LLC. How do I do this? Are there step-by-step outlines and financial projections available?
Basically, a holding company is a company organized with the intention of acquiring equity ownership in other companies, so if you have an existing LLC you could generally acquire equity ownership of other companies through the LLC, effectively making it a holding company. Holding company structures and company acquisitions can vary, so we aren’t aware of any outlines or step-by-step blue prints with financial projections that business owners can rely on in every conceivable situation when establishing holding companies and acquiring equity ownership in other companies through those holding companies.
As to holding company requirements and startup considerations in general, we have provided the information below; however, you may find it beneficial to consult with your lawyer and tax advisor or CPA to review your holding company plans and thoroughly evaluate all of the legal and tax considerations.
Holding company requirements
There are several ways to create a holding company. The regulatory, governance, and other potential requirements for starting a holding company would depend on the legal business structure (corporation, LLC, etc.), whether you plan to solicit outside investors, whether you have employees, and other factors. Nina Kaufman explains for Entrepreneur:
“In creating any business for any purpose, you have both tax as well as legal factors. Deciding on the form of entity for your holding company depends on a number of issues. For example, what’s your personal tax situation? Do you envision bringing in other owners—especially passive investors—into the holding company? And once you buy these businesses, what plans do you have to continue to operate them? … All of these factors, and more, go into weighing which form of entity will be right for your situation. Another important factor to consider when you buy these businesses is your expertise in the industry.”
Holding company start-up considerations
As we discussed above, a holding company is basically a company organized with the intention of acquiring equity ownership in other companies. The holding company may not develop or market any products or services on its own. However, an operating company that buys other companies is also a form of holding company but is often referred to as a parent company. The following articles discuss potential holding company startup issues, including these basic steps:
- Determine the industries you want to focus on.
- Develop a business plan that clearly defines your acquisition strategy.
- Create a corporate entity.
- Arrange financing sources.
- Network to find opportunities:
Holding company investment model
Generally speaking, buying other businesses requires a significant amount of equity capital since buyouts can seldom be financed 100%. Some wealthy individuals may have the financial resources to start a holding company with their own money and commercial loans. Other holding companies may raise money from private investors or by selling equity ownership (stock/membership certificates) to the public. Also, it is possible to start an operating company and then use the surplus working capital and financial leverage of that business to start buying other companies. To help determine what holding company business model and structure would be more effective for your situation, you can review the following example investment model and large holding companies:
Example holding company investment model:
Example publicly-owned holding company:
Example private holding company (investment firm):
Should I Form a Holding Company For My Business?
According to the Key Small Business Statistics report by industry Canada, small businesses with 1-4 employees have a 60.5% survival rate and 5-19 employees have a 66.4 % survival rate in the first 5 years of operation. For those that continue to operate, part of their success can be accredited to efficient tax-planning initiated through holding companies.
Holding companies can be an ideal business structure to help protect your business interests now and in the future.
In this post, we will explain what a holding company is and touch upon the primary benefits of forming this entity behind the operational structure of your business, which includes asset protection, capital gains exemptions, tax savings, and succession planning.
What is a holding company?
Simply put, a holding company is a parent corporation that owns assets of other companies, but do not actively participate in the daily business operations of a business.
It’s the operating company that produces and sells the goods and/or services instead of the holding company.
What type of assets can holding companies own?
A holding company can own a wide range of assets and the most frequently owned business assets may include:
- Shares of stock of other corporations
- Equity and hedge funds
- Interest earning investments
- Intellectual property (trademarks, patents, copyrights)
- Real estate properties, land
Why incorporate a holding company?
Through a holding company, there are a variety of strategies that business owners can utilize to help limit liability risks, minimize taxes, and protect assets.
The following are 4 primary reasons to form a holding company:
1. Asset Protection from Creditors
By creating a holding company, excess earnings/monies from the operating company can be withdrawn to the holding company (usually in the form of tax-free dividends) to shelter against creditor claims.
The holding company will be able to use these dividends as an investment vehicle to generate assets safely out of the reach of creditors.
Also, if the operating company ever requires a loan to purchase assets, they can borrow the funds from the holding company to do so. This arrangement will allow the holding company priority claim of the debt on the assets over external creditors.
2. Lifetime Capital Gains Exemption Claims
The lifetime capital gains exemption (LCGE) of $866,912 as of January 1, 2019 can be claimed to offset a capital gain on the sale of shares of a qualified small business corporation (QSBC).
This is a lifetime cumulative exemption. This means that you do not have to claim the entire amount at once but you can claim any part of it when you dispose of qualifying property.
What Type of Property Qualifies for Exemption?
There are three types of property that can give rise to the capital gains exemption:
- The sale of Qualified Small Business Corporation shares;
- The sale of farming property; or
- The sale of fishing property
What are the requirements for a qualified small business corporation?
It is best to consult with your accountant or lawyer to determine whether or not your business is qualified for exemption. However, basic conditions that need to be met include:
- The sale of your business must be a share sale
- No one but the owner or related person must have owned the shares for two years prior to the sale.
- 50% or more of the business’s assets must have been used in an active business in Canada for 2 years prior to the sale.
- At the time of sale, 90% of the value of the business’s assets must be used to generate active business income or the assets must be shares or debt in other qualifying small business corporations.
3. Income Splitting & Deferring Taxes
Especially beneficial for family-owned businesses, holding companies offer the ability to split income amongst adult family member shareholders and provide flexibility in the timing of that income payment.
As mentioned earlier, an active corporation can extract earnings to the holding company by the way of dividends. Family member shareholders who may be in the lower income brackets can take advantage of their lower marginal tax rates on those dividends.
Another advantage of a holding company is that it allows shareholders control of when income is actually earned and ultimately, defer when taxes are owed.
4. Estate Planning Tool
A holding company can aid with the transition of your business assets to future successors. Although not suitable for all business owners, there are various strategies that may be considered as part of a business succession plan.
One of these strategies is an estate freeze. With the help of a holding company, an estate freeze allows the business owner to limit the value of the business’s assets, transfer all future growth of the business to his/her successor while maintaining control of the business.
Forming a holding company can be a complex and complicated matter which requires input from both accounting and legal professionals. If you have more questions relating to holding companies or other legal matters, don’t hesistate to give us a call at (778) 565-4700.
The preceding content is for informational purposes only and does not constitute legal or professional advice. To obtain such advice, please contact our offices directly.
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Starting a Holding Company
Investment holding companies, as the name implies, exist solely to hold investments. Investment holding companies do not offer any products or services to the public, including financial planning services. Holding companies are essentially a vehicle for individuals or partners to make personal investments under the umbrella of a legal company, adding a layer of liability protection for highly-speculative investments or making transfer of multiple financial assets easier in estate planning. You can start your own investment holding company by forming a strategy and filing the proper paperwork.
Form an initial investment strategy. Determine exactly which types of investments you wish to hold. Investment holding companies can invest in stocks, bonds and other securities, as well as real estate, annuities, loans and other alternative investments. Create a plan for a balanced portfolio, hedging your favored risks with investments with inverse value correlations. The decisions you make in this step will affect decisions you make in subsequent steps.
Select a form of business organization. The types of investments that you choose to hold will influence the ideal form of organization for you. As mentioned, if you plan to hold highly-speculative, highly-leveraged investments, such as real estate and foreign currencies bought on margin, seriously consider choosing a form of organization that offers liability protection, such as a limited liability company or S-corporation.
Register your business in your state. Submit the required registration documents for your chosen form of organization. Contact the secretary of state’s office in your state for guidance on the exact documents and procedures required for your business type.
Ask a representative from the secretary of state about any licensing requirements in your state for investment holding companies, or go to the Small Business Administration’s Business Licenses and Permits page on their website to find a list of state licensing authorities (see Resources).
Obtain start-up financing. The amount of financing you need will depend on the decisions you made in step one, as well as the ambitiousness of your growth plans. If you plan to hold mostly real estate, for example, you might need to obtain several large mortgages at once from a single lender. If you plan to favor stocks, you might decide to start with a small bankroll and work your way up, or start with a larger bankroll to employ your proven strategy on a large scale right away.
Build your initial portfolio. With your start-up capital in hand, purchase your initial assets according to the asset allocation plan you developed. At this point you are officially up and running. Continue to monitor your investments, using capital gains and other investment income to finance progressively more and larger holdings.
Businesses that have developed significant assets often choose to hold those assets in a separate, sometimes subsidiary company. Doing so can provide liability, taxation, and organizational advantages. From real estate and equipment to intellectual property, many businesses large and small are structured as a series of connected companies.
Liability protection and tax mitigation are key reasons businesses hold assets in a separate company. It can keep the assets of your business protected from the liabilities of the operations. The asset holding company is not responsible for any of the activities of the business and so the liability of the operations of the business is less likely to reach the assets of the holding company. Additionally, the character of the income changes, resulting in potential income tax savings.
The owners of the company holding the assets are not necessarily the same as the owners of the operational business. Often, the assets are held by a group of investors that lease these assets to the operations company. In other cases, the asset holding company is a wholly-owned subsidiary of a parent company and the operations are conducted through another subsidiary. Large companies like Berkshire Hathaway operate using this model.
Different business structures have different taxes, so holding the assets of the business in one structure and housing the operations in another can have tax advantages. Discuss the specifics of your setup with legal and accounting experts to determine the best route for your operations. Particularly if your business is taking on money from outside investors, they may have certain structures they prefer for comfort, liability, and taxation purposes.
Having your business operations organized into discrete buckets also provides cleanliness of ledgers for your finances and can help you operate your different businesses separately. A larger company that is a manufacturer and also distributes may split those two functions into separate entities and allow each to operate and grow on their own. A smaller services company starting a separate product line may want to form their product as a separate company to help keep the income and operations of the two separate.
Forming an asset holding company is similar to forming any other company. You file your basic incorporation documents with the Secretary of State, adopt your operating agreement or by laws, and get an EIN from the IRS. The details in your operating documents will vary depending on the purpose and structure of your company, whether you have a parent company holding subsidiaries, or the investors holding the assets are different from those running the operations. Bringing an attorney in to help you structure the company, draft the documents, and transfer the assets helps you to maximize the benefits associated with this structure. An attorney will also provide you with an operational roadmap for the future of the company.